An interesting article in Philly.com, Philly land prices plummet, as weakening housing market tightens purse strings, has some statistics on what could be the start of a slowing real estate market. The article opens with some interesting research on the change in vacant land prices and how they could be the leading indicator of coming changes.
Prices paid for vacant land in Philadelphia have plummeted to their lowest levels in three years after peaking in 2017, an indication that the city’s development boom led by townhouse, condo and apartment projects is losing steam.
Buyers of bare development sites paid a median price of $31.72 a square foot during the first six months of 2018, down more than 46 percent from last year’s $59.23, according to public data compiled this month at the Inquirer’s and Daily News’ request by Kevin Gillen, senior research fellow at Drexel University’s Lindy Institute for Urban Innovation.
The article then goes on to show how this data usually precedes a slowing market. As a real estate investor it’s important to be cognizant of what part of the real estate cycle is happening.
Knowing that you are likely to see the continued tightening of the market in many areas, should lead you to plan your investing accordingly.
Definitely, recommend taking a look at all the research in the article.
This recent article, How Dead Malls Are Resurrecting As Something Else, has a look at how malls are quintessential to American Culture but how many are facing a very tough path forward. Though for the savvy real estate investor this change could make old malls a great investing opportunity.
“The shopping mall is the quintessential American contribution to the world’s consumer culture, but the conditions that led to the creation of shopping malls and sustained them for decades are changing rapidly,” noted the Urban Land Institute — back in 2006.
The article then went on to highlight a number of mall redevelopment projects both successes and failures. Another important highlight from the article was what Simon Property Group (The largest mall owner in the US) is now looking at for its redevelopments.
Simon Property, which owns malls across the country, reported occupancy of 94.7% for all of its U.S. mall properties as of June 30.
Rent spreads were up as were funds from operations for the second quarter. “We see a bright future for our portfolio but it’s not without challenges,” Vlahos said.
Simon is working to reinvent its mall properties using trade area demographics to determine the best future fits for particular properties. “Maybe it’s entertainment; maybe it’s food; maybe it’s experiential retail,” Vlahos said. “All of us are trying to get a handle on that.”
This article from AllianceBernstein, Not Dead Yet: What Many Investors Get Wrong About The American Mall, has some very interesting thoughts on the future of malls as their potential for real estate investment.
Headlines about the death of the American shopping mall have become so common that the phrase “retail apocalypse” has its own Wikipedia page. But this is a death wrongly foretold – and that creates investment opportunities.
It’s true that some malls are dying. Foot traffic is down as more Americans shop online, while shifting demographics have made malls in some parts of the country obsolete.
We estimate that a third of the 1,200 malls that were operating at the start of 2017 will close their doors, with most of the casualties in less affluent areas where population growth isn’t keeping up with other parts of the country.
Many investors have tried to profit from the shopping mall’s expected demise…Here’s the problem as we see it: not every mall is destined to close. We think plenty are likely to adapt and survive. And those that do fail won’t all do so at once.
Investors Business Daily has a great look at 1 investor who sees great promise with old malls especially those that might be the most overlooked like those in rural areas, The Investors Who See Plenty Of Life In Dying Malls.
Buying malls on the cheap leaves Hull with plenty of money for aesthetic improvements, such as raising the ceilings and removing kiosks in a bid to create long sight lines and a sense of open space.
Hull is one of a small crowd of operators bucking the conventional wisdom that there are simply too many malls and that only those catering to wealthy shoppers will survive the death of legacy retailers.
While operating strategies vary, most are shopping for older malls in places with no other enclosed shopping center within 50 to 100 miles.
Such older properties have some inherent advantages. Many were built as the surrounding community was sprouting, so the original developers had their pick of the best locations.
Despite the rise of e-commerce, people still come to malls to participate in the social aspect of shopping — especially in suburban or exurban places with few large gathering places.
For those looking to invest in old malls the Urban Land Institute asked a panel some thoughts on how to succeed going forward, Industry Outlook for Shopping Centers, (Below are some excerpts from their answers.)
