UP Front: Are Deals Moving in Opportunity Zones After All?
The general consensus about Opportunity Zones has been that while interest in these areas is intense, there has been little activity. Most of the capital…
The general consensus about Opportunity Zones has been that while interest in these areas is intense, there has been little activity. Most of the capital poised to invest in Opportunity Zones, so the theory goes, is waiting on the sidelines until the Treasury Department clarifies more regulations. A study by Real Capital Analytics disputes this notion, finding that both investment and prices are rising in Opportunity Zones. Report author Jim Costello found signs that the program is making a difference.
The study looked at the variation in sales activity between both Opportunity Zones and areas that were not selected to be part of the program—tracts that Real Capital Analytics termed “Also Rans.” Theoretically, both of these areas were ripe for redevelopment and both should see more activity as cities grow and populations expand. To see if the program was making a difference Real Capital Analytics looked at the sale of sites and properties scheduled for development in the three Census tracts types. If sale activity grew in both the Opportunity Zones and the Also Rans, it would suggest that the program was not needed, Costello writes. In fact, the team found that last year’s sale activity for development-oriented type projects was falling in the Also Ran areas even as it grew in the Opportunity Zones.
There are some caveats to this finding, the study said. Some of the turnaround in the decline for development-related sales starting in 2017 likely came from the revamp of bank lending standards for construction loans. Also, the pullback of those so-called high volatility commercial real estate loans had crimped capital availability across census tracts of all types starting in 2015.
The study further notes that total development-related sales volume in the Also Ran zones is significant: $8.4 billion over the 12 months through Q1 2019, or 32% of the US total. The growth rate for such sales in the Opportunity Zones is higher, in part, because the base of sale activity is smaller: $3.7 billion, or 15% of the US total.
Nonetheless, the study concludes, “the fact that development-related sales are growing in Opportunity Zones as such activity is shrinking in the Also Rans is evidence that this program is not just a buzz item.”
One reason for the growth, according to Costello, is that the Opportunity Zone program is inspiring property owners that have held lower-quality assets with deferred maintenance to finally sell the assets. Properties, in short, are not selling for top dollar. These properties “are being sold on the cheap and with those deals growing in the area, the simple average price will fall as the average will suddenly include a lot more of these lower priced assets,” Costello says.
That said, prices are actually climbing in the Opportunity Zones, he continues. The index RCA developed to look at Opportunity Zones versus the rest of the US controls for the quality differences between properties and excludes prices for redevelopment properties “so as to get at the fundamental market trends.”—Erika Morphy
CAPITAL MARKETS: In Senior Housing, Capital Sources Want Experienced Borrowers
The senior housing market is seeing a boom. With the 65-plus demographic growing daily, many investors and developers are entering the senior housing space. While capital appetite for senior housing deals is healthy, senior housing is still considered a specialty market, and new entrants can have trouble landing capital sources.
“Capital availability is good. The caveat is that new entrants are going to have a relatively difficult time getting capitalized because of the nature of senior housing, especially when you get into the assisted living and memory care space, which is as much an operating business as it is a real estate business,” according to Shlomi Ronen managing principal at Dekel Capital. “For those doing their first project, they are going to need to bring an existing equity relationship into the space or partner with someone that has experience on the operations side in senior housing.”
This is a dichotomy in the market, where there is both a plentiful capital supply and a high level of scrutiny on each deal. In addition, not all capital providers will consider senior housing opportunities. “From both a debt and equity perspective, this is a specialty item,” says Ronen. “There are people out there doing it, but it isn’t as large of a group as the main asset classes, like apartments. The pool of capital for senior housing is much narrower. Capital sources understand the challenges of operations and they want to make sure that they have an experienced developer and operating team on board.”
However, the scrutiny comes with more medical- and operational-intensive management properties, like assisted living and skilled nursing. Active senior housing and independent living have a larger pool of capital. “Active seniors housing is essentially multifamily with more activities,” says Ronen. “The same goes for independent living.”
Despite the challenges, Ronen says that he has seen significant new entry into the market. “We are seeing people that have never done senior housing, partnering with operators and building divisions around senior housing,” he says. “There is a lot of activity and new entrants into the market, which has resulted in some markets being oversupplied.”
The activity has actually led to an oversupply issue in certain markets. Ronen points out Salt Lake City and Dallas as cities with an oversupply of senior housing. In those markets, capital providers are also showing restraint. “If you have an oversupply issue, it is going to be very difficult for you to get financing,” he adds.—Kelsi Maree Borland
TECHNOLOGY REVIEW: Your Gut Instinct Is No Longer a Competitive Differentiator
Despite the long-awaited and much-heralded embrace of tech in the CRE industry, there are still some noticeable gaps in what type of technology is being adopted. For example, a new Deloitte Insights report points out that most CRE managers and investors continue to make heuristic, or instinct-based, decisions rather than ones informed by data analysis.
