May 17, 2017May 18, 2017 By Alexandra Coleman, Art Aguilar and Megan Rappa

Zoning & Land Use

Zoning

Zoning is a legal mechanism that enables a local government to regulate development of privately owned property. In 1916, New York City adopted the nation’s first comprehensive zoning rules and regulations known as the “Zoning Resolution.” The law was prompted by the construction of the 42‐story Equitable Building in Lower Manhattan (see Figure 1, below) that caused concerns regarding height, form of the buildings, and shadows that affected property owners and the value of their property. The Zoning Resolution became the model for future laws and is still the traditional method of land use regulation. The constitutionality of zoning rules and regulations was confirmed in the 1926 United States Supreme Court landmark case Village of Euclid, Ohio v. Ambler Realty Co.

Figure 1 – Equitable Building, Manhattan

New York City’s Zoning Resolution controls the use, density, and bulk of development within the entire city, with the exception of parkland, which does not have a zoning designation. New York City is divided into three basic zoning districts: residential (R), commercial (C), and manufacturing (M). The three basic categories are further subdivided into lower, medium, and higher‐density residential, commercial, and manufacturing districts. Development within each residential, commercial, and manufacturing district is subject to use, bulk, and parking regulations. The Department of City Planning oversees NYC’s Zoning Resolution and according to their website:

Zoning is the language of the physical city. It aims to promote an orderly pattern of development and to separate incompatible land uses, such as industrial uses and homes, to ensure a pleasant environment. The Zoning Resolution is a legal instrument to regulate and establish limits on the use of land and building size, shape, height, and setback.

The NYC Department of City Planning created a web‐based application that provides the public with up‐to‐date zoning and related information for New York City. The web‐based application is known as “ZoLa” – the Zoning and Land Use Application – and can be accessed through the following link:

http://maps.nyc.gov/doitt/nycitymap/template?applicationName=ZOLA

Within this application, one can search a property by address, block/lot, intersection, or place of interest. The results provide the site’s block and lot number, zoning district, zoning map, and historical zoning map. Within these results, there are hyperlinks that provide further information. For example, entering an address that results in an “R8” zoning district and clicking on the “R8” zoning district links to the NYC Department of City Planning’s website providing additional information about the “R8” zoning district including floor area ratio (“FAR”), building height, and required parking. The NYC Department of City Planning also publishes a “Zoning Handbook” that is available for purchase online and at their Manhattan office at 120 Broadway, 31st Floor, New York, NY 10271. The “Zoning Handbook” greatly assists any user in interpreting the Zoning Resolution, which is estimated almost 1,300 pages.

Zoning is enforced by the NYC Department of Buildings, which holds the primary responsibility for interpreting and enforcing NYC’s Zoning Resolution to ensure the safe and lawful use of buildings and construction sites across the five boroughs. Much development in New York City occurs as‐of‐right. Once the NYC Department of Buildings is satisfied that the proposed structure complies with all relevant provisions of the Zoning Resolution and the Building Code, a building permit is issued and construction can begin; no further action is required.

Land Use

Land use refers to the activity that is occurring on land and within the structures that occupy it. Types of uses include residential, retail, commercial, industrial, vacant land, and parks. In each case, where appropriate, the number of buildings and their heights, the number of dwelling units, floor area, and square footage should be noted.

Land Use information and maps can be found on the ZoLa website, under “Show Zoning & Related Data on Map.” For example:

For more detailed information, the NYC Department of City Planning provides a database called “PLUTO,” which stands for Primary Land Use Tax Lot Output, and provides data on the following land use types: one‐and two‐family residential buildings, multi‐family walk‐up residential buildings, multi‐family elevator residential buildings, mixed residential and commercial buildings, commercial and office buildings, industrial and manufacturing, transportation and utility, public facilities and institutions, open space and outdoor recreation, parking facilities, and vacant land. The website also provides “MapPLUTO” that merges PLUTO tax lot data with tax lot features from the Department of Finance’s Digital Tax Map. The website can be accessed through the following link: http://www1.nyc.gov/site/planning/data-maps/open‐data/dwn‐pluto‐mappluto.page

