Cushman & Wakefield Report Highlights the Inflation Challenges Facing Real Estate Tenants

Rising interest rates could lead to reduced commercial real estate leasing for certain property types for the next several years, according to a new Cushman & Wakefield report on inflation’s impact on real estate occupiers. Most measures of inflation are at levels not seen in decades, and the report notes that the increased costs of labor, materials, energy, and other inputs for companies are unlikely to slow down anytime soon.

A significant imbalance between labor supply and demand has led to shortages across multiple sectors, leading to fast wage growth, one of the inflationary challenges that real estate tenants face. Real estate rent growth is a lesser problem for tenants, though. The report says real estate costs are primarily driven by local market conditions, as rent growth is a function of local fundamentals and vacancies more so than national or local inflation pressures. But costs associated with buildouts have risen sharply, and construction labor shortages create challenges for tenants. “Planning further in advance is more important than ever,” Cushman & Wakefield’s report advises.

Wage growth and retaining employees is perhaps real estate tenants’ most significant challenge right now. Labor costs for real estate occupiers are rising more quickly than any time in recent memory, with median wage growth in the first quarter of 2022 spiking 6 percent from a year earlier. Escalating labor costs may not ease as quickly as other forms of inflation unless a recession happens, which some are ominously predicting. Either way, the economic climate for real estate occupiers from office to retail is tumultuous at the moment, and it will probably stay that way for the time being.

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How Homeownership Can Keep You on the Right Side of the Widening Wealth Gap

Inflation is being felt in every sector of our economy right now and while the cost of living and basic necessities like gas and food continue to rise, wages are trailing behind. Some experts say we may be headed into a recession which will inevitably widen our wealth gap even further. One of the best ways to be on the winning side of this gap is through homeownership.

Homeownership has always been a primary tenant of the American Dream, fostering stability for families and a stronger sense of community. Homeownership remains the primary means of building wealth in the U.S. and is one of the most effective means of producing a generational financial legacy.

In 2015, the U.S. Census Bureau conducted a study with some shocking results. Homeowners’ median wealth was an astonishing 80 times higher than that of renters. The two biggest factors in the wealth gap were home equity and retirement accounts. Equity is the market value of assets after all debts have been paid off.

Buying a home is not without risks, and no investment is ever guaranteed. But history continues to prove that owning property leads to stable and significant returns. The speculative risk that is taken with stocks, crypto currency, NFTs, art and other investments typically do not apply with most real estate investments, particularly if you hold onto it long enough.

What makes homeownership such a remarkable wealth-builder?

1) It appreciates- On the lower end of the appreciation spectrum, homes average just around 4% annually, on the higher end (as we have experienced over the past couple of years), home values have soared to almost 30% in some locations. Obviously rapid growth like this is an anomaly, but it does happen.

2) It uses the principle of leverage- Equity accrues on not only your down payment amount and monthly mortgage payments, but the entire value of the home. If you put 10% down on a $300,000 home you earn appreciation on the total value of the house, not just your initial $30,000, as if you had personally invested all of that money yourself instead of borrowing from a bank.

3) It is forced savings- Comparable to a 401K or similar retirement plan which deducts money from your paychecks into outside investments, your monthly mortgage payments (especially if auto-debited) act in a related fashion. However instead of building equity through returns from the fluctuating stock market, you’re building equity through the more reliable real estate market. According to a recent analysis by the National Association of Realtors, the average homeowner accumulated $176,123 in home equity in a span of 10 years on a median-priced single-family home. Over 30 years, the wealth gain increased to $307,979.

June is National Homeownership Month. The real estate market is shifting and interest rates will probably continue to rise, but both of these may work to your benefit (referenced in my previous
articles). It is still a great time to build wealth and create a financial legacy for you and your family through homeownership.

If you have any questions or would like to take the next steps, reach out. We would love to help!

By Holly A. Morris, Realtor

The Meridian Real Estate Group

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Order Up! Independent Restaurants Are Recovering From the Pandemic

If you noticed that your local restaurants are looking fuller these days, you’re not alone. After the pandemic plummeted restaurant activity and forced many mom-and-pop eateries to close, a report from The NPD Group shows that independent restaurants are experiencing quite the upswing.

Independent restaurant locations, or restaurants that aren’t associated with a corporate chain (and only have one to two locations in total), represent more than half of the entire restaurant industry. Yet these locally-owned restaurants were less resilient to the stark drop in consumer spending than their chain peers when COVID-19 forced the world into lockdown. Eight percent of independent restaurants, approximately 28,399 locations, permanently shut their doors in 2020. But the sector had inched up 1 percent slightly by the end of the following year when 2,893 units had opened.

Visits to local restaurants, both for in-person dining and online orders, increased by 12 percent during the 12-month span ending in March of 2022. Independent restaurant visits are now only 7 percent beneath pre-pandemic levels, specifically the 12 months that ended in March of 2019. Independent restaurant owners have also increased their orders of food and suppliers from wholesalers by 27 percent in the same one-year period, which ended last March. Those wholesale orders have now eclipsed the March 2018-2019 levels.

