REDnews December 2020 Magazine by RE Journals

THE TEXAS COMMERCIAL REAL ESTATE NEWS SOURCE | DECEMBER 2020

Year in Review Building up the Construction Industry: 2020 in Review

Development Depth:

EDCs protect business, encourage growth during pandemic

A year like no other:

2020â&#x20AC;&#x2122;s impact on Austin, DallasFort Worth and Houston

Leaving a legacy:

Celebrating the life of James B. DeGeorge Sr.

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IN THIS ISSUE 12 Features Building up the construction industry: 2020 in review A strong labor market and continuous population growth at the beginning of the year meant that Texas contractors were in a frenzy of activity putting up new properties. So where do we go from here following the stalled economy that hit us beginning in March?

A year like no other: Reviewing 2020’s impact on three Texas markets Austin, Houston and Dallas-Fort Worth—all were impacted by the tumultuous events of this year, but to different degrees. What did 2020 look like for these metros and where might things go from here?

DECEMBER 2020

Leaving a legacy: Celebrating the life of James B. DeGeorge, Sr. U.S. Marine, commercial real estate icon, husband, father and much more—James B. DeGeorge Sr. left a void in the personal and professional lives of many when he passed away in October. But his legacy lives on through his sons who learned so much about the industry from him. Development depth: EDCs protect business, encourage growth during pandemic COVID-19 has created many challenges for many investors, developers and companies. Quite often, the best way these organizations are finding to weather this storm is through the counsel and aid of local EDCs.

Gross-Ups & COVID: Alpha Office Escalations solves complicated calculation issues From vigorous cleaning protocols to lower rent collection, the pandemic has wildly skewed the operating margins for many property owners. Looking for a way forward? How about talking to the guys who literally wrote the book on escalations.

South Central Texas postCOVID-19 forecast

CCIM office sector luncheon— demand, density and flex space: Systemic change or return to yesterday?

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Central & South Texas postCOVID-19 forecasts

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ALEX GETTY, EXECUTIVE DIRECTOR

La Marque Economic Development Corporation LMEDC.com | 409-938-9258 | agetty@lmedc.com

GATEWAY TO THE GULF

Letter from the Editor THE TEXAS COMMERCIAL REAL ESTATE NEWS SOURCE

December. You might have had your doubts, but here we are—we’ve made it through all 48 months of 2020.

NATIONAL PUBLISHER

I’ll try not to repeat myself from what I’ve said in this space over the course of previous issues, but this has been a year that, hopefully, only comes once in a lifetime. We take on the events that were in a number of articles this issue. But we also turn a hopeful gaze onto 2021.

MANAGING EDITOR

Mark Menzies menzies@rejournals.com Matt Baker mbaker@rejournals.com

STAFF WRITERS Ray Hankamer rhankamer@gmail.com Brandi Smith info@REDnews.com

For example, how much did construction activity slow down in Texas markets following pandemic-induced hits to the petroleum industry and the economy at large? Things certainly stalled, but there are numerous indications that we may already be on the rebound. This will not be a repeat of 2008/2009.

SENIOR VICE PRESIDENT

We also take a closer look at Dallas-Fort Worth, Houston and Austin in particular. Texas’s three biggest metros were riding the crest of the bull market that brought us into 2020. So how much hurt have these markets felt since the beginning of a bear market?

Ginger Wheless ginger@REDnews.com

Additionally, Houston lost an iconic member of the CRE community this year with the passing of James B. DeGeorge, Sr. Our obituary celebrates not only the life he led, but the business knowledge he passed on to his sons.

commercial real estate brokers, investors

There’s plenty more fantastic content in this issue and I hope it finds you in a better state of mind than you were perhaps earlier this year. On to bigger and brighter things in 2021!

Benton Mahaffey benton@REDnews.com

EMARKETING DIRECTOR Sarah Evans Carter emarketing@REDnews.com

ADVERTISING & CONFERENCE SALES Joni Margotta joni.margotta@rejournals.com

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Building up the construction industry: 2020 in review BY BRANDI SMITH

“As the economy has reopened, construction activity has recovered somewhat, but the impact of the still very weak economy has meant the delaying and cancelling of planned projects.” Heading into 2020, forecasts for the Texas construction industry called for continued expansion, boosted by the state’s strong job market and continued growth. As we wrap up the year that was, we’re reflecting on the pandemic’s impact by talking to experts from Dodge Data & Analytics and Cumming.

DECEMBER 2020

Richard Branch

Dan Pomfrett

“In the early days and weeks of the crisis, many parts of the country shuttered construction activity putting people out of work,” said Dodge’s chief economist, Richard Branch. “As the economy has reopened, construction activity has recovered somewhat, but the impact of the still very weak economy has meant the delaying and cancelling of planned projects.”

Experts expect the rebound will not be as lengthy as it was following the 2008 recession. While it took 10 years for construction volume levels to bounce back after that, they predict volume will return to 2019 levels in three to four years. “Projections this time last year had a steady growth in the market for construction volume between 3 percent and 5 percent (dependent upon the sector and geographic location). However the pandemic has reduced these to a contraction in 2021 of approximately 7 percent, with a reversal positive 7 percent in 2022 and between 4 percent and 5 percent for the following years,” said Dan Pomfrett, Cumming’s vice president of forecasting and analytics.

In addition, sectors such as hotel and transportation will take years to recover due to reduced traveling, while other sectors will have to adapt going forward. “The office sector could see less demand for space as a growing number of companies shift to remote work,” Branch said. “Education construction (particularity college activity) may be altered by a shift to more online learning.” He and Pomfrett both predict long-term impacts on the construction industry, though they anticipate Texas will be able to recover more quickly than many other markets.

So where does Texas stand at this moment? Through nine months of 2020, total building construction value in the Lone Star State is down 6 percent from the same time period in 2019. Pomfrett attributed some of that slowdown to the petrochemical industry.

“Compared to other similarly sized states (California, New York and Florida), Texas is overall in relatively better shape,” said Branch. “Florida total construction is down 4 percent on a year-to-date basis, but the percent declines in California and New York are in the double digits.”

“The impacts of lower fuel prices, production rate changes and, in some cases, a pause on construction are starting to ripple through the region,” he said.

The saying goes “Everything’s bigger in Texas.” Fingers crossed that applies to economic recovery and the future of the construction industry.

While hospitality and retail sectors are garnering headlines for taking the brunt of the pandemic’s blow, Pomfrett said green shoots are starting to be seen “particularly in the renovation and repurposing of existing buildings.” Another bright spot is housing, per Branch. “Within Texas, the residential market stands out as a clear winner driven by strong single-family activity, while nonresidential buildings are on the decline,” he said. According to Dodge research, San Antonio is showing the most growth, posting a 10 percent year-to-date gain for building construction, largely built on the strength of single-family activity.