May 17, 2017May 18, 2017 By Alexandra Coleman, Art Aguilar and Megan Rappa

Public Policy

Public policy has a significant role in how a city develops. Policies are shaped by public stakeholders, interest groups, politicians and local community boards; and they are enforced by government agencies. This section outlines prominent agencies, regulations and incentives that directly affect and oversee real estate development in New York City. A majority of the information provided focuses on residential and multifamily development, as housing is the most regulated sector of real estate. Commercial (office and retail) and industrial development is mostly controlled by zoning and land use law as previously discussed in Sections II A and B.

New York State and New York City Development Agencies

While New York City has an “as of right” building policy3, there are federal, state and city agencies that oversee new development, preservation and sustainability of the City’s buildings and neighborhoods. Some of these agencies are named and profiled in further detail in this section. Contact information is also provided for each of the agencies, as well as details about how to gather information about the actions and policies of a particular agency that may relate to a prospective development site or project. A full list of New York City agencies that specifically oversee housing and development can be found at the following link of the City of New York’s website:

http://www1.nyc.gov/nyc‐resources/agencies.page

We have selected a few specific agencies that are particularly active in the financing and regulation of new developments and preservation projects in the five boroughs. These agencies may have encumbrances on properties, and their approval may be required for the sale of a specific property. Furthermore, these agencies may be responsible for interim ownership and transfer of title of blighted and foreclosed properties throughout the City. They are in essence the “owner” of many sites throughout the City, and take on the role of financier and partner of many private and not‐for‐profit developers. Valuable financing and subsidy programs are provided and administered by these agencies, and may be imperative to the success and feasibility of a project. The term “public‐private partnerships” is often thrown around in regards to urban development and revitalization. It is precisely these agencies that comprise the “public” side of such a partnership. They offer financial incentives to private developers and real estate owners to encourage them to invest private capital and resources in community development and rehabilitation projects. It is, therefore, imperative to understand the role that development agencies play and how to navigate them when considering the acquisition or development of specific NYC sites.

US Department of Housing and Urban Development (HUD)

HUD is a federal agency that distributes funding in the form of mortgage financing and rental subsidy to each of the fifty states. The states then allocate these public monies to developers and their individual residential projects. Each state housing agency has their own application process and scoring system to determine how funds are allocated. Funding for HUD programs is determined by the federal budget. The agency has regional offices that oversee a specific geography, or “catchment area”. A list of the regional HUD offices and their respective Directors can be found on the HUD website:

https://portal.hud.gov/hudportal/HUD?src=/program_offices/field_policy_mgt/localoffices#NY.

New York State Homes and Community Renewal (HCR)

This agency is responsible for allocating and managing HUD funding to the state of New York, and project management for the construction and preservation of affordable housing. HCR is further divided into five separate divisions:

HCR Division of Housing and Community Renewal (DHCR)
HCR Housing Trust Fund Corporation (HFTC)
HCR Housing Finance Agency (HFA)
HCR State of New York Mortgage Agency (SONYMA)
HCR Affordable Housing Corporation (AHC).

HCR and its subdivisions are important to become familiar with should an owner/developer pursue the development or acquisition of multifamily or SFR rental housing in NYC. Property site research may reveal that one of these agencies is a mortgagor of the property. Often times, HFA and SONYMA loans are assumable for future buyers. Alternatively, the mortgage may have an accompanying Regulatory Agreement that encumbers the property, and may require agency approval to sell.

SONYMA has a first‐time homebuyer loan product to promote homeownership that requires minimal down payment and boasts a low interest rate. There are a variety of similar incentive programs and loan products to promote residential acquisitions by New Yorkers. While some of these are reserved for primary residences, others can be used to purchase a single family or townhome rental property. These programs originate and evolve over time. For the most up to date program information, always refer to the HCR homeownership and rental owner links (below).

