The Ground Floor

Top Four Markets for Real Estate

This post was written by Trisha Riggs, vice president of communications for ULI.

Washington, D.C. ranks as the top market in the United States for real estate investment and development, which, in the current economic environment, means it is the least troubled. So says the 2010 version of Emerging Trends in Real Estate®, released this week at ULI’s Annual Fall Meeting in San Francisco.

The widely anticipated annual industry overview, copublished by ULI and PricewaterhouseCoopers, was based this year on a record number of surveys and interviews with more than 900 developers, investors, brokers, analysts, researchers, appraisers, and academics. The overriding sentiment: No one is bullish on any particular market--even the perennial favorites such as Washington. Still, despite the faint enthusiasm, the report notes that "markets performing well before the crash will perform better coming out of it, while those lagging before will continue to lag."

The top four markets--all of which are gateway, 24-hour cities heavy on brain power with significant geographic barriers to entry:
• Washington: "Always the top market during recessions, buffered by the federal government;"
• San Francisco: "Highly volatile, but bounces back quickly;"
• Boston: "All those universities help buffer the market;" and
• New York: "Wall Street is down, but not out and always reinvents itself"

The number five market, Houston, is not a gateway city, but is an energy capital with a talented workforce, says the report.

Out of favor: manufacturing centers (mainly in the Midwest); secondary or tertiary cities requiring a flight connection to go overseas; formerly high-growth markets now suffering from overdevelopment and a bubble burst; and places where most development has been concentrated on the fringe.

Emerging Trends predicts that investment and development will start to pick up steam in a couple of years. In the meantime, those who are in a position to do so should buy or hold multifamily; buy hotels; buy distressed condos and second homes; buy land; buy or hold industrial; hold office; and apply a "triage" approach to retail.

Looking past the recession, "The future is about green development, infill, and transit-oriented development."

Future for Office Development: Wide Open Space

Post- recession office development will evolve away from individual cubicles and offices toward more casual, open, environments in which many employees share the same equipment and space, according to industry experts at ULI’s recent spring council forum.

Sustainable office development was among the panel discussions at the event that looked beyond the current economic environment to longer-term land use issues. “Smart” office design, panelists said, continues a pre-downturn trend that is focusing on creating workspace that feels more like a club than a traditional office.

According to David Rush, director of design at HOK in Atlanta, the main driver of change in office space design will be the massive entry of Generation Y (born approximately between 1977 and 2001) into the job market. These younger workers, highly adept at using the latest information technology, are accustomed to working anywhere, anytime, and tend to shun workspaces that feel formal, rigid, isolated and hierarchical, he explained. The challenge for those designing and building offices, Rush said, is the need to optimize all resources related to the use of the space -- including energy consumption, technology, worker productivity and satisfaction, and time spent in the workplace – while controlling costs.

Panelist John Cantrell, interiors design technician at HOK’s Atlanta office, pointed out that providing a sustainable working environment is “more than just retrofitting old space” with recycled materials and energy efficient features. Rather, he said, it’s about designing space in a way that is highly flexible, well connected from a technology standpoint, and which fosters collaboration and teamwork among onsite workers as well as those who are working offsite. Minimizing barriers and providing more communal space provides a sense of transparency and reinforces a collegial atmosphere that gives workers a stake in the company and a sense of belonging, he explained.

Any approach to sustainability must consider both economic and environmental aspects, Cantrell added. “Sustainability cannot separate economic issues and environmental issues and be good for people either way.”

The new “hub” model must provide an easy transition between working away from or within the space, panelists said. Anecdotal evidence indicates that an open design in the workplace, combined with a flexible policy on where and when work is conducted, is  highly appealing and could increasingly become a major factor in attracting and retaining talented workers, Rush noted. “What we are seeing is the first generation of what is coming.”

Are Hotels in Trouble?

This post was written for The Ground Floor by Rob Goodspeed, an Information Intern at the Urban Land Institute.

Thanks to the economic downturn and the increased cost of flying, the number of business travelers is down. The rising cost of fuel and continued turbulence in the airline industry means long-hated fare rules have returned.

After largely disappearing due to competition from discount airlines, with their low and standardized fares, major U.S. airlines have reintroduced rules requiring Saturday stays or multi-day trips for cheap round-trip flights.

An analysis by USA Today last month concluded 57 percent of airfares had some type of minimum stay rule, whether a one-night or Saturday stay. The article found the application of such rules depend on the local market competition and time of the year. Cities and routes without direct competition from low-cost carriers like Southwest or JetBlue have the most restrictions.

Things are likely to get worse for airlines before they get better. Noting that every $1 increase in the price of fuel results in $1.6 billion in increased costs, the International Air Transport Association recently announced the global airline industry is predicted to experience a $2.3 billion loss in 2008, due almost entirely on increased fuel prices.

The higher fares and complex rules are just one force keeping business travelers at home. Declaring "The Waning Days of the Road Warrior," Business Week cited a variety of forces to explain the biggest decline in business travelers in five years. Beyond tightened travel budgets, the trend is explained by improved video conferencing technology, a desire to avoid the stress of travel, and even a desire to cut their carbon footprint.

The decline in travel is beginning to effect the hotel industry -- in the U.S. at least. Marriott Chairman and CEO. J.W. Marriott, Jr. caused a stir recently when he commented that his company was beginning to feel the pressures of a weakened economy.

However, internationally Marriott is expecting an increase in revenue per room this year. Luxury hotels are booming in the Middle East, where business and leisure travel has climbed 18 percent since 2005, and sparkling new hotels are drawing visitors from around the world.