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“On the other end of the spectrum is Houston,” said Branch, “which is down 17 percent through nine months as that metro is not only dealing with COVID-related impacts, but also very low oil prices.” “Overall our view of the Texas market is a positive one. There will be some peaks and troughs, which will be both region- and sector-specific, with burgeoning sectors such as tech and biopharm becoming more prominent,” Pomfrett said. “The key to the successful bounce-back of the region will be the availability of skilled labor.” That is a major component of Pomfrett’s observations: the challenge to deliver the workforce needed when construction volume regains momentum. “Worker productivity is being affected by local government regulations, close-downs and social distancing requirements, which curtail utilization, subsequently leading to either the need for additional labor to offset this or project schedules being extended,” Pomfrett said.

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A year like no other: Reviewing 2020’s impact on three Texas markets BY MATT BAKER What a year. The pandemic, civil unrest, a retreating economy, plummeting oil prices and more have all had varied impacts on Texas’ markets. While everyone is eager to Michael Caffey leave 2020 behind, what are the real estate prospects for the state’s largest metros in 2021?

Dallas-Fort Worth

According to Michael Caffey, president, advisory services, South-Central Division and Latin America at CBRE, investment activity in the Dallas-Fort Worth area hasn’t tapered off as much as many may have feared. “Investor activity in Dallas-Fort Worth has continued throughout the year,” Caffey said. “While activity is down overall, we’re still a top-four market for total investment volume behind New York, Los Angeles and the Bay Area.” There is one main attraction, of course. As logistical warehouses remain the most sought-after and dynamic commercial property type, DFW’s industrial sector has been immune to the headwinds of 2020 and seen year-over-year growth. In fact, demand among e-commerce tenants, 3PLs and the food and beverage industry has increased rents and sent vacancy rates to a near all-time low. Industrial submarkets have all remained remarkably stable, with activity largely driven by the amount of available space. For example, in the GWS/Arlington submarket, where the vacancy rate is 4.7 percent, there is naturally less activity than in submarkets that have more available space like South Dallas or North Fort Worth. It’s not just investors who are eager to tap into the Metroplex’s strong industrial performance. 10

DECEMBER 2020

Developers have hardly slowed down, even as the pandemic ravaged the world’s economy. To date, 18.8 million square feet of industrial product has been delivered to the local market in 2020.

Patrick Duffy

“The DFW development pipeline has remained relatively robust throughout the year, particularly in the industrial sector where we’re tracking about 22.3 million square feet under construction,” Caffey said. “Continued economic growth will drive supply chain activity in Dallas-Fort Worth and across the country, and spur demand for logistics real estate in an already supply-constrained environment.” Caffey said that he and his team are also seeing investor activity pick up for multifamily assets, with construction activity matching in an attempt to keep pace with continued population growth. While there is still capital market activity for office and retail space, demand for those product types isn’t nearly as strong as for industrial and multifamily assets. Office groundbreakings have slowed down, however there are still more than 4 million square feet under construction, following several projects delivered in Q3. Historically strong submarkets like far North Dallas, Preston Center, Richardson/Plano, as well as North Fort Worth, all saw positive office absorption so far in 2020. Though overall activity remains depressed, buildings in these submarkets are still well-leased.

Houston

Year over year, the data shows that office investment rose in the Houston metro during the 12-month period ending in Q3 2020. However, that activity is really buoyed by two monster deals in December 2019. Following

Occidental

Petroleum

Corporation’s

acquisition of Anadarko Petroleum, Howard Hughes Corp.— looking to maintain its near monopoly in the submarket— acquired two towers in The Woodlands from Ryan Bohls Occidental in a $565 million sale-leaseback. Separately, Skanska divested its 90 percent interest in the Bank of America Tower, with Beacon Capital Partners picking up the asset in a record $373 million transaction. “If you take those two deals out of what we're looking at for 2020, it's pretty dismal,” said Patrick Duffy, president of the Houston office of Colliers International. “Underwriting the office market right now is extremely difficult, especially as people have time to digest the impact of work from home and what that does to the long-term occupancy of these buildings.” According to Duffy, the pandemic caused owners, investors, developers and tenants alike to pause all real-estate-related decisions, waiting to see how the situation unfolded. As a result, he instructed his sales team to start keeping track of sidelined deals. “I've been doing this for 38 years I've never had to ask anybody to reclassify a deal that was in negotiation or was pending as ‘on hold’,” Duffy said, “but we started seeing a lot of deals just locking up.” The Colliers Houston team shifted more than $6 million worth of revenue into this new ‘on hold’ category. The good news now is that this figure has fallen to approximately $3.4 million. Some of that is due to transactions that have died, but also because previously frozen deals are back at the negotiating table. The pandemic hit U.S. markets more or less equally,

but Houston has the misfortune—this year, anyway— of being dominated by the oil and gas industry. With flights grounded and commuters staying home, gas prices plummeted, and the effects could be felt in Houston’s CRE industry. Layoffs at Exxon, Shell and other O&G firms continue to drive up office vacancy. Similar to the office sector, Houston’s industrial investment activity is skewed by one major transaction, Prologis’ acquisition of Liberty Property Trust. If it weren’t for one REIT buying another REIT and recording it as real estate sales, activity would appear to be very slow in Houston’s industrial market. “That's not a lack of interest on the investor side of the equation, that's a lack of available property. Nobody wants to sell,” said Duffy. “Really, the industrial market here has been fairly robust.”

Austin

Austin has been in growth mode the past few years, which has led to an explosion in office development. According to Ryan Bohls, director in NAI Partners’ Austin office, the metro had more than 8 million square

feet of office product underway pre-pandemic, virtually all of which is still slated to deliver over the next two and a half years. The events of 2020 may cause a crunch with all of this new product, however. “An additional 7 million square feet of new construction has been in the pipeline and that’s where we get a little more iffy, with developers and financiers requiring more preleasing activity prior to making hard commitments to go vertical,” said Bohls. “That’s a tall task when some of these new buildings may experience significant downtime in advance of tenanting up.” A heavy concentration of tech tenancy in the CBD could hurt downtown’s office figures the most, as these firms are more readily able to work from home. Bohls notes, however, that a correction in the office market was needed, with a 3-million-square-foot deluge of space being deployed at precisely the wrong time. As is the case elsewhere, industrial is the most unwavering asset class. Austin trails only Atlanta and the Inland Empire for leasing activity as a percentage of inventory with over 4 million square feet since the first quarter.