HCR, For Homeowners: http://www.nyshcr.org/SONYMA/ and http://www.nyshcr.org/HomeOwnership‐HomeBuyers.htm
HCR, For Rental Owners and Managers: http://www.nyshcr.org/RentalHousing‐htm

New York City Housing Development Corporation (HDC) & New York City Housing Preservation and Development (HPD)

HDC and HPD function in a similar capacity. They are both financing and development corporations that fund and oversee the construction and preservation of multifamily housing in NYC. HDC was created by the New York State Legislature in 1971 as an alternative means of supplying financing for affordable and mixed income housing separate from the City’s capital budget. Flexibility was built into the agency’s mission, and it has amended its tools and resources over time to now include the issuance of bonds and low‐cost loans, and a variety of subsidy programs to develop and preserve housing.

HPD was established in 1978, and operates in a similar capacity as HDC, with additional responsibilities of compliance monitoring, management and regulation of the City’s housing stock. HPD oversees city government programs to reach specific housing targets (ie Mayor Bill De Blasio’s Housing New York Plan: 200,000 affordable housing preserved or constructed units in ten years). HPD is often a partner of developers and community organizations to ensure that these projects are feasible and in compliance with the City’s neighborhood planning initiatives. Some of the unique functions and development resources offered by HPD include: tax abatements, issuance of tax credits and low‐interest loans. The agency participates in oversight of its projects through issuance of fines and penalties to owners for failure to maintain compliant and up‐to‐code housing. In this manner, HPD is a tenant advocate, proactive neighborhood planner, and ultimately ensures quality, not just quantity, of housing for New Yorkers.

Like most community development agencies, HDC and HPD originate projects through a Request for Proposal (RFP) process. RFP links are available for both agencies.

HDC RFP Link: http://www.nychdc.com/Current%20RFP

HPD RFP Link: http://www1.nyc.gov/site/hpd/developers/rfp‐rfq‐rfo.page

City owned land and foreclosed properties with City mortgages fall under the jurisdiction of these two agencies. An agency may issue an RFP for developer proposals for the new development or redevelopment of a blighted property. The requirements and selection criteria are published in the RFP and made available to the public. The overseeing agency establishes a list of qualified developers to acquire these sites, and to develop them per the agency’s specifications. Through a public‐private partnership structure, the agency assists the developer with assembling the capital stack to realize a feasible and profitable project. The next section discusses public policy in the form of legislation and initiatives that incentivize developers to build in‐demand assets; in New York City, this is almost always housing.

New York City Development Incentives

Development incentives are imperative to successful city planning. These incentives provide financial justification for a developer to construct a property that may not necessarily be best and highest use, or one that may accommodate reduced income units (ie affordable or supportive housing). It allows the City to have an active role in creating and maintaining vibrant and diverse communities. This section will briefly discuss some of the major tax‐related incentive programs, as well as 80/20 developments which allow owners to build beyond as‐of‐ right square footage per zoning and floor to area ratio (FAR). As a potential investor or developer in an 80/20 project, or one that has received special tax treatment, it is important to understand the mechanism in place and how it will affect future property tax rate assumptions. It may also become necessary to be in open communication with the City to maintain or extend tax exempt status for a property after you have acquired it.

Tax‐Exemptions: 421a and J51

The 421a program offered developers a ten‐year tax abatement if they opted to develop multifamily housing on a vacant site. The program originated through the NY State Legislature in 1971. The impetus for this program, amongst others, was to encourage developers to create more housing options throughout the five boroughs for New Yorkers. During the construction period, developers paid no tax (up to three years), which was followed by a ten‐year tax abatement period which reduced by 20% every two years until expiration ten years out. There are several variations of the 421a program that offer additional benefits to owners that develop partially or entirely affordable housing projects, as well as those that convert commercial spaces to residential. The program expired in 2015 with no alternative or renewal in place. At the time this paper was written (Spring 2017), the new 421a Bill was still being debated by state legislature. Debated additions to the Bill include modifying the applicable zones for the program, as well as a contentious requirement for union wages.8 Per the below diagram, it is clear that the program was an effective tool to encourage new housing development through the eighties, nineties and early 2000s. More information regarding properties that receive special tax treatment per 421a, and about the evolving revision of the Bill can be found on the New York City website:

http://www1.nyc.gov/site/finance/benefits/benefits‐421a.page

Similar to 421a, J51 is a New York City tax abatement program for owners and developers of multifamily residential. However, J51 is and as‐of‐right program that is specific to the rehabilitation (not new construction) of aging and blighted rental housing in the five boroughs. HPD is the agency that determines a project’s eligibility for a J51 exemption and administers the program over the term of the exemption. In exchange for the providing this benefit to ownership, HPD requires that the units be rent stabilized throughout the period of the tax exemption.10 As previously discussed in Section I B, property searches will indicate if a property receives this tax benefit. The City also makes this information available to the public via a compiled and updated list of J51 properties found at the below site:

http://www1.nyc.gov/site/finance/benefits/benefits‐j51.page.

The program includes two benefits: 1) The exemption reduces the taxable assessed value of a property (which is the basis for calculating real estate tax), and 2) The exemption reduces the actual tax that has been charged against a property.11 The duration of a J51 tax exemption is ongoing, so long as the rental units remain rent stabilized and compliant with HPD program requirements. As these programs are evolving over time, it is important to refer to the NYC City website for the most up‐to‐date specifics regarding Tax Incentives:

http://www1.nyc.gov/site/hpd/developers/tax‐incentives.page.

80/20 Multifamily Housing Developments

80/20 Developments are not unique to New York City, and exist throughout the nation. This development program has become a widely popular and successful means of incentivizing developers to construct desperately needed affordable housing throughout American’s cities and suburbs. In New York City, a developer is able to build beyond the maximum square footage as defined by zoning and FAR for a lot if the project will be housing that offers 80% market‐rate units, and 20% affordable housing units.12 In addition to the ability to build additional rentable square footage, HFA offers tax‐exempt financing for 80/20 developments to help create a feasible project. HFA will require the owner to enter a Regulatory Agreement that will assure rent regulation and compliance for the affordable component. Furthermore, if 80/20 developments are built in specific districts of NYC, additional tax incentives may be available through the City. These developments may take the form of a public‐private partnership to redevelop City owned land and revitalize a neighborhood (ie Battery Park City).

There are a variety of tax‐exempt financing options available for the development and preservation of affordable housing that warrant a discussion beyond the scope of this report. The key takeaway is that when acquiring or developing residential projects in New York City, it is imperative to understand the financing terms, requirements and restrictions of a project, as well as any compliance related matters (related to tenant income and rental rates) should a project have an affordable component. This information is readily available through property searches and City agency websites. The HCR website offers an exhaustive list of the various financing programs available and details their accompanying tax incentives:

http://www.nyshcr.org/Topics/Developers/MultifamilyDevelopment/.

May 17, 2017May 18, 2017 By Alba Dodaj, Danlin Luo and Joel Neuenhaus

Competition Indicators

GDP

Why it is important?

No matter in global market or local market, competition of a market stands for its economic power and indicates its current position and future potential. Therefore, GDP is frequently referred in the beginning of general research reports.

Strengthens/ Weakness

For example, in the Q3 of 2016 real GDP expanded at a 3.5% annual rate which is the strongest growth rate in two years and more than triple the rate of growth for the first half of 2016. But the flaw is that GDP is too generic to support a deep research, especially for a specific area or period.

Resources

World Bank (data.worldbank.org) can provide information about GDP by countries.

Exchange Currency Rate

Why it is important?

From an international scope, exchange currency rate is a significant indicator of attractions to the (overseas) investors.

Strengthens/ Weakness

While its weakness is that currency would be a double-edged sword. When the dollar continues to strengthen against a basket of foreign currencies, that sword will cut the foreign investors out.

