Will Philadelphia Luxury Apartment Market Slowdown In 2018?

Matthew Rothstein has some interesting insights in Bisnow Philadelphia, Philly Multifamily’s Price Problem And 4 Other Things We Learned At The 2018 Forecast Event. It’s interesting to see how the costs of construction are driving up rents especially in the upper end of the market.

Multifamily supply boom hitting top of market hardest

One of Philadelphia’s biggest advantages in drawing millennials — it is second in the country in terms of millennial growth, according to Longfellow Real Estate Partners Managing Director Jessica Brock — is its affordability compared to New York and Washington, D.C.
But newly built apartments in Philly are targeting rents at an average of $3.50/SF, according to JLL Research Director Lauren Gilchrist, or $3,500/month for a 1K SF apartment.

For most Philly renters, that is an astronomical figure. “You can go to tons of places in nice areas that are considerably cheaper than that, so I’m not sure who will be paying those rents besides professionals landing in Philadelphia for the first time or empty nesters coming into the city,” Gilchrist said. The lease-up numbers bear that out.

Available apartments costing $3.50/SF are about 60% occupied, according to Gilchrist, compared to 80% of apartments between $3 and $3.50/SF. Apartments that rent between $2 and $3/SF are over 90% occupied. The continuing difficulty of buying a house, even for those making a decent wage, means that millennials are likely to stay in the renting market for longer, as their wages figure to increase eventually.

Because of that, and landlords’ willingness to offer generous concessions, Gilchrist has no long-term concerns about multifamily absorption in the city.

There could be a tremendous opportunity for the owners of redevelopment projects or older apartment buildings to find creative ways to offer better incentives to those looking at the top of the rental market.

Will Residential Real Estate Be Down and Commercial Up Due to the New Tax Plan?

George Schultze has an article in Forbes about the Christmas Tax Plan, Investing After A Christmas Tax Gift, that shares some of the changes coming with the new tax plan.

A new income tax rate cap of 25% for pass through entities (such as LP’s and LLC’s). However, this doesn’t apply to certain businesses (like hedge funds and other service businesses) and phases out for larger companies. Having said that, it will benefit manufacturers, real estate investment companies and certain other industries.

Mortgage interest deduction will be capped at $1 MM for future home purchases.

From a quick look, it seems like commercial real estate stands to potentially gain significantly, and residential could see a bump in the road with the lowering of the mortgage deduction.

Update: Dan Kern in U.S. News & World Report has some interesting insights into how the tax plan changes could effect real estate.

How the Tax Plan Affects Investments

Changes to taxation of pass-through organizations such as LLCs and S corporations are among the most complex aspects of the tax bill. Pass-through entities will receive favorable tax treatment, helping manufacturing and real estate organizations, however, law firms, medical practices, consultants and investment managers are among the entities that won’t be able to take advantage of the beneficial tax treatment of pass-through income.

The increase in the standard deduction will limit the number of households that choose to itemize deductions, which will reduce the financial incentive to buy a home rather than rent.

Expensive real estate markets in high tax states such as California, New York, New Jersey, Connecticut and Massachusetts will see declining demand as a consequence of caps on mortgage interest deductibility and severe reductions in the deductibility of state and local taxes. Reduced supply of homes for sale in those markets may provide a partial offset for the demand loss, as current homeowners may be less likely to sell given the tax changes.

 

What Real Estate Investing Strategies Will Benefit Most Under the New Tax Plan?

John Engle in Seeking Alpha has some really interesting perspectives on what real estate investing strategies could benefit most form the recently passed changes to US tax law, The Big Winner Of The Tax Bill: Commercial Real Estate.

Pass-through entities such as partnerships and limited liability companies are set to benefit greatly from the new law….Real estate investment is almost always conducted through such entities, so it will be a sector to benefit richly after the late-stage inclusion of property investment under the provisions of the bill.

Some commercial real estate, especially non-residential, will benefit from the new law’s expanded coverage and scale of Section 179 of the United States Internal Revenue Code, which covers certain kinds of depreciation deductions. Specifically, Section 179 states that a taxpayer may choose to deduct the cost of certain types of property as expenses, rather than capitalizing the cost of the property. The new tax law will double the current dollar limitation on the amount that can be expensed each year from $500,000 to $1 million.

The impact of the changes to Section 179 will depend on the strategy and sectoral exposure of the particular real estate investor. Already the most popular strategy among private real estate investors, value-add strategies will undoubtedly get even more attention, especially non-residential value-add scenarios.

 

Alistair M. Nevius, How tax overhaul would change business taxes, has some excellent insight into how Section 179 will change.

Sec. 179 expensing: The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phaseout threshold to $2.5 million. These amounts will be indexed for inflation after 2018.