Big firms are having big effects on Austin’s industrial market. Amazon has leased over 6 million square feet marketwide, though a slowdown seems imminent. However, Bohls expects a “multiplier effect” as suppliers look to locate within a tight radius of Tesla’s recently announced Gigafactory. Hotel room rental rates were absolutely slashed around the country following the initial outbreak of COVID-19. With the cancellations of festivals like South by Southwest and Austin City Limits— in addition to business conferences—Austin’s hospitality industry took a massive hit. Bohls pointed out that more than a third of CMBS-backed loans on buildings near Power Five school stadiums are delinquent, which is a trend worth watching as the University of Texas has capped football attendance. “Austin, and Texas in general, are probably the best suited state/city in the country to weather a storm like this,” Bohls said. “We recovered from the Great Recession in record time (20 months compared to 53 months nationally) and post-pandemic circumstances in coastal markets should result in a groundswell of continued activity in Central Texas.”

City Management DECEMBER 2020

Leaving a legacy: Celebrating the life of James B. DeGeorge, Sr. BY BRANDI SMITH When Michele DeGeorge (née DiGiorgio) arrived in Houston from Italy in the 1880s, he could never have predicted the impact he and his descendants would have on his new home. Several generations later, the community he quite literally helped build is saying goodbye to Michele’s last surviving grandchild, James B. DeGeorge. Born in 1932 to parents Gasper M. DeGeorge, Sr. and Josephine Pinto DeGeorge, James attended school and even some college in Houston before attending the University of Texas at Austin. The call of duty interrupted his studies in 1951; James, a United States Marine Corps reservist, served at Camp Pendleton during the Korean War. He married several years later in 1955 and, two years after that, welcomed his first child into the world. James “Jimmy” Bernard DeGeorge Jr. was followed by Gregory “Greg” Allman DeGeorge in 1958 and Lance Clayton DeGeorge in 1970. “He was like a lot of dads,” said Greg. “He was very interested in my upbringing and how I did in sports.” James would often take the time to come to his sons’ games or, as a special treat, take them to a pro football game on the weekends. As they grew older, Greg said his father never pressured him or his brothers to pursue a career in real estate. “His attitude was ‘You can do whatever you want to do,’” Greg said. “I actually got more pressure from a couple of friends who told me I’d be crazy if I didn’t go into real estate because it’s in my blood.” To understand that, you need to look back into the history of the DeGeorge family. James’ grandfather, Michele DeGeorge, immigrated to the United States in 1882 with his wife Ursula and settled in Houston by 1884. There, he operated a grocery store and saloon, which he eventually 12

DECEMBER 2020

Top Right: DeGeorge Hotel. Bottom Left: Auditorium Hotel. Bottom Right: Woodway Arch.

“I don't know if there are any other commercial real estate families in Houston that started doing business in the 1880s and are still going.” expanded to three different locations. Michele invested the money he earned into real estate, eventually founding the DeGeorge Hotel in 1913 and the Auditorium Hotel (now the

Lancaster Hotel) in 1926. He passed away a year later, leaving roughly 100 pieces of real estate and his legacy to his children. Continued on Page 14>

“That was the deal that really put us on the map. I coldcalled Whole Foods Market and my father called his restaurateur friend Tony Vallone and we were able to sign them up to pre-construction lease agreements. That’s all the bank needed to guarantee us a loan to build the center.” James B. DeGeorge < Continued from Page 12

“I don't know if there are any other commercial real estate families in Houston that started doing business in the 1880s and are still going,” Greg laughed. James followed in the footsteps of his grandfather and father, eventually making a name for himself as a visionary developer of residential and commercial properties. “He always seemed to make moves at the right time,” Greg said. “Timing has a lot to do with success in real estate and he just seemed to have the right timing. He was very good at location selection as well.” That was evident in his 1988 decision to build the 25,000-square-foot Woodway Arch Shopping Center located at 5750 Woodway Drive and Bering Drive. Considered a risk because of the economic recession, it was one of few, if not the only, shopping centers built in Houston that year. It became an immediate go-to for neighbors in Tanglewood, Briargrove and Memorial Villages. “He saw the potential in this under-served area in terms of retail,” said Greg. “In fact, DeGeorge Real Estate Services offices on the second floor above 14

DECEMBER 2020

Wells Fargo Bank at Woodway Arch.” Which brings us full circle. DeGeorge Real Estate Services is the company Greg founded in 1990. James B. DeGeorge Greg had listened to those friends all those years before and studied business at University of Texas at Austin, then jumped into the real estate industry via a job at Century Development at Greenway Plaza. During his years with the company, he managed a 1-million-square-foot office building at San Felipe Street and Augusta Drive. “My dad was very proud that I got that experience,” Greg said. “Then when he built Woodway Arch, I said, ‘I have an idea. How about you and I work together, and I'll help you lease and manage your new center?” Jimmy joined the company in 1992 and the next project that James, Greg and Jimmy worked on, the 45,476-square-foot Woodway Square Center at Voss Road and San Felipe Road, brought the sixteenth Whole Foods Market in the grocery company’s history. “That was the deal that really put us on the map,”

said Greg. “I cold-called Whole Foods Market and my father called his restaurateur friend Tony Vallone and we were able to sign them up to preconstruction lease agreements. That’s all the bank needed to guarantee us a loan to build the center.” Youngest brother Lance, who heads up DeGeorge Design, joined the team in 2008, which created a full-service real estate firm offering leasing, management and development (Greg), construction, financial and leasing (Jimmy) and architectural design (Lance). “My father was very proud that his three sons work together in real estate as a team, as partners,” Greg said. “The joy of his life was being able to say his sons followed in his footsteps and those of his father and grandfather.” James passed away on Oct. 19, 2020, but not before building on the legacy of those before him. That legacy is one that only grows as Greg’s nieces and nephews, several of whom are in college, will ensure it lives on. “We have another generation coming up behind us,” Greg said, “and we plan on putting them to work here in the next few years!”

Development depth: EDCs protect business, encourage growth during pandemic BY BRANDI SMITH Success in the commercial real estate world has always been about the ability to evolve. Investors are constantly looking for what’s “next,” while developers keep an eye on what the market is asking for. Retailers need to know the trends that their customers will want. And economic development organizations must be able to pivot when their community indicates a change is needed.

Craig Rhodes, senior director of regional economic development.

In so many ways, the COVID-19 pandemic has tested the evolutional capacity of EDCs throughout Texas and a number of them are passing with flying colors, helping the investors, developers and companies that call their towns home weather an incredibly challenging time.