On the one hand, foreign buyers increase the diversity of the potential homebuyer pool, pushing up the demand that can be very helpful in minimizing the effect of localized recessions on housing markets. But affordability and inventory can suffer – particularly in very desirable urban areas, if foreigners purchase homes in the U.S. without the intent of relocation, thereby removing these properties from the market. So, when using exchange currency rate in research, its two sides of effects must be considered.

Resources

Exchange currency rate can be obtained by international finance websites or currency information website, e.g. XE (http://www.xe.com) where you can review the currency chart for selected periods.

CPI

Why it is important?

In a nationwide, CPI inflation can be seen as a consequent reaction after exchange currency rate. A strong domestic currency can decrease the inflation rate in a nation, because of lower prices for foreign products. A study of the correlation between various asset classes and inflation shows that real estate returns have the highest correlation.

Strengthens/ Weakness

While in the real economy, there are a lot more factors that affect house prices and the correlation is not as prominent as in our example. So for a thorough research, these factors and their chain reaction cannot be ignored.

Resources

Information about these indicators can be obtained from most major financial or research websites and US Department of Commerce, Bureau of Economic Analysis.

May 17, 2017May 18, 2017 By Alba Dodaj, Danlin Luo and Joel Neuenhaus

Capital Cost Indicators

Interest Rate

Why it is important?

Continued to the previous economic indicators, capital cost is also a major concern for real estate investment. The most direct indicator is the interest rate which is critical in the finance and evaluation of any investment primarily because of their impact on the present value of future cash flows and current mortgage. When the interest rates go up, the monthly payment increases and the value of any future cash flow decreases, which in turn lowers the value of the asset.

Strengthens/ Weakness

However, interest rates never change alone, so it is useless to analyze the potential effects on real estate value without thinking about the other factors that may occur in tandem with changing rates.

Resources

Interest Rates are various from lenders, where we may get information directly. But the most common one is the Federal Funds Rate which can be obtained from Federal Reserve. There are also some prime rates can be reliable references, such as WSJ Prime Rate or LIBOR.

10-year treasury yield

Why it is important?

Another indirect indicator – 10-year treasury yield is also drawing attention from investors and researchers. And treasury yields are related directly to mortgage interest rates, which affect home buying and refinancing decisions. Usually, treasury bonds are benchmarks for mortgage and other loan rates because they are risk-free assets. There is a strong correlation between mortgage interest rates and Treasury yields, according to a plot of 30-year conventional mortgages and 10-year Treasury yields using Federal Reserve Economic Data. The other reason 10-year treasury yield became an economic indicator in real estate is because many investors have been laser-focused on how a rise in US Treasury rates could trigger a rise in cap rates, and therefore a fall in real estate values.

Strengthens/ Weakness

Upon Morgan Stanley’s technical analysis, the correlation between cap rates and Treasury rates turns out to be tenuous. This suggests that other key variables may influence cap rate movements and real estate which need a deep exploration.

Resources

For 10-year treasury yield, most finance websites (e.g. yahoo, Cushman & Wakefield, Oxford Economics, Moody’s) can offer accurate information.

Investment Sales

Why it is important?

From the perspective of market volume, investment sales can indicate the dynamic in the real estate market which including office, retail, industrial, multifamily, hotel and lands. While the peak year of sales activity in this cycle was 2015 (at $546.3 billion), it never surpassed the previous peak year of 2007 ($569.9 billion). This was a function of many factors, including pre-election jitters along with a sharp move upwards in Treasury yields which had many investors pausing and recalibrating. Key players are also a part of this indicator. Like the largest players in the market—private equity and institutional investors—grew their investments in commercial real estate modestly in 2016. These two types of buyers accounted for more than 70% of asset purchases. So this indicator can help researcher or investors forecast the next quarter or year, also track the major player in the market.

Strengthens/ Weakness

But for any specific type of real estate or area, the total investment sales cannot help with identifying the internal changes and future trends.

Resources

While the total volume of investments sales can be obtained from RCA, NCREIF, Moody’s Analytics and other major real estate or finance consulting websites.