One of the most important things to consider for those looking to make value-add real estate investments in old malls or mixed-use developments is how the change in what consumers want and expect is going to lead to the increased rise of experiential retail.
For those not familiar, experiential retail, is the term given to the new blend of experiences into traditional retail. It’s what you see working at the high-end malls and town centers. It’s perhaps, one of the things most smaller retail areas are missing.
If you’re looking for a more in-depth look at experiential retail the NAIOP – Commercial Real Estate Development Association, formerly National Association for Industrial and Office Parks, has an excellent look in their article The Rise of Experiential Retail. As it is really all about the person going there’s experience.
The bottom line seems to be that while most “stuff” can be bought online, people will still go to brick-and-mortar locations to have “experiences.”
These experiences can be wide-ranging, and include the following:
- Personal services such as nail and beauty salons.
- Health and fitness facilities such as yoga, massage and meditation studios, as well as traditional gyms.
- Cinemas and theaters that present plays, concerts, comedy shows, lectures and more.
- Art galleries and stores.
Storefront Magazine has an excellent read on experiential retail and how it is going to shape the future of shopping, 7 Case Studies That Prove Experiential Retail Is The Future.
Customers don’t want to just walk into your shop, buy your product and leave because they could do this in the comfort of their own home. But by creating a more immersive retail experience, retailers can drive people towards their stores and ensure they leave not just with your products but also memories.
Retailtainment is predicted to dominate the industry, the fusion of retail and entertainment, an effort on the part of retailers to provide customers with fun, unique experiences that elevate shopping above anything it’s previously been.
Though in most cases experiential retail is considered as being within a store or property as a mall, an interesting real estate investment strategy, for anyone not looking to invest commercially would be to look at towns that are adopting events that blend into the experiential retail experience. A great example would be the Town of Media.
If you’ve ever been to Dining Under the Stars or any of the other times they close the street and open it up to foot traffic, you see the transformative power of creating an inviting experience.
Recently, a very astute real estate investor, who’s been successful in Fishtown and Brewerytown, told me he considers Media an excellent place for residential real estate investment. He cited the commitment of the town to driving people to the stores and restaurants downtown (Basically…experiential retail), good schools, access to good public transportation (regional rail and trolley), and his belief we’ll see a migration of millennials into places like Media as their demographic ages.
For those looking to find the next best real estate investment, this recent article from BisNow, As Retailers Go Dark, Mall Vacancies Reach Highest Level In 7 Years, shows older malls, especially in the suburbs and rural areas, could benefit from looking at incorporating experiential retail into how they view their property.
The article mentions some data from REIS.
Nationwide, mall vacancy rates rose to 9.1% in the third quarter, their highest level in seven years, according to Reis data, up from 8.6% in Q2 2018 and 8.3% in Q2 2017. Rents are down as well by 0.3% during the third quarter to $43.25/SF.
Many lower-end malls aren’t benefiting from the economic revival, especially in economically depressed areas, such as parts of Pennsylvania, Ohio or Michigan.
Those areas have too many shopping centers but not enough consumers, the Wall Street Journal reports. Lost anchors in lower-end malls are more of a symptom of a problem than a problem itself for many properties.
“Any mall that is worried about a Sears or Macy’s closing has bigger issues,” Sandler O’Neill + Partners Senior Analyst Alexander Goldfarb tells the WSJ.
Retail is going to continue to change. Property owners who adapt best are going to find the greatest success. In many cases this is going to mean re-thinking the tenant mix or even starting to look outside the box and consider co-working spaces or other ways to create unique experiences within the property.
Many of the areas that have seen tremendous real estate investment and development over the last 10 years have been in proximity to one of several of Philadelphia’s excellent colleges. North Philadelphia has seen a transformation due to the growth of Temple University, whereas West Philadelphia has seen major growth due to the continued expansion of Drexel and Penn.