An example of that: GHP hosted a virtual business recruitment mission with Houston Mayor Sylvester Turner in October 2020 to connect with companies in Silicon Valley. The event followed up a successful delegation trip in 2019 meeting with California tech companies about the opportunities for growth in Houston.

At the Greater Houston Partnership (GHP), the team shifted to a strategy of remote working, online meetings and virtual events in March, according to

“The traditional trade shows, conferences and outbound recruitment missions have been replaced with virtual industry roadshows, site consultant outreach and targeted business outreach activities,” he said.

“The project pipeline has continued to stay active with new prospects

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“Over and over, we’ve heard our business owners say that they wouldn’t have made it through the pandemic without our COVID Business Relief program. Rather than a big project slam dunk this year, we had hundreds of small businesses survive the 2020 COVID pandemic. That’s something we’re proud of and we’re in a great position heading into 2021.” considering relocations and expansions in the region. We have had multiple new projects announce this year including Amazon, Google Cloud and Greentown Labs,” said Rhodes. “We are currently tracking over 140 active projects in the pipeline, with manufacturing and logistics leading the industry sectors.” Similarly, the pandemic has changed operations for the City of Seabrook and its economic development arm, but economic development director Paul Chavez said his team is embracing the new normal.

Craig Rhodes

“We are utilizing new technologies and finding innovative and creative ways to communicate with prospects,” he said. In nearby La Marque, the EDC changed its focus from business attraction to business retention, delivering nearly $1 million in COVID Business Relief Grants to business owners. The funds helped keep the doors open after state-mandated closures had a profound impact on business owners of every kind, especially retail and restaurants. “Over and over, we’ve heard our business owners say that they wouldn’t have made it through the pandemic without our COVID Business Relief program. Rather than a big project slam dunk this year, we had hundreds of small businesses survive the 2020 COVID pandemic,” said Alex Getty, executive director of La Marque EDC. “That’s something we’re proud of and we’re in a great position heading into 2021.” There’s been no slowdown in prospect activity at all in Conroe, one of Houston’s fastest-growing suburbs. If anything, Conroe Economic Development Council executive director Danielle Scheiner said things are picking up, particularly for warehousing and logistics projects but also for manufacturing of consumer products. “We are still averaging 1,000+ homes a year with more and more sites in the early stages of development,” she said. 16

DECEMBER 2020

Danielle Scheiner

Paul Chavez

Alex Getty

Conroe’s EDC just celebrated the signing of its first occupant in the Deison Technology Park. VGXI, Inc., a manufacturer of plasmid DNA for vaccines and gene therapies, will move its headquarters to Conroe from The Woodlands. The state-of-the-art, 240,000-square-foot facility is expected to be operational in January 2022. “On the industrial side, we have five projects currently under construction in our two parks,” said Scheiner. “We still have some retail/commercial sites under construction, although I don’t anticipate any new ones starting anytime soon.” Retail, she expects, will be the sector hit hardest by the pandemic. Scheiner said many of Conroe’s local eateries and boutiques have held on so far, but they need the continued support of the community. In Seabrook, that’s exactly what customers have been doing. Sales tax revenue there has remained healthy, while other areas have taken hits. “Both retailers and restaurants in Seabrook offered and continue to offer services to meet the current needs of our residents and visitors. This in addition to our SEDC Emergency Business Retention Incentive has helped keep our economy strong,” said Chavez. The City Council’s planning and zoning commission is currently reviewing plans for a five-level, 170-room boutique hotel that would feature an extended stay complex of 76 guest suites.

“Also included in the plan is a 23,700-squarefoot conference center, 24,850 square feet of retail buildings for food beverage leases and a future proposed multifamily apartment building containing approximately 260 residential units,” Chavez said. “This development will be located with waterfront views of Clear Lake and only minutes away from I-45 and NASA Space Center.” Location, he points out, is as important as ever when discussing future development plans.

“COVID changed things but our position is as strong as ever. Our location along 45 and proximity to the Galveston-Kemah-NASA tourism market will continue to drive commercial development in our city.”

“Being on Galveston Bay and Clear Lake with prime commercial property that fronts the water, Seabrook has numerous opportunities that are available for planned development,” said Chavez. “In a past survey when asked what makes Seabrook attractive and distinguishable from surrounding cities, the most repeated responses received from the community survey were: the waterfront, the potential for waterfront development, opportunities for water recreation (boating, fishing, etc) and coastal living.”

The value of location is something La Marque EDC’s executive director also stressed. “COVID changed things but our position is as strong as ever. Our location along 45 and proximity to the Galveston-Kemah-NASA tourism market will continue to drive commercial development in our city,” Getty said. “Over the past decade our population has grown by more than 30 percent and we don’t see it slowing down as another new neighborhood development was approved by the City Council this fall.”

we approach incentives for jobs that might be working remotely. In our case, if the payroll is managed out of that facility, they can count those jobs regardless of whether they are working remotely or at the physical location.” Though the pandemic has certainly created challenges, Houston-area EDCs are stepping up to face those challenges in whatever way their communities need and will continue to do so to help businesses thrive.

The 2021 Tarrant County Commercial Real Estate Forecast January 28, 2021 - Fort Worth Convention Center

La Marque’s EDC is also responding to business owners who are taking advantage of this time as an opportunity to renovate and improve their properties. “We’ve seen an uptick in business improvement grants, which is encouraging. We’re seeing everything from 50-year-old buildings getting facelifts to new signs and landscaping at some of our retail centers and even complete interior remodels in some of our local restaurants,” said Getty. Chavez agreed. “Businesses and developers continue to ask for feedback on the types of projects that would qualify for incentivizing,” he said, “and our track record shows that we are aggressive with coming up with deals that provide a solid return on investment for the community that also pushes the needle towards landing the project in Seabrook.” Prospective developers in Conroe are asking about anything that will help offset their overall cost of doing business, whether that be tax incentives or fast permitting approval. “Anything that allows them to operate more efficiently to help their bottom line,” said Scheiner. “They are interested in understanding how

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DECEMBER 2020

Gross-ups and COVID: Alpha Office Escalations solves complicated calculation issues BY BRANDI SMITH

“For the first time in my life, I find myself unconsciously counting to twenty every time I wash my hands, which I now do more often than ever before.” Bill Brownfield