There are several reasons why. Habit is a powerful explanation. “The industry has long thrived on relationships, which is how many investors have traditionally gained access to unique information,” according to the report. “Traditionally, most investors have combined this information with their gut instincts to make investment decisions.”
Other reasons why investors may not see the need to embrace data analytics is that they are unaware of the wide variety of datasets available for CRE or perhaps lack the analytical capabilities to generate insights from that data.
Even for those who are aware of its capabilities, there are challenges to adoption, Deloitte Insights writes. Some may be unsure where to start; others may not know which new skills and capabilities should be added to begin. Most CRE executives are certainly savvy enough to worry about the uncertainty of a return on investment.
No Longer Competitive
The heuristic approach to decision-making continues, however Deloitte Insights notes that this approach may not remain competitive for much longer. With increased availability and transparency of data, the report suggests that access to information may not be a competitive advantage anymore. Investors will find they have a growing number of blind spots as they seek to diversify portfolios. For instance, Deloitte Insights notes, some of the newer business models, such as short-term rentals for co-sharing spaces, have different dynamics and a limited track record of performance and returns. It states that “For investors and managers evaluating these new business models, relying on intuition may not be enough.”
Indeed, there is much more data available today than there was even just a few years ago. “Information such as net effective rents, leasing spreads, lease comps, market demand, and tenant information have now become much more accessible and granular,” the report says. Also, alternative datasets from IoT sensors, social media, geospatial information, and satellite imagery are increasingly being used.
How It Works With CRE
There are many ways data analytics can be applied to CRE. They can be used in acquisition, disposition, and portfolio management processes to manage risks and complexities effectively, and mitigate fees and margin pressure, according to the report. For instance, during due diligence, investors can use diagnostic analytics to understand the correlations between property performance and user movement within and around weather conditions, energy prices and the property itself.
Another example the report provides: retail mall investors can use traditional property data around performance, combined with alternative retail sales data from mobile sensors, social media, and physical store sales, and use machine learning algorithms to analyze consumer buying behavior for geographical insights and retail tenant profiles.
“Advanced analytics can help investors and managers better understand the sources of risk—from asset level, to macroeconomic, to regulatory—so they can draft appropriate mitigation measures,” according to the report; “For a diversified CRE portfolio, this could involve assessing risk and return across multiple property types, geographies, and regulators.”
How to Get Started
For any company that isn’t in the tech sphere, investing in a new—and particularly—advanced application may seem daunting. Expert consultation certainly may be warranted. In the meanwhile, here is a cheat sheet that can get executives thinking about what they may need.
Develop a data management plan. Deloitte Insights suggests investors and managers first assess existing processes to identify areas in which they are lagging and those in which data analytics and AI would likely most benefit them. “For instance, some investors may need data analytics to improve their deal sourcing and bidding capabilities, while others may use it to help generate smarter portfolio management options.” Part of a data management plan also calls for investors and managers to better understand the different types of datasets and analytics solutions currently available. Also, investor firms should identify the skill sets they expect to use for advanced analytics, Deloitte Insight says.
Embrace a data-driven mindset. Deloitte Insights readily acknowledges that adopting a new approach and changing behavior throughout an organization is not easy. “C-suite leaders will need to clearly articulate the benefits of utilizing alternate datasets and analytics,” it advises. “They should act as change champions, taking ownership and being accountable for setting a data-driven culture.—Erika Morphy
BEHIND THE DEAL: Confluence of Factors at Work in Mega Green-Up Loan
Many factors were at play for a recent Freddie Mac loan for repeat Newmark Knight Frank/Freddie Mac sponsor, Prime Residential. The $166 million loan was obtained for the acquisition of Domain Apartments, a San Jose, CA-based 444-unit property that was built in 2014.
NKF was able to provide flexibility for Prime during the bidding process and throughout the transaction. NKF executive managing director, Mitch Clarfield, with director Ryan Greer, provided the 10-year, full-term, interest-only debt at 65% loan to value. NKF also worked closely with Prime and Freddie Mac to determine that the property qualified for a Green-Up execution, which removed the transaction from Freddie Mac’s annual production cap, allowing Freddie Mac to offer additional interest rate savings to Prime.