Industries Indicators

To solve the problem of internal changes, it is necessary to track related industries to see how it influence real estate market. And it also shows the economic structure which could be healthy or unhealthy, traditional or innovative.

Technology

Why it is important?

The first industry indicator could be technology. Silicon Valley is a typical example which can refer to all high-tech businesses in the region. The term is now generally used as a synecdoche for the American high-technology economic sector and became a global synonym for leading high-tech research and enterprises. In real estate, it is also like a landmark which developed and boomed with technologies. So this area has an innovation and advanced economic structure, and it would definitely attract investors or developers to create spaces for them to live, work and shop.

Strengthens/ Weakness

There are some major indexes can be indicators for the technology industry, like the S&P 500 Information Technology Index, which comprises those companies included in the S&P 500 that are classified as members of the GICS information technology sector. The tendency is remaining positive, but this indicator is too generic like GDP, only shows a simple impression. For a specific research, there would need a more statistics analysis for technologies companies.

Resources

S&P 500 or NASDAQ can offer industry indexes which are more reliable and updated.

Retail

Why it is important?

With the rapid growth of Information Technology, there is another topic – E-Commerce which is often brought up to compare with traditional retail. For the whole retail industry, consumer spending growth is an important indicator for researcher and investors to evaluate the whole market performance. In 2016, retail closures and bankruptcies were up significantly, and over 4,000 major chain closures were tracked, a figure that surpassed 2010’s record 3,600 shuttered major chain storefronts. In addition, there were 26 major U.S. retailer bankruptcies during 2016 compared to 22 in both 2015 and 2014. Therefore, a few major retail categories will be contracted, while other sectors that have been growing will increasingly face issues of market saturation that will slow expansion. Contraction from department store chains and high-profile apparel in 2017 will mostly impact mall and lifestyle center properties. However, the anticipated atmosphere of uncertainty may negatively impact publicly traded brands beyond those categories. On the whole, neighborhood/community and power centers will perform best with the least exposure to contraction, while the impact of these trends on mall and lifestyle centers will be disproportionately felt by Class B and C properties, particularly those in secondary or tertiary markets. Although this information is not direct with the retail tenants or landlords, it can impact investors’ decision and the retail real estate market from its rent, absorption and vacancy. In this case, retail sales should be an indicator to reflect the changes in traditional retail market.

Strengthens/ Weakness

However, with a larger share of that spending going to eCommerce. This indicator only can reflect consumers’ buying power, but cannot be analyzed for traditional retail or e-commerce.

Resources

Cushman & Wakefield and similar real estate service companies offer detailed reports for retails and shopping centers by locations.

E-Commerce

Why it is important?

Like mentioned before, a large share of retail sale is going to eCommerce. With that said, the demand of warehouses and distribution centers will increase, then industrial real estate will continue to benefit from this growth. So the eCommerce sales can be another industry indicator.

Strengthens/ Weakness

But due to its limitations, it may only apply to specific research in industrial real estate.

Resources

E-commerce sales information can be obtained from US Department of Commerce.

ISM Manufacturing Index

Why it is important?

There is another commonly used industry indicator for research in industrial real estate — ISM Manufacturing Index. The ISM manufacturing index is based on surveys of 400 purchasing managers nationwide regarding manufacturing in 20 industries. The index has a strong correlation with manufacturing industrial production and provides timely information on manufacturing.

Strengthens/ Weakness

The ISM index is also a good leading indicator of the economy and is useful in gauging turning points in the business cycle. However, ISM index does not capture technological change and production efficiencies, which make it possible for production to expand while employment contracts.

Resources

ISM Index, as a common index industrial business, can be obtained from Institute for Supply Management directly or related industrial reports.

May 17, 2017May 18, 2017 By Alba Dodaj, Danlin Luo and Joel Neuenhaus

Demographic Indicators

Why it is important?

Demographic are the data that describes the composition of a population, such as age, race, gender, wage, migration patterns and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced, what types of properties and the major age group are in demand. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades like baby boomers and “two-child” policy. Increased population requires more housing, shopping, working (which includes both factories and office buildings) and more hotels for recreation.