With news of a potential vaccine on the horizon, the thought of returning to “life as normal” seems more possible than ever. However, the pandemic may have changed some of our behavior permanently, specifically impacting how we think about the safety of our work environment. “For the first time in my life, I find myself unconsciously counting to twenty every time I wash my hands, which I now do more often than ever before,” said Bill Brownfield, Counselor of Real Estate (CRE), Certified Commercial Investment Member (CCIM) and co-author of The Escalation Handbook for Office Buildings with Larry Mayerhofer, CPA. “Extrapolate that behavioral change out to include many millions of office employees and you can quickly conclude that some, probably a lot, will want to work in offices that have an office version of the proverbial Good Housekeeping Seal of Approval.” As a result, Brownfield said many office owners and managers are executing new and/or expanded operational protocols designed to improve air quality and safety so tenants will feel comfortable when they return. “Most of their operational adjustments have been implemented by now and are becoming normal daily routines for cleaning, security and social distancing,” Brownfield said. “Some have made capital investments in HVAC upgrades, touchless technologies, UV lighting and other preventive strategies.” In many cases, those operating expenses can be allocated on a pro-rata basis to a property’s tenants, along with their base rent, via escalations. But because leases so often vary, calculating the appropriate share for each tenant accurately can be a challenge. “We know that owners and property staff care deeply about doing the right thing. But the scope of responsibilities for property managers and accountants has expanded so much over the past two decades that they have little time for deep dives. They’re pedaling as fast as they can, so they need new tools to 18

DECEMBER 2020

Larry Mayerhofer

automate and speed up work processes,” said Brownfield. That’s where Alpha Office Escalations (AOE) can be a lifesaver. Brownfield, after literally writing the book on escalations, teamed up with Mayerhofer, a Certified Public Accountant with more than 30 years of real estate accounting experience in the Chicago market, to develop the software specifically for commercial property managers and accountants. “We believe that AOE is one of those timely tools that will save time, improve accuracy, eliminate redundant processes and build trust with each tenant,” Brownfield said. “When done accurately, escalation invoices do their part to build and maintain trust. At AOE our goal is ‘Happy Gross Ups’ for each tenant and landlord.” Expense recoveries are extremely important and can range from 10 percent to 50 percent of a building’s total revenue (depending on the lease structure used for each tenant), according to Brownfield. As an example, a base-year lease can generate 10 percent to 20 percent of a building’s revenue (depending on the maturity of each lease term). A net lease, though, can generate 40 percent to 50 percent. “What’s surprising is how few owners and managers look at recoveries from that perspective,” Brownfield said. “Don’t get me wrong, they know it’s important, but they often don’t know how much of the building’s operating expenses they are subsidizing. If they did, they’d probably focus more on absolute accuracy and compliance with each individual lease.” So how do you get started to deal with COVID-19’s impact on 2020’s operating expenses? First, Brownfield and Mayerhofer recommend setting up a Chart of Accounts category for unique or COVID-related expenses, so they can be isolated and dealt with at the end of the year.

“Depending on circumstances and market conditions, a property owner can then choose to either absorb those costs or to pass them through to the tenants, collectively as CAM charges or individually as above-standard rebills,” said Brownfield. The AOE team also suggests that the prior years’ methodology for grossing up variable expenses be consistently applied for 2020’s expenses.

“The best way to keep an existing tenant is to have exceptional, responsive service and a trustworthy relationship.”

“If the methodology is correct, and if COVID-related expenses are excluded, the total grossed-up operating expenses should be very close to 2019’s, since inflation is modest,” Brownfield said. “However, if grossing up blows up the variable expenses too much (due to such historically low occupancy), then it is likely that the prior methodology is flawed, in which case it should be analyzed and improved.” Brownfield and Mayerhofer encourage a stress-test of the methodology at various levels of occupancy. If that doesn’t work, it needs to be repaired. It’s a complicated process, especially because every lease gets abstracted for key provisions, but most abstract forms don’t collect all of the necessary economic factors used to create accurate invoices. “Our AOE software duplicates the methodology used in our Handbook and our

abstract (we call it a Tenant Profile in our system) is flexible enough to capture all of the strange and wonderful lease clauses,” said Brownfield. At a recent fall training seminar for AOE clients, most of whom are office property managers and property accountants, multi-tenant building occupancies ranged from 10 percent to 75 percent, varying by market, building and tenant type. That spectrum means that calculating escalations accurately is more valuable than ever as buildings make improvements to lure tenants back in. “Office buildings compete on several levels. Location and rental rates to some extent, but also on service and trust. The best way to keep an existing tenant is to have exceptional, responsive service and a trustworthy relationship,” Brownfield said. “If those two happen, rent will take care of itself, because service and trust will carry the day, even during COVID-type events.” To learn more about Alpha Office Escalations, visit https://www. alphaofficeonline.com/.

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South Central Texas post-COVID-19 forecast BY RAY HANKAMER

“When pandemic recedes, we will

be quick to return to old habits and dense environments, office and social; in 18-24 months we will be back to normal here” Panelists: Emmy Hise, STR; Jimsi Kuborn, City of Converse Economic Development Corporation; Bethany Babcock, Foresite Real Estate; Leo Gomez, Brooks; Kammy Horne, Via Metropolitan; William Curtis, Port San Antonio; Josh Schneuker, Seguin Economic Development Corporation; Amber Austin, CBRE; Debra Guerrero, The NRP Group, LLC; Gary Goodman, Passco Companies; Jonathan Horowitz, Convive Hospitality Consulting

Office

• Office in San Antonio “ok” and not sliding too much; 15% vacancy citywide, with average rents $21.95 down from $22.50 this time last year; robust development market; tenants beginning to return to offices • Some landlords working with tenants on short-term renewals to build tenant goodwill, and to retain them • The hybrid work from home and office model is here to stay, although the productivity metric for this formula is not fully known yet • Company culture is “at the office” and it is especially important to for new hires to interact with peers and senior employees as they learn and absorb the company culture • When pandemic recedes, we will be quick to return to old habits and dense environments, office and social; in 18-24 months we will be back to normal here • 8% unemployment in S.A. • In the meantime, low-rise development is S.A. is increasing; two people per elevator is pushing this—no one wants to wait in line to go upstairs; essentially S.A. is not a high-rise office market 20

DECEMBER 2020

• This market is attractive: central time zone, low cost of living, available work force, no hurricanes, bilingual population, easy traffic flow (as opposed to Austin) • S.A. thrives on tourism, government/military, bioscience, universities—all hard hit by COVID; hospitality and tourism will be especially slow to come back • “It will get a little worse before it gets better, but we will weather the storm.”