Independent restaurants are beginning to bounce back despite record inflation, a pronounced labor shortage, and climbing fuel prices. This revival is also good news for retail real estate as well. Restaurants have long been considered a safer option for a retail anchor as they drive foot traffic, but pandemic lockdowns that forced restaurants to close or only allow take-out orders put that theory to the test. This upswing shows that restaurants are still a dependable means to drive foot traffic into retail centers.

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Thinking about selling your home? This may be the time

Home prices are at record highs and still rising, but there are some early indications that the market may be starting to cool. For sellers looking to get top dollar for their home, the time to sell is now.

But homeowners are still holding back from listing their homes, said Jeff Tucker, senior economist at Zillow. While the inventory of homes for sale has ticked up this spring, he said it has more to do with buyers retreating than a flood of new homes hitting the market.
“Sellers don’t seem to be particularly incentivized by these higher prices, or even about how April and May is the best time to list the house for a quick sale that gets a high price premium,” Tucker said.
The main reason that homeowners aren’t flocking to the market to cash in, he said, is simply because they still need a place to live. “They worry, quite reasonably, that they would need to pay a lot to find another place as good or better.”
Many would-be sellers are waiting for the right moment to strike, said Tracey Murray Kupferberg, an agent with Douglas Elliman in Long Island, New York.
“A lot of people are saying, ‘Am I making a mistake in waiting because I’m never going to get that dream price again?’ There is this fear they might miss the peak,” Kupferberg said.
But there is reason to believe that peak could be now.

Signs the market is cooling

It is impossible to time the market exactly, but many analysts expect home prices to peak this quarter.
“It is likely the pace of price appreciation will peak some time this quarter, either in April, May or June,” said Tucker. “That will be the high water mark for annual pace of appreciation, then it will decelerate.”
Signs that the market will start to cool can be found across the market. Mortgage rates, which have increased at the fastest rate in decades this year, are now over 5% and are expected to keep rising. The more expensive it is to finance a home, the less purchasing power buyers have and many give up if they can’t afford a house that fits their needs. That, in turn, can lead to less competition and some price easing.
In addition, there’s been a five consecutive months of declines in pending home sales, as well as a drop in newly constructed single-family sales, according to the National Association of Realtors. That means fewer people have been willing or able to buy. And the share of listed homes with price cuts has been increasing over the past two months, according to
The average profits made on selling a median-priced single-family home dipped in the first quarter, according to Attom, a real estate data company. While profit margins often decrease during the slower winter months, the latest dip marked the first quarterly decline since the fourth quarter of 2019 and the largest since the first quarter of 2011.
“Some sellers really made out over the past two years,” said Kupferberg. “Some buyers did, too. It was a win-win then, with rising prices and really low mortgage rates. Now it is different.”
She said sellers can often be slow to recalibrate after the market shifts, still expecting their home will sell in days with manic bidding wars.
“Prices are going to top out,” she said. “Then it takes a while for sellers to realize they have to lower their price. This pool of buyers can’t afford the home because the cost of borrowing has gone up.”

In need of a quick sale

Lotte Vonk was on the fence about selling her home, mostly because she wasn’t sure where her family would go.
Vonk knew that when her second child arrives in a few months, space in her suburban Chicago townhome would get tighter. But she couldn’t find many homes on the market that seemed to be a good fit, plus home prices and mortgage rates just kept rising. Still, like many would-be sellers, she knew that if she and her husband didn’t sell soon, they’d miss getting the highest price for their home.
“We were very aware of the rising interest rates,” she said. “We were thinking we should sell this house and buy now, or renovate so we can stay.”
Even as they considered expanding the three-bedroom townhouse where they live with their toddler, a dog and cat, they still eyed new listings on the market.
Earlier this month they found the perfect five-bedroom house in a nearby suburb. Once their bid was accepted, they raced to put their home on the market in a week. They couldn’t afford carrying both homes, so the offer to buy the new home was contingent on the sale of their current home by mid-May.
They listed their home for $315,000 last week and have already had more than 20 viewings, but no viable offers.
“Everything I know about the market has told me that the houses should be flying off the shelves,” said Vonk. “When things are not selling it is either the price or the product. It was a gut rehab a few years ago, I know it isn’t the product. So it must be the price.”
They are going to reduce the price and see if that brings in a buyer in time.
“I don’t want to lose out on the house I love,” Vonk said. But she added that she’s willing to sell her home for a little less than her dream price, just to be able to buy her next home.

Staying put, for now

When Kupferberg, the agent in Long Island, visited a potential seller’s home recently she told the owners it would sell fast, even if it did need a little work.
The three-level home with five bedrooms, a pool, and a tennis court was becoming too much to manage for the empty-nesters and Kupferberg knew it would be appealing to buyers willing to pay top dollar.
Still, the couple wavered on the decision to sell or stay put.
“They don’t want to miss the mark, they know their house would sell right away,” said. “But if they take the leap right now, where will they live?”
Kupferberg said she doesn’t have easy answers. Many of her would-be clients are homeowners with a large home who would like to downsize, but also want to stay in the community near their grown children or grandchildren, where their church or synagogue is, close enough to go to the same doctor. There aren’t many options.
“I don’t know what to tell people who want to sell but don’t have anywhere to go,” she said. “Unless they have another home or have a relative to stay with so they can benefit from what we’re