The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Looks like it will be an interesting start to 2018 in the commercial real estate space. I think we will see some tremendous opportunities across multiple sectors.

King of Prussia Mall to Become the Suburban Hudson Yards?

Michael Tanenbaum has an interesting article, Could King of Prussia Mall become a place to call home?, which looks at some of the development ideas being considered by Simon Property Group Inc for the old JC Penney department store.

Simon is the largest mall landlord in the country and owner of the King of Prussia Mall. Currently, they are working on ideas for the

The article mentions that Simon has a vision that the King of Prussia mall could grow into something like Hudson Yards.

Eather than replace JCPenney with another distressed retailer, Simon president and COO Rick Sokolov told Bloomberg believes the property can be utilized as a suburban version of Manhattan’s Hudson Yards:

Sokolov declined to divulge details of the proposed plan for the mall. On a conference call with analysts in October, CEO Simon said the project could include a hotel, apartments and office space, and had the potential to increase the property’s value from $2 billion to more than $3 billion.

Located on Manhattan’s West Side, Hudson Yards is a sprawling complex of high-end apartments, restaurants, offices, parklets and retail shops. It is the largest private real estate development in American history and the largest in New York City since Rockefeller Center.

 

Finance-Commerce.com has an interesting look at the King of Prussia mall redevelopment plans as well, Mall-owner Simon looking beyond retail.

King of Prussia Mall, a 2.8 million-square-foot shopping wonderland northwest of Philadelphia, is the type of destination center that mall defenders say can defy the rise of online shopping. It’s a sprawling complex that houses stores from all corners of the retail universe, more than 50 food venues and a concierge lounge. Yet it still has to grapple with today’s reality, such as a J.C. Penney that shut down in July and left a hole in a key anchor spot.

It’s a sign of the times that even King of Prussia — which ranks in the top 3 percent of malls in the country, according to Green Street Advisors — is turning what was once retail space into other uses. With the rise of e-commerce imposing a rapid reckoning on retailers and their landlords, mall owners are turning to everything from restaurants and bowling alleys to apartment buildings and hotels to internet-proof their properties. Retail landlords have spent $8 billion in the past three years on updates that focus on experiences that can’t be found online, according to brokerage Jones Lang LaSalle Inc.

 

One thing is for certain. There will be tremendous opportunity in the retail to redevelopment area as e-commerce continues to change how people shop and live.

Investing In the Changes to Retail Properties in the Philadelphia Area

Philly.com has an article, Wills Eye foresees more retail stores as more medical providers invade the malls, highlighting the continued changes to the retail sector and it is something that commercial real estate investors need to take note of.

As more changes happen to the types of stores that are found in malls, shopping centers, and even strip malls, smart investors will be able to find excellent opportunities to invest and rehab, to meet the change in tenants.

Landlords and brokers say it’s part of a bigger trend of the wellness sector invading malls and shopping centers, as traditional anchors close amid the rise of internet shopping.

“What you’re seeing is traditional retail properties going through a detoxing, a sort of cleansing – where underperforming, homogeneous retailers are vacating and in their place enters a new breed,” said Joseph Coradino, chief executive officer at Pennsylvania Real Estate Investment Trust

The article went on to highlight a recent report from commercial real estate firm CBRE.

The report noted how the wellness sector is moving into malls, driven by aging baby boomers. Since the first quarter of 2016, 35 percent of all leased square footage in the Philadelphia metro area was signed in the categories of “Tech, Health, and Food and Beverage,” the report said.

Broker Andrew Shpigel at MSC Retail mentioned landlords like wellness tenants, such as hospital branches and eye-care shops, because they typically come with strong financial backing.

“They’re a stable use and almost considered online-proof,” he said. “The landlord’s ultimate goal is to drive traffic to their property and promote cross shopping with the other tenants, and health/wellness/medical operators do exactly that,” enabling patients to take care of multiple needs in one stop.

Interesting Real Estate Finance & Investing Strategy for LifeTime

It seemed like pretty big news that Life Time Fitness, lifetime.life , was putting its brand-new club in Ft. Washington, Montgomery County, up for sale but it seems like the deal is part of a broader overall corporate real estate strategy according to The Ambler Gazette,

Natalie Bushaw, PR director for Minnesota-based Life Time Fitness, said in an email June 14 that a Philadelphia Business Journal story published online that morning titled “Life Time Fitness puts Fort Washington club up for sale” was “somewhat misleading.”

“As part of our normal course of business, we are always exploring financing options that are to our advantage,” Bushaw said. “This includes working with REITs on sale-leasebacks of some of our buildings as a way to be asset light and more capital efficient. It is a common financing practice that we and many others utilize.”