Industrial

• “Brooks” is multi-use redevelopment of former airfield and is going strong; tech innovation is coming into “Port San Antonio”; Seguin to the east is seeing big growth in manufacturing, some is in support of new Toyota plant in S.A. and Tesla in Austin with plastics and transmissions suppliers • Warehouse demand is picking up all over the metro area, and with it lots of new jobs, since e-commerce is beginning to dictate how we shop • New start-ups are happening during COVID in industries such as robotics and hardware repair—the robots need repairing by live people • Opportunity zones are stimulating development • Inquiries and actual leases are being signed with companies from S. Korea, France and Japan, as well as with renewal energy and wind turbine companies • Extensive workforce labor re-training is underway to supply new industries with qualified employees; tech schools are trying to imagine future jobs and train for them; the tech world has ‘found Texas’ and its good tax environment and work ethic; manufacturers are holding events to introduce high school students to vocational career dreams • Some industrial and mixed-use parks are running out of land; as industrial develops, the challenge is to develop housing, retail, public transportation, schools and restaurants in tandem and close by to create unified neighborhoods with complete quality of life benefits • COVID has not interrupted industrial development, but overall has sped it up; authorities and developers are working hard to keep developable land ready and in the pipeline, with all the needed infrastructure to be shovel-ready when the customers come Continued on Page 26>

CCIM office sector luncheon—demand, density and flex space: Systemic change or return to yesterday? BY RAY HANKAMER

Speaker: Rives Taylor, Gensler - November 12, 2020 Takeaway: In the architectural and interior design world, as well as in the office building investment community, much thought is being given to the future…not only with respect to work space configuration, but to design materials, air flow management, the relationship between the inside and the outside of the building and much, much more.

collaborative space seems to be more effective if it has an outside view or feel to it; do all employees who are working from home still need a desk at the office if they are just coming in to hang out in the collaborative space? This brings up the question of movable partitions or permanent drywall in space buildout

• Our climate going forward, and insurance issues related to it, are of major concern to investors in the office sector; how does a building stay viable with increasing temperatures, increasing insurance rates and increasing vulnerability to storms, heat, wind, fire, flooding and other natural threats as our planet continues to heat up?

• Property insurance is rising due to worldwide hits to the re-insurance industry, ranging from 10-25%; fires in California, floods like Harvey, and even the bomb blast in Beirut have taken their toll on insurance premiums; how to prepare a building so that it does not get covered with mold if electricity goes out for two weeks following a hurricane? Buildings have already adapted to ADA requirement, sprinklers and smoke detectors, and other regulations, and the trend is to anticipate even more areas where advance planning can make a difference, not only to insurance premiums but to building operating efficiency, livability and safety

• People want to return to the collaboration of the office space and companies want their people to return, but how to mitigate virus fears while bringing people back to the office building? What worries workers, and how to assuage their worries about elevators, transit, air flow at work, and even walking on the sidewalk into the building from the parking garage?

• Design materials such as carpets and wall covering and other interior elements are now being made of sustainable materials, and their price/value/durability are all being weighed in the course of re-thinking what a building should be; can we eliminate toxic odors from drying carpet glue and drying paint, which affect some tenants?

• Walkability from home to office to shops and services is at the forefront in designers minds; also attention is being paid to north, south and western exposures of buildings and to the less desirable interior offices…i.e. fine tuning a building with respect to sun and wind light and ‘green’ views outside

• We also have a broader more diverse population to design buildings for; more focused attention on building interior cleaning must be factored into rental rates; how does 24-hour building occupancy by some tenants affect operating costs and security expenses?

• The pandemic has shown that workers like the flexibility of working from home and the office; and some have found they are more productive working at night, or for example twelve hours straight and then with a day off; avoiding everyone parking and walking in and out at 9 and 5 solves problems and alleviates fears of virus transmission, but what about when the pandemic is under control? Workers want to set their own pace without giving up all collaboration at the office, and the learning and mentoring and establishment of company culture which goes with being together

• Will COVID fears subside in 12-18 months, and will people remain interested in the new paradigms? We will still be facing hotter hots, colder colds and drier drys and the buildings must evolve to the new normal

• The trend is toward more focus on the outdoors, and ‘green’ work areas in natural settings…could be climate controlled atriums where weather is severe; more integration of the office building itself with its neighborhood is seen as desirable, including encouraging pop-up businesses to serve tenants where retail/restaurants are not immediately near; how to overcome the now current fear of density? Some older more spacious buildings—even warehouses—may be candidates for office space of the future, with modifications of course; every aspect of a building, including a waiting area for Uber or Lyft pick-up or drop-off are being studied;

• Is the developer building to own, or building to flip? Tenants should think about this when they sign a lease, as it gives an indication of what degree of quality was built into the building • Does a tenant with extra space sub-lease and bring a new population into his area, or just hold until the lease expires and then move the company to a building that has more walkability or one which is closer to employees’ homes? • The uncertainty of the future dictates versatility today • Will B & C buildings be too problematic to adapt to the future, or too expensive to adapt? The older buildings often have the better locations, so a complete mechanical and aesthetic refit may make sense

2020 Texas multifamily virtual event BY RAY HANKAMER

Keynote Keynote Speaker: Dr. James Gaines, Chief Economist, Texas A&M University, Real Estate Center • February 2020, was the peak of the 128-month-long prior recovery; then we fell sharply into recession • Down 31% in Q2 and down 25-30% in Q3 (est.) • Since March nationwide, 63 million have filed for unemployment—about 38% of the workforce; in Texas, 6 million; Texas lost 1.4 million jobs in March-April alone; lost jobs have now recovered by about one-half; Houston has retained 92% of pre-COVID jobs • Texas has had a ‘double whammy’: oil and COVID…energy demand is down and will stay there for a while, although price at $40 bbl seems to have stabilized • Our federal deficit will hit $4 trillion this year, and the Fed has had to borrow $3 trillion of it; in 2-5 years there will be a huge debt overhang • 3.4 million mortgages—7% of total-are in forbearance arrangements, but those arrangements may expire in early 2021 • For recovery, we must: a) get virus under control b) increase consumer demand and spending c) re-employ people d) stabilize/improve global trade • We have no inflation and stable (low) interest rates at or lower than 3% • Texas is a little better off than rest of the U.S., and it should be early 2022 before we approach under 5% unemployment • Home sales are up 3.5%, and prices up 5-6%; there is an inventory shortage of singlefamily homes; new home construction is up and could be one of major drivers pulling us out of current slump • In multifamily, occupancy and rents are down some, but by and large people are paying rent; low income Class B & C are where some evictions are pending, and in some areas 30-54% of tenants fear eviction in coming months; for the first week in October, percentage of tenants paying rent have caught up to last October • Lower rents result in higher cap rates in investment sales, as investors factor in risk