“It was a confluence of circumstances that led to the green execution,” Clarfield says. “Fannie and Freddie were asking everyone to consider green-up execution, but with the property’s construction date, we were surprised it would qualify. But because it was built without LED lights, changing out all of the interior corridors and exterior lights to LED was the qualifier. To take a property built more than two years ago and have a 30% savings in energy and water was the answer.”
Clarfield said the team was able to index lock the transaction quickly in order to capture a decrease in Treasury rates, providing Prime with a more cost effective set of financing options.
“Better still, our partnership with Freddie Mac and excellent relationship with Prime provided us the opportunity to close the transaction under the Freddie Mac Green Advantage Program providing Prime with more favorable terms and helping Freddie Mac achieve its mission to provide more sustainable housing,” said Clarfield.
In addition, he said this transaction may be an example of a bigger trend in terms of yield.
“We are seeing more investors accepting lower yield for quality core real estate than they might have considered 12 to 18 months ago,” Clarfield says. “This is accelerating the abundance of investors looking for properties to put away for long-term yield.”—Lisa Brown
EXEC WATCH
Executive JLL has announced the addition of five new brokerage experts to strengthen its industrial practice in Chicago. Mark Nelson, SIOR, Michael Nelson, SIOR, Gavin Stainthorpe, Michael Conway and Brian Etten collectively join JLL from NelsonHill, a Chicago-based commercial real estate services firm.
SECTOR WATCH: The Healthcare Hotel
Treating healthcare patients like hotel guests isn’t necessarily a new concept. The trend has existed in various forms throughout the last 20 years. However, the motivations behind it have definitely changed, and so have the actual effects on the patients and the healthcare industry as a whole.
When the concept of hotel-like design was first introduced to the healthcare industry, it revolved around the idea that if inpatient surroundings, primarily patient rooms and nursing units were similar to hotel-like environments, healthcare institutions could charge their occupants additional fees for the upscale experience. This would increase their bottom lines, despite the higher staffing ratios that were necessary to enhance and maintain the experience.
This trend was more prevalent in major urban areas like New York City where Academic Tertiary Care Facilities abound, which could institute this practice, and where there was a significant populace willing to pay more for the differentiated attention and experience.
What would these hotel-like design features spaces entail? Typical features would be atrium lobbies, multiple receptionists, early examples of navigants, skylights, as well as upscale wall, ceiling, and flooring finishes: expensive woods, granite, and other similar materials. The trend created reasonably successful units, with high occupancy rates that would generate lucrative income for the institutions that could afford the initial capital costs. Though this trend started to show patients were getting better sooner, this was not tracked or studied at that time. The motivation behind the trend was not focused on the effects of hotel-like design on patients, the motivation was purely economic.
If we fast forward some 15 years, we have learned from The Center for Health Design’s industry investigations and research into issues like Patient Focused Care and Evidence Based Design (how we interact with patients and that one can factually see and test the value of design) that there is a correlation between outcomes and environments, and that those high-end units of yesteryear were onto something, even if they didn’t know or fully understand what.
Now the cost benefit to a hospital’s bottom line of being able to discharge patients sooner is well known. Additionally, the benefits of privacy as a major Evidence Based Design tenet, have found their way into the Facilities Guideline Institute (FGI) Code for hospital design, mandating such things as single patient rooms in lieu of semi privates, along with space in the room for family and friends, and, at the same time, promoting the benefits of issues like light control, acoustics and warm materials.
All these new changes have shown that people do get better faster. While hospitals are becoming more consumer-centric, this trend has also encompassed changes in the way medical staffs are being treated at these updated facilities. Providing employees with high end and high functioning working environments is another benefit in helping people get better faster. Access to top medical equipment and installing well designed lounges, cafeterias and TV rooms for the staff is another example of creating a hotel-like atmosphere for not only consumers but also for the staff.
While the idea may seem to be intuitive—when you’re treated well, you’ll heal faster—it is only recently that we have the tools to verify this fact. In the Kimmerle Group, a design, real estate planning, development and branding practice, we seek to balance the growing technological demands of equipment in highly acute care main frames with the warmth of wood, paneling and cabinet work that conceals medical equipment when not in use. Concealment, virtual and otherwise, goes a very long way to enhancing the quality of the space and mitigating the harshness of exposed equipment, no matter how beneficial that equipment may be. An example can be found in a group of recently completed nursing units for bariatric patients done by Kimmerle, where we concealed overhead lifts when not in use.
Considering the benefits that hotel-like design has on a patients’ wellbeing and recovery time, we are confident that further research will result in the proliferation of beneficial environments coupled with lower healthcare costs.
Michael Azarian, managing director of Kimmerle Group’s Health Care Studio. The views expressed here are his own.