 

Will Philadelphia Real Estate See A Big Year in 2018?

Curbed Philly has an interesting statistic showing a snapshot of how much development is expected in Philadelphia during 2018. According to their numbers, we could potentially see over double the new construction that we saw in 2017!

But while Philly saw 3.3 million square feet of new construction deliver this year, apparently we haven’t seen nothing yet. A staggering 8 million square feet of construction is on the way in 2018. Still, 2017 did have some winning projects leave their marks on Philly’s skyline in more ways that one.

How this will affect the local real estate markets, is yet to be seen but if you’re an investor interested in investing in Philadelphia or the suburbs, 2018 could be a great year!

 

Do You Need Insurance When Rehabbing Your Investment Property?

Having the correct insurance coverage is an often-overlooked aspect of starting a rehabbing project, after investing in a new rental property.

Building an addition or making renovations may leave you without adequate insurance coverage or could expose you to unexpected liabilities. Before you start your project, take a moment and consult with your insurance professional, it could save you a lot of money. 

Homeowners Insurance Adjustments

Depending on the size and scope of your remodel, your insurance professional may recommend changing some of the limits on your homeowners’ insurance policy. Depending on how you purchased the property, it may not be a homeowner’s policy.

For example, it may be a good idea to increase the building and liability protection on your home during the course of the project.

 

Your Contractor’s Insurance

After reviewing your own insurance coverage, it is also important to check the insurance of your contractor or home remodeling company. Ensuring the general contractor has the proper insurance is very important. By hiring an improperly insured contractor, you can be vulnerable to a lawsuit should someone be injured during your remodel.

The amount of liability insurance your contractor needs will vary. It is dependent on a number of factors including amount and type of work being completed. You will want to ensure the contractor has at least general liability and workers comp insurance.

If the general contractor is planning to use any subcontractors during the project, you will need to check the coverage of those subcontractors. If an employee of the subcontractor is not a full-time employee and is injured, he may not be covered by anyone’s workers compensation insurance.

General Contracting Yourself

If you are planning to act as your own general contractor, be sure to mention this to your insurance person. Depending on your state, acting as a general contractor on a home improvement project could subject you to additional liabilities. If you do act as a general contractor, you may want to consider purchasing a builder’s risk policy for the duration of the project.

Will 2018 Mark A Big Change In Real Estate?

There is an interesting article trending on LinkedIn about 50 Big Things that will happen in 2018. One of the items, specifically mentions a possibility the CEO of Redfin seeing happening.

The 50 big ideas for 2018

By Chip Cutter and Laura Lorenzetti Soper

If 2017 left you breathless, exhausted by unexpected headlines, then brace yourself. The coming year may bring even more turbulent change, according to the CEOs, academics, economists and other bold thinkers we consulted for our annual peek at the year ahead.

17. The U.S. becomes landlord nation.

By Glenn Kelman, CEO of Redfin

The last decade has seen the most expansionary fiscal policy in American history. What has historically stopped governments from printing money willy-nilly is inflation, when the price of groceries, gas, gadgets, books, bicycles and everything else under the sun shoots through the roof.

But that hasn’t happened in this century because other forces keep making stuff cheaper: Amazon has made it easy for consumers to see when one product does the same thing as another but for a lower price. Globalization has shifted manufacturing to wherever wages are lowest. And robots are doing most of the work for free.

The only asset that is still made locally, by hand, with utterly unique characteristics, is a house. And there, inflation is roaring: the price of that one asset has increased 35 percent in five years.

The Federal Reserve sets aside the cost of houses when deciding whether inflation is a problem even though that cost is, for most Americans, the primary determinant of where we can afford to live, and how much money we have left over to spend on everything else. The result has been that printing presses run day and night, creating money much faster than we can create houses.

And because we made money cheap at the same time that we cut off credit to half of America, one group of people has been able to buy houses, and the other group has had to rent them, creating a landlord nation where the divide in assets is much wider even than the divide in income.

Cheap money, unevenly distributed, has resulted in expensive houses, unevenly distributed. It’ll be a seller’s market for years to come.

Will Real Estate Become A Better Investment Under the New Tax Plan?

According to a recent article from Bloomberg, commercial real estate owners could potentially some exciting tax advantages under the new plan. The article laid out some specific provisions for investing in commercial real estate.

Owners and developers of commercial real estate stand to gain from a new tax break for “pass-through” entities, which don’t pay corporate tax but instead pass income through to their owners’ individual tax returns, according to the report, by Cushman & Wakefield Inc.

The House and Senate have reached a tentative agreement to create a 20 percent deduction for pass-throughs, which the report notes are responsible for 61 percent of investment in U.S. commercial real estate.