Developing, designing and building a successful apartment project Speakers: Sumner Billingsley, Billingsley Company; J.C. Clements, Jr., Flagship Capital Partners; John Hammond, Riverway Title; Michael Blackwell, Mill Creek Residential Trust, LLC; Jason Haun, ZOM Living; Brent Little, Fountain Residential Partners; Evan Beattie, GFF; Dave Holland, Provident Realty Advisors; Danny Baker, CBRE; Greg Austin, Marcus & Millichap, Investments; Tony Spaeth, Greystone; Todd McNeill, Marcus & Millichap Capital; Art Rastegar, Rastegar. • These are good time for M-F designers

DECEMBER 2020

• Primary M-F growth areas are suburbs, as opposed to urban and exurbs-in the context of COVID, suburbs are attractive, with caveats • 4-6 acres sites where developer throw up a block of standard design apartments are a thing of the past; developers are seeking 30-50-70 acres tracts where mixed use with amenities can create an ‘urban feel’—but in the suburbs—hiding parking, and providing dog parks, trails, lakes/water and many other interior and exterior architecturally designed focal points • Lower density and proximity to good schools and to jobs with companies which are also re-locating out of dense city centers cuts down on commuting time and expense, giving renters more personal time • Companies from east and west coasts are migrating to metro areas like DFW, where cost of living and lifestyles are more appealing • Developers must start with raw land, then create a ‘sense of place’ in the suburbs, with walkability the key, creating the illusion that their developments are in established locations; sense of neighborhood must be created with architectural features simulating single-family homes, townhouses and buildings of varying heights and facades • Management is offering diversions such as activity-segregated areas in pool courtyards and inside, eliminating the large multi-functional rooms popular in the past; more heavily themed, small, intimate areas, such as lobbies with ‘library feel’, rooftop bars, i.e creation of a boutique hotel feel, etc.; also free DJs, courtyard concerts, yoga classes, dog parks with BBQ for socializing, comedy shows, outdoor movies, etc. • Mixed-use should offer walkability to restaurants and shops where possible, even if M-F developer must participate in their development; some are including even singlefamily homes for rent, and encouraging mixed generation ‘neighborhoods’; desire is to create ‘urban quality’ in the ‘burbs • Brick exteriors expedite lease-out, conveying image of quality; trend now is to higher quality architecture in suburban M-F developments; many of these trends were slowly developing but COVID has expedited them, as tenants are desiring to move out of city centers; 2/3 bedroom rental townhomes are becoming part of the mix • With the rush to the ‘burbs and the small town zoning boards which control them, experienced developers are faced with ‘educating’ some of the boards to the realities developers face; some projects are so large that they must be developed as public-private partnerships, which are devilishly difficult and highly complicated in many cases, but rewarding when done right • Tenants wishing to ‘work from their apartment home’ instead of going into the office are dictating some design features in the common areas, which are being built out to resemble small intimate coffee shops • Construction costs as always must be managed, but overall are lower in our part of the country, and work can go on all year round; modular construction techniques are always being discussed but infrequently used, as conventional construction remains competitive

Central & South Texas post-COVID-19 forecasts BY RAY HANKAMER Speakers: Michele Van Hyfte, Downtown Austin Alliance; Claudia Alvarado, STR; Johnathan Horowitz, Convive Hospitality Consulting; Todd LaRue, RCLCO; Anthony Rinaldi, Saxum Real Estate; Christian Fletcher, Marble Falls Economic Development Corporation; Mike Heiligenstein, Central Texas Regional Mobility Authority; Joe Simmons, AQUILA; Zane

• There has been a compression of cap rates to mid 4s in industrial, pushed by low interest rates; industrial real estate is very busy in Austin

State of the Market/Office

• Life sciences such as wet labs/bioscience drives some industrial demand in Austin now; most is build-to-suit because of specialization of use

Cole, JLL.

• Overall optimistic nationwide and in Austin, slow at moment; renewals picking up a little; potential dynamic future with Austin Chamber of Commerce getting calls from companies all over the country wanting to relocate there • Population growth continues in Austin at fast rate; market pausing but not regressing • Tenants will take a little less space and are reassessing balance with some work at home remaining into the future; young professionals need interaction with colleagues and bosses; stay at homers still will need an office to go to; human engagement essential in business world

• Austin is a mini-Detroit with Tesla coming and has been a mini-San Francisco relative to tech; people like to come to Austin to live

Hospitality/Retail

• Austin CBD hotels are hurting badly since it is a meeting/convention/festival/sportsoriented market, and those are shut down during COVID; it will be a while before people congregate again; this affects restaurants and shops in the CBD too; hotel occupancy in Austin market is in 40-45% range

• Amazon and Tesla gigafactory and related vendors creating excitement and demand in market

• Take-out and drive-through restaurants doing better than sit-down, high-end ones, which are struggling; with coming fall and mild weather, outdoor seating is key to survival; when COVID fears dissipate there will be huge pent-up demand for restaurants and hotels, if they can stay alive till then

• Investment capital very interested in being in Austin, although pausing for the moment to watch for return to normal business pace there

• Absence of conventioneers and office workers hurts CBD businesses; normally fall is the season when all Austin hotels are packed

• Some demand trending away from CBD to suburbs where workers are closer to home, especially with Austin’s challenged highway congestion; outlying towns like Leander, Manor, Pflugerville, Cedar Point, Round Rock and others getting attention; nationwide and locally, de-urbanization is taking place

• Austin is working to increase residential occupancy in CBD, which will help shops and bars and restaurants

• At present, tenants have lots of options—lots of sub-lease space to choose from, and rents are coming down with some concessions and negative absorption as new supply comes online; tenant advantage may not last long and it is time for tenants to lock in their deals since in twelve months or less the market may return to ‘normal’…we are very close to a vaccine

Industrial

• Boom in e-commerce driving demand for industrial—furniture to food to everything, and

boom has intensified with COVID; Austin is a ‘final mile’ market; lots of retailers expanding their online marketing besides amazon

• In Austin, size of the average warehouse has doubled in recent years, and Austin is still a relatively small market compared to Houston and Dallas • Food delivery ‘exploding’ and driving demand for industrial • Truck and employee parking for e-commerce warehouses is huge compared to ‘normal’ warehouses and parking is expensive to supply • Some tenants going for shorter terms to remain flexible in changing market • Workforce is available to industrial tenants in Austin and far suburbs so no problem there; easy to draw people to Austin • Cold storage demand is booming, and it costs twice as much to build as a standard warehouse; some conversion of big box retail to cold storage is happening

• The pandemic has resulted in the City of Austin relaxing some regs and expediting creativity to help struggling businesses, such as enabling sidewalk dining; some red tape is being cut; but it is just a matter of time till Austin resumes its boom • Nationally and locally, the restaurant industry is the second largest employer and financial assistance to this industry is desperately needed