Strengthens/ Weakness

However, the number of the population growth cannot explain the inside population structure. So following the previous industry indicators, besides indicators like age, race or gender, demographic indicators would include the total employments and employments in different industries in this case. The first common index is non-farm employment which represents employments working the secondary and tertiary industries who would take up most commercial real estate in the market. But it is not detailed enough to support further research. So, the office-using employment would be an important indicator for office while industrial employment would indicate the quantity of labor in industrial real estate. These specific industry employments can indicate the expansion or contraction of the industry, then indicate its demand/supply in real estate.

While the income in any specific areas can translate into consumers’ confidence index which indicate consumers’ buying power and the affordability of housing.

Overall, demography is a critical driver of real estate demand with the population growth, including immigrants. In 2015, in 44 million immigrants living in the United States. At the current pace, the foreign-born population will grow to 52 million by 2025—more than one of every seven residents.

But most immigrants have their preferences in locations, so the significance of this indicator may work for a few cities which attract immigrants rather than the whole country.

Resources

Demographic data can be obtained by U.S. Bureau of Labor Statistics.

May 17, 2017May 18, 2017 By Alba Dodaj, Danlin Luo and Joel Neuenhaus

Relocation Demand Indicators

Why it is important?

Besides the population growth, there are some factors impact real estate demand, such as relocation.

One of the most common reason is retirement. The traditional labor pool of the working-age population 20–64 will grow much more slowly over the next decade, which means slower job growth and rising wages. From ULI data, the retirement surge over the next decade means that by 2025, the number of people leaving the labor pool (the total number of people ages 20–64) will almost equal the number entering it. ULI also predicts Household growth over the next decade will tilt heavily south, toward the “affordable sunshine states” of the Sun Belt: Florida, Texas, the Southeast, and the Southwest. So the retirement indicators are significant in relocation and senior housing/Health Care research.

Returning suburban growth is one of the relocation trends. Urban areas, which tend to have less room to build, higher prices, and fewer desirable schools, will capture 15 percent of household growth, modestly boosting cities’ share of the total number of households. Many suburban cities created decades ago that are now largely built out continue to reinvigorate themselves with vibrant suburban downtowns composed of new retail and residential developments. In suburban areas, home size, privacy, housing affordability, and kid-friendliness feel more urban than suburban, while school quality, public transportation, and proximity to employment feel more suburban. Because both cities and consumers want retail that is walkable from housing, retail and residential developers should work closely to create cohesive developments to satisfy this evolving consumer. An 86 percent surge in household formations to 12.5 million households over the coming decade in comparison with the prior decade will drive purchases in all stores that cater to new households, particularly renters, who will constitute 58 percent of the net new number of households.

Another relocation trend is the shift to sharing and experience economy. The new sharing economy, which includes more opportunities to rent or borrow than ever before, will most certainly affect household formation and spending patterns. The well-known examples are Airbnb and WeWork, which hit the hotel market and traditional office market representatively.

Wages, Labor costs & Job Markets

Why it’s important

When conducting due diligence and creating your project proforma, wages, labor costs and the job market can weigh heavily on your expected returns.

On the revenue side of your income statement, changes in these markets can impact your rent inflator, bad debt rates and vacancy rates. To cite one of the more dramatic recent examples, have a look at the building boom in North Dakota, fueled by high oil prices and the requisite demand for labor. With the decline in oil demand, the result is a glut of homes on the market, shuttering businesses and over-leveraged local governments. Not a recipe for a healthy real estate market.

On the expense side, labor costs commonly make up a disproportionate amount of real estate development costs. Typically 45-50% for of the budget for commercial projects, with unionized labor, costs can be 20 to 25% higher.

Strengths/Weaknesses

Labor and wage indicators are an important component of market research, but should be taken in context. What would it look like if we saw a geographic area with a sudden increase in U6 (underemployment)? Is this a sign of a weakening economy or an aging population working fewer hours?