Outside the city in places like Delaware County, the expansion of capital projects at places like Villanova continue to transform neighborhoods. While not limited to these two examples, colleges and universities have been the drivers of much real estate investment.
A recent article from BisNow highlights the issues colleges and universities are now having due to the lack of affordable student housing. College Students, Lack Of Affordable Housing Is A Big Issue National Student Housing.
Student housing development is unique. There are not as many national and local government tax-credit programs to offset the cost of the projects and they face many of the same challenges as multifamily developers, Frisco, Texas-based Texla Housing Partners CEO Roger Phillips said.
The price of ground-up development and value-add renovation of an existing property is at an all-time high, Phillips said. “Developers want to build more affordable housing for students but there just aren’t enough affordable housing programs,” Phillips said.
Even if you do find moderately priced land, it is usually several miles away from campus and colleges don’t like that. Students want to be close to campus. Demand has shifted to be closer. “Also student housing-oriented lenders want developers to be within certain distances from campus or the project won’t get funded.”
While building affordable multi-family housing as an investment is definitely not for everyone, keeping an eye on where investments are happening, is a great strategy for someone looking to invest in small multi-family or single-family student housing.
Opportunity Zones are becoming increasingly more talked about as having the potential to see significant real estate investment. As we previously wrote in, Will New Qualified Opportunity Zones Change Where to Invest In Philadelphia and the Suburbs?, we see Philadelphia opportunity zones as having the potential to see a high-level of new development and an influx of new real estate investments both institutional and individual.
For those asking, “What is an Opportunity Zone.” The answer from the IRS is,
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation authority to the Internal Revenue Service.
The Brookings Institute has an explanation on how some of the benefits for investors could be realized.
For background, Opportunity Zones offer favorable capital gains treatment for taxpayers who invest in designated high poverty neighborhoods. Invest in real estate or businesses located in a qualified zone, hold it for ten years, and not only can you sell your investments free of capital gains tax, but you also you get a tax break on untaxed capital gains rolled into an Opportunity Zone investment. Individuals in a high-tax state and with short-term capital gains can avoid $7.50 in taxes for each $100 they invest, even before considering any return on their Zone investments. It’s very favorable treatment.
Jon Banister has some interesting insights on how much money could potentially be invested in Opportunity Zones in a recent Bisnow article, Investors Lining Up To Pour Billions Into Opportunity Zones. He writes,
The program, part of the Tax Cuts and Jobs Act President Donald Trump signed into law in December, gives large tax breaks to investors who place capital gains into funds that invest in opportunity zones, a set of largely low-income areas across the country.
Treasury Secretary Steven Mnuchin last week predicted $100B of capital would be invested into opportunity zones.
Steve Glickman, the original architect of the Opportunity Zone policy, who launched a consulting firm last month to advise investors on the program, said he has spoken with hundreds of investors eager to deploy money into opportunity zones. “We always knew this would be a larger incentive than any previous community investment program, but I think the actual market demand and interest is way higher than even I thought earlier this year,” said Glickman, who will speak Oct. 16 on Bisnow’s D.C. Opportunity Zones event.
Philadelphia and the suburbs have a number of Opportunity Zones. The PA website has more information on locations including an interactive map.
The site also explains the criteria that went into determining the selection of sites.
Kelsi Maree Borland has an excellent article on GlobeSt.com. Her article titled – Rethink Your Definition of Class-A A focus on amenities, outdoor spaces and food-and-beverage services has changed the definition of class-A real estate, hits a number of the points we have been stressing for those real estate investors looking to make value-add plays on older office or in our opinion potentially even retail buildings.
Though the article is behind a pay-wall I thought she lays out the changed concept of what constitutes Class A office space by writing:
Once simple defined as a top-end building—whether office or multifamily—class-A now requires a lot more than just quality to be competitive. New class-A space in Downtown Los Angeles comes with a full amenity package, outdoor spaces and food-and-beverage services.