As high oil prices seem here to stay, savvy business people and real estate investors are adjusting their plans accordingly.

Compact Communities - Is Density Incompatible With Safety?

Reducing the carbon footprint of metropolitan areas will require making them more compact in order to reduce driving or vehicle miles traveled (VMTs). Forgive me for saying this (density being a four letter word) but this will require increasing the density of existing communities and building new ones with appropriate density. 

So what are the best ways to design compact, densely populated, walkable communities which are attractive, safe and lively? One thing clearly needed is enough housing so people live in the community; this is what creates the "24/7" communities which have been shown to be most successful over time. What are the best ways to do this while reducing crime and enhancing public safety?

Context is Everything

How a building relates to its surroundings and neighbors is crucial for the creation of an active streetscape and to foster a sense of community. West River Commons, a small (one-acre) mixed-use project in the Longfellow neighborhood of Minneapolis, Minnesota, is an excellent example of context-sensitive design.

Like many pre-WWII inner suburban neighborhoods, the Longfellow neighborhood comprises single-family homes sited on a dense and walkable street grid. Also like many neighborhoods from this time period, the scale and walkability of the area has been comprised by fast moving traffic on arterial streets lined with one-story commercial strip centers.

West River Commons fronts one of these arterials, Lake Street. Its 53 apartments, three townhouses, dry cleaning shop, two restaurants and one cafe are designed in such a way to provide a transition from the activity and traffic on Lake Street to the more quiet residential feel just a block away. The focal point of the project is a small park which provides outdoor setting for the restaurants and serves as an informal community gathering point.

A complete case study of this project can be found on ULI's Development Case Studies Web site. (If you are not already subscribed to the Development Case Studies, you can subscribe here.)

Downtown Premiums or Downtown Discounts?

It's not surprising that some central business districts (CBDs) Class A office space is offered at a sizable premium to it's surrounding suburbs.  However, often some major markets find that it's actually the suburb office space that's at the premium.  A study by Richard Barry Joyce & Partners LLC looked at 37 cities offering Class A properties with a concentrated urban core of at least 10 million square feet with some interesting outcomes.   

It's no surprise when cities like Midtown Manhattan, Boston and Washington, DC offer office space in excess of 55% premiums over suburbs that surround those markets.  More surprising are CBDs like Los Angeles, Sacramento and San Francisco at premiums of 15%, 21% and 33%, respectively.  These premiums are often attributed to metro rail systems with downtown hubs, centralized entertainment venues and the city's commitment to cultural amenities.  Therefore, many CBDs have changed from standard 9-5 environments to 24-hour work and entertainment scenes.

However, many Class A office properties in certain central business districts are actually at discounts to their surrounding suburbs.  These areas are often included due to sluggish markets which often lead to lower downtown rents.  CBDs of St. Louis, Oklahoma City and Detroit offer office space discounts of -19%, -16% and -6%, respectively.  One city not meeting this mold is Phoenix with CBD office space at a discount of -12%, however, being one of the fastest expanding areas with financial services jobs on pace to increase 5.3% in 2006. One factor to this oddity is Phoenix's dependency on cars over public transportation.  Therefore, many suburban office buildings get higher rental rates because they offer more parking facilities for their tenants. 

Also, don't let vacancy rates fool you.  Low vacancy rates aren't predictors of higher downtown rental rates.  For example, Chicago has a vacancy rate of 16% and still has a 41% premium over it's surrounding suburban markets.  Conversely, Charlotte offers vacancy rates of 5% without any substantial premiums to it's suburban markets due to two high-quality office areas receiving rents nearly as high as those downtown.

How heavily does transportation weigh on office rental rates?  Will CBDs and suburban rates ever balance in larger cities such as Manhattan, Boston and DC?  Comments?   

Las Vegas: Is Overdevelopment the Real Sin?

Often marked as the entertainment capital of the world, Las Vegas doesn’t seem to be as entertaining to the mega real estate owners whose development dreams aren’t quite what they’ve planned.  Casino giant Harrah’s Entertainment has paid nearly $1 billion over the past year amassing around 350 acres of land throughout the Vegas strip area without any disclosure of future plans.  Other Vegas players including Wynn Resorts and Boyd Gaming have their own massive redevelopment projects in the works with hopes to remake other parts of the Vegas strip over the next decade.  Finally the biggest, MGM Mirage approved in 2004 a $5 billion budget to develop the MGM Mirage’s Project CityCenter.  However, is that enough capital to make it happen?

No.  MGM has recalculated costs and now has set a budget for Project CityCenter costs to exceed a whopping $7 billion.  However, they aren’t the only ones facing shattered dreams.  Why?  A large portion of these issues can be attributed to the global construction boom.  Massive developments under way in China, the Middle East, Europe and even the U.S. have created shortages and an increase in costs for steel, concrete and even glass for skyscraper windows.  In addition, a lack of the big construction firms to start and complete all the new development jobs.

Contractors in Vegas have attempted to deal with this issue by placing staff members in China to work directly with steel suppliers and establish direct contracts to get the best deals.  MGM Mirage has attempted to deal with the issue itself by building its own concrete plant right onsite and locking prices for items like steel, elevator shifts and copper piping.  Regardless, overdevelopment costs have slowed the growth process in Vegas with hotel-room growth estimates averaging 1.8% over the next five years.  This falls far below the 4% growth Las Vegas has experienced over the past five years.

Is Vegas moving to quickly or have their big bang projects just come at the wrong time?  Do you think other major or even smaller markets developers are battling the same cost issues?  Is bigger not always better in the development arena?  Please give us your opinion.