Resources

Source Name	Link
Bureau of Labor Statistics	Regional Data. NYC.

Construction Material Costs

Why it’s important

After acquisition and labor costs, your next largest development project cost is likely to be construction materials. Various factors can influence these costs, luckily, the Bureau of Labor Statistics compiles this information on a regular basis. In a large project, small changes can have a big impact.

Strengths/Weaknesses

To the extent a project relies on a volatile commodity component, the developer can purchase insurance in the form of futures contracts for that good. Additionally, when considering which materials to use, a developer should consider the risk of functional obsolescence. Functional obsolescence accelerates the effective depreciation of your building components as the result of a more desirable substitute good. This can be caused by technological innovation in energy efficiency, fire safety or a number of other building features in high demand. The result could be higher than expected vacancy rates at your project.

Resources

The Bureau of Labor Statistics collects and publishes data on the producer price index (PPI). This includes regional PPI data which is further separated into various construction industry components. There is also census related data available at: https://www.census.gov/construction/.

May 17, 2017May 18, 2017 By Alba Dodaj, Danlin Luo and Joel Neuenhaus

Supply & Demand Indicators

Absorption rate

Why it’s important

Carrying costs can push out your project’s break even point substantially. The market absorption rate offers a window into how substantial your carrying costs will be for your project. The absorption rate is calculated by dividing the total available space or available housing units by the average number of sales or space leased per month. In addition, absorption rates should also compensate for new construction and removal of existing space from the market, often due to physical depreciation. Absorption rates can also be used as a key indicator for developers considering new projects in an area.

Strengths/Weaknesses

Calculating residential inventory is an easier task than calculating commercial inventory. This creates more inherent risk in a commercial project. Due to less centralized records, absorption rate calculations can also overlook pre-sold homes and destruction of existing stock. In the event of a natural disaster, one’s knowledge of local conditions would enable a more thorough understanding of the impact on absorption rates. Absorption rates may also differ across different sub-geographies and price segments of the market. Therefore, it is critical to understand how substitute product may differ from the broader market absorption trends.

Resources

Your local multiple listing service will generally capture enough of the market to provide a clear view of absorption trends in the residential market. Various appraisal and brokerage firms also publish absorption rates online.

Total Inventory

Why it’s important

The number of housing units or square feet is a critical component in the supply and demand picture of a market. When combined with population, we get a good barometer of the supply/demand equilibrium or lack thereof.

Strengths/Weaknesses

Total inventory does provide a picture of deteriorating inventory or the pipeline of new inventory. It’s simply a snapshot of what’s in service today. The real value of this data is unlocked when used in tandem with population data; specifically projected changes in population. Any differential between these numbers can be compared with additions and subtractions from the total inventory to determine whether the future conditions will drive up prices due to undersupply or will drive prices down due to oversupply.

Resources

The US census conducts a study every other year called the American Housing Survey. It provides an estimate of total housing inventory, plus many other valuable data points for the professional real estate researcher.

Vacancy Rates

Why it’s important

Your vacancy rate will determine how long a space is empty between occupancies. Your effective vacancy rate will be determined by a number of factors, including: market conditions, pricing strategy, management policies and physical characteristics of the space. Key considerations during due diligence should include identifying the price at which rent revenue is maximized and degree to which the space is in demand for transient tenants. A transient tenant means more turnover and is generally less desirable.

Strengths/Weaknesses

While all properties have a “natural vacancy rate” (i.e. unoccupied time due to turnover), many of these factors are under control of the owner/manager. It’s important to understand which factors you have control over through effective management techniques and which must be acceptable as a condition of ownership. In fact, a high vacancy rate due to under-management can be a desirable characteristic to an investor, as that would indicate potential cash flow upside once they are able to apply their superior management acumen.

Resources

In addition to US census’ American Housing Survey, vacancy rates can be assessed by speaking with other owners and brokers in the area, as well as conducting research through the local MLS. Much can be uncovered about the vacancy rate for a particular property through the due diligence period.