We see this trend as growing outside downtown areas and continuing into the suburban office building sub-markets in Philadelphia. People’s desire for good spaces, amenities and wellness or healthy living options is only going to continue to grow.
A recent article in AZ Big Media, Offices look for competitive edge to attract and retain tenants also highlights the growing push towards the use of amenities and how they can differentiate one’s office building. Though the article highlights the Arizona market, I found two quotes in the article especially telling.
“The competitive environment to recruit and retain employees is pushing the facility amenities,” said Bryan Taute, executive vice president at CBRE. “The buildings with the best amenities are typically leasing faster and getting higher rents.”
“The buzz around amenities outweighs the number of buildings that actually have amenities to offer,” added Chris Walker, managing director at Cushman & Wakefield in Phoenix. “Those that provide them and provide them in a well thought out, impactful manner, will likely see increased occupancy and potentially will be able to hold rental rates better than the competition.”
How office developers and building owners decide what amenities to incorporate in their facilities depends on the market and what type of tenant they are trying to appeal to.
If you are thinking, I need to sell my house, so I need to figure out the best process to sell a house fast in Philadelphia, there are a number of things you need to take into consideration.
It is also important to realize that for much the same reason as many people consider selling their homes for sale by owner, getting a house ready to sell fast definitely takes time and if you are looking for the fastest way to sell a home it definitely is to consider companies who buy homes quickly in Philadelphia.
If your first thought is, I’m not ready to sell it as fast as possible. There are a number of steps you can take, to get your house ready to sell fast.
One of our biggest recommendation after identifying the items that need to be repaired or updated is to determine what can you handle yourself and what would require handling a professional to handle them.
This is just a short quick list and even all the items above can take some considerable time, money or effort. If you are looking to sell a house fast – give us a call at 215-987-4561.
This recent article by Donald F. Smith Jr. who serves as President of the Regional Industrial Development Corporation (RIDC) of Southwestern Pennsylvania (Think Pittsburgh), What Property Owners Outside CBDs Can Do To Attract Expanding Industries, on National Real Estate Investor Online makes some excellent suggestions for investing in real estate right outside a central business district but many of the strategies could be used by anyone looking to invest in Philadelphia neighborhoods outside Center City or even any of the surrounding suburbs.
One thing I think Mr. Smith nailed is what companies and their employees are really looking for.
As much as budget factors into location decisions, companies choose locations based on how well the property and surrounding community fits their brand image and appeals to the talent they are trying to attract. Employees and potential employees not only want creative, amenities-rich workplace environments, they want to work in a neighborhood that makes them feel welcome and can provide them with a sense of belonging.
They care deeply about the surrounding community atmosphere and the type of identity it conveys. If they cannot easily or comfortably go out for a coffee break, take a client to lunch or get drinks with co-workers and friends after work, the property will raise immediate red flags.
The changing nature of real estate continues to show that companies and employees both place a high emphasis on amenities. Mr. Smith also mentions the high level of emphasis placed on location and particularly on-site fitness amenities. Convenience, access to experiences, and proximity to local businesses all seem to score high as well.
There is an interesting and very hypothetical question on Quora, I’m an entrepreneur and made $2 million this year with my business. I wanted to invest in real estate to avoid taxes but my accountant says to wait till next year…What should I do?, which could potentially give some insights for those looking at long-term success as both a small business owner and active real estate investor.
A very interesting and potentially insightful answer was put forth by Michael Lantrip an author of several books including, “Tax Cuts And Jobs Act For Real Estate Investors.” (The Tax Cuts & Jobs Act also created Opportunity Zones and the potential for real estate investments in these new areas.)
One thing to note about his answer, he does open it with, “Your question is obviously fake, but as a HYPOTHETICAL, there is a very interesting answer. Let me show you how to pay Zero Taxes on the $2M…”, but the potential 10-point strategy he lays out is filled with gold.
But here’s what you can do to keep the entire $2M:
1.) Create a single-member LLC.
2.) File Form 8832 electing to be taxed as a corporation.