Multifamily

• There is a trend to single family home rentals, for seniors downsizing and for families who do not yet have savings for down payment to own a home; these rental units take many forms and developers are experimenting with townhouse looks, and other architectural styles; demand for single-family rentals should exceed supply for foreseeable future • Consumer confidence is rising, and the housing market is strong, multi- and single-family • Multifamily rent collections are around 87%, 2.9% lower than 2019, with October improving over September; Class B & C collections are lower than Class A • Demographics as well as COVID are driving move to suburbs; low interest rates and lower land costs are driving development to suburbs; new family formation results in demand for ‘burbs; but there is still significant downtown demand for multifamily, although it is expensive • Going forward, demand for multifamily promises to remain strong, as Austin and surrounding area continue strong growth; in general, the national market is under-supplied as well DECEMBER 2020

SCOOP 1

Tim Baker to join Weitzman to manage its acquisitions activities as Executive Vice President | Managing Director of Acquisitions

Weitzman, a leading retail-focused commercial real estate firm based in Texas, is significantly expanding its investment properties platform with a key new hire and the expansion of the firm’s equity fundraising, investor relations, investment strategy and deal sourcing. Joining Weitzman to manage its acquisitions activities as Executive Vice President | Managing Director of Acquisitions is Tim Baker, a retail and commercial real estate professional with extensive experience in the Dallas-Fort Worth shopping center industry. In this new position for the firm, Baker’s responsibilities include sourcing acquisition opportunities for existing properties in Dallas-Fort Worth and across the state’s major metro areas. Baker will collaborate on acquisitions with Ryan Stempf, Weitzman’s Chief Investment Relations Officer. Stempf’s focus complements Baker’s through his involvement with investor relations, fund raising and the formation of investment strategies. “Tim is a powerful addition to our team, and in his new role and in working with Ryan Stempf’s investor sourcing, he will be instrumental in our growth across the state,” said Marshall Mills, president and CEO of Weitzman. “We have developed a substantial group of investors looking to place capital in retail real estate with us, and we are also in dialogue with several institutional groups. We continue to target two main buckets of deals: grocery-anchored centers and well-located, shadow-anchored neighborhood strip centers.” Prior to joining Weitzman, Baker served as Senior Vice President of Real Estate and Development for the Pittsburgh-based retailer, Giant Eagle. While there, he led an interdisciplinary team responsible for all aspects of real estate, construction, design, asset management and related duties for the privately held, nearly 500-store grocery and convenience chain. His retail real estate background also includes Albertsons Companies, where as a Regional Vice President he handled real estate duties for a 1,000-plus store territory that included Texas and approximately two dozen other states. He also has senior-level real estate experience with both Safeway (Tom Thumb, Randalls, etc.) and Walmart across numerous states and countries. At Walmart, as Senior Real Estate Manager, Baker was responsible for market strategy and direct purchase/lease negotiations, as well as development at a time when the company was rolling out its Supercenter concept in D-FW. Baker also has experience with all aspects of real estate investment, including deal sourcing, property acquisitions, asset management and disposition. Stempf has a diverse understanding of retail, multifamily, industrial and office properties across numerous markets within the United States. Over his career, he has acquired more than $400 million worth of properties, asset managed projects worth over $1.1 billion and was involved in the sale of properties with a combined value of over half a billion dollars. Baker is a member of the International Council of Shopping Centers and the North Texas Commercial Association of Realtors.

1 BACREN's Recent Board Meeting. 2 BOMA Houston Building Owners and Managers Assoc. 3 BOMA S.A. North SA Chamber of Commerce at La Cantera Resort and spa. 4 BOMA S.A. N S.A. Chamber of Commerce 5 CREW Dallas Testimonial Tuesday Member Spotlight, Kristin Stewart with Purdy-McGuire Inc. 6 TREC Dallas Young Guns at Halloween DECEMBER 2020

South Central Texas < Continued from Page 20

• VIA—the public transportation system—although with low funding, is striving to increase occupancy of buses on popular routes so that the many local employees without personal vehicles can get to work smoothly and quickly; VIA only saw a 50% drop in ridership with the onslaught of COVID, a much lower drop than many other cities

Hospitality/Retail

• Hotels and restaurants are two of the hardest hit segments of CRE, and especially in San Antonio, which is so dependent on tourism and conventions; for hotels, revenue per occupied room plummeted by 84% in April and is down 46% in September, tracking the slow recovery elsewhere in the U.S. • Occupancy, which was 60% last year is currently 43%, and rates are $22 per room lower on average • A large percentage of the population is still hesitant to go out to eat in a restaurant • In retail, investors are shopping for deals due to low interest rates; there are struggling tenants and struggling landlords, who are giving concessions and rent deferral to help bridge tenants through the time of COVID; landlords with cash are offering T.I. on favorable terms to attract good tenants; second generation restaurant spaces with drive-thru are being snapped up instantly • Future new-build restaurants will have smaller footprints, more outdoor seating and more emphasis on drive-throughs • Converse, a small suburb in NE San Antonio, has 3,000 new homes under construction with 2,000 more in the pipeline

Multifamily

• In high-end properties, rents are being collected at the rate of 98%; in lower-end properties there are 85-90% collections, still not too bad considering the levels of unemployment and partially due to the local rental assistance programs; in Austin the low-end collections are far lower • There are vigorous workforce housing programs in San Antonio which provide dignified housing to lower income citizens, especially the service economy and gig workers; however, there is still a gap in affordable housing; 30% of income for housing costs is considered the sweet spot, but many families still pay a higher percent; developers try to locate workforce housing near transit corridors • S.A. is attractive to multifamily investors and developers because of the favorable demographic trends; new Class A projects are considered

DECEMBER 2020

‘like bonds’ to California investors; once COVID is past, rents are projected to rise at a 2.5% annual level, and projects can be financed now interest-only for 2.5%, so developers consider that an excellent set of circumstances; rent control and other government regs in California are driving developers to Texas from that state • S.A. has a good future for the next generation of renters as well—it is a fast-growing market with jobs in healthcare, renewable energy, manufacturing, aerospace, cyber security, low cost of living, moderate climate, and available Class A office at reasonable rental rates • Class A multifamily investments have cap rates that are trending down; supply and demand for Class A is roughly in balance at present, but demand will increase as COVID is brought under control; walkability from apartments to retail and restaurants is in high demand by tenants • Urban multifamily is currently in lower demand than suburban locations; why pay high rent in a cramped space if the restaurants and bars in the urban areas are closed down?...result: attractiveness of suburban multifamily…for the moment; so for the moment suburban multifamily development makes more sense to developers—and it is also cheaper to build where land is cheaper and sites more available

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