3.) File Form 2553 choosing Subchapter S status.
4.) Find a commercial shopping center selling for $6M.
5.) Contribute $1,500,000 of the $2M to the LLC.
6.) Use the $1,500,000 as a Down Payment (25%) and enter into a Contract for the LLC to buy the shopping center.
7.) Before you close, do what is called a Cost Segregation Study.
8.) Now you close on the shopping center and operate it until the end of the year.
9.) When you file your S Corp tax return for the shopping center, let’s say it shows an operating profit of $700,000.
Now, here’s the kicker.
I recommend reading his response in its entirety, it’s definitely worth the time even if to come up with some questions to ask your personal financial advisor or CPA.
An interesting part of the strategy he lays out is the necessity of the Cost Segregation Study. He provides additional insights on the strategy within his answer, but for those real estate investors unfamiliar with what exactly a Cost Segregation Study is, Ernest & Wills provides an excellent definition. From their website:
Cost Segregation is the practice of identifying assets and their costs, and classifying those assets for federal tax purposes.
In a cost segregation study, certain commercial building costs previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation using accelerated methods. Residential buildings, including multi-family buildings are subject to a 27.5 year life.
An “engineering-based” study allows a building owner to depreciate a new or existing structure in the shortest amount of time permissible under current tax laws.
Michael’s answer also sheds some insight on how the changes to the Tax Cuts and Jobs Act can have significant benefits for real estate and business owners. The IRS has an update from April 9th, 2018 – New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act.
A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.
The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to:
the enlargement of the building,
any elevator or escalator or
the internal structural framework of the building.
Roofs, HVAC, fire protection systems, alarm systems and security systems.
These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply:
The taxpayer didn’t use the property at any time before acquiring it.
The taxpayer didn’t acquire the property from a related party.
The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
As you can see there are a number of provisions and factors that influence how the deductions can be used. As a savvy business owner or real estate investor, it is best to consult with your tax and investment professionals to determine how best to structure your real estate investment as a business owner or as a business owner who recently divested.
There is an excellent quote in a Miami BisNow article, Watch Your Back, WeWork: Landlords Move To Cut Out Middleman, Offer Coworking Themselves, which has an excellent quote from Angelo Bianco of Crocker Partners that frames many thoughts we’ve hear from local Philadelphia area real estate investors. Which is, why shouldn’t they get into co-working spaces themselves?
“Co-working is a huge change in the market, but it’s not what it appears to be,” Crocker Partners Managing Partner Angelo Bianco said. “It’s just subleasing space. You have to be careful when you say that’s absorbed; it increases competition for small suites.”
Bianco said that in some of Crocker’s buildings, “We hire a manager to have our own operated co-working location. [Co-working companies] were smarter than property owners. Now, we’re going to steal their ideas. Why would we allow somebody to make a profit on our space?”
While it sounds excellent, as a real estate investor, to be a landlord and generate some additional income by running your own co-working space there are a number of things to consider before you make the decision to go ahead. There are a number of tasks that have to be handled before you could consistently expect to run a co-working space, especially if running an office business is outside your normal business operations.
Alex Hillman, co-founder of Philadelphia’s Indy Hall, has some excellent insights into the costs associated with starting your own co-working space in his article, HOW MUCH DOES IT COST TO START A COWORKING SPACE?
Your start-up costs will vary depending on some of the following things:
Our initial 1800 square foot Indy Hall $6,000 for rent x 3 (First/Last/Security) $2,000 for 20 desks & chairs from Ikea $150 for a wireless router $500 for a 1 year insurance policy $300 for misc things like trash cans & bags, cleaning supplies, etc
Our second (replacement for the original) 4500 square foot Indy Hall $18,000 for rent x 3 (First/Last/Security) $1,600 for additional workstation furniture $600 for first conference room table & chairs $300 for whiteboards $3,000 for networking equipment $2,000 for projector & installation equipment $5,000 for misc furniture, lockers, kitchen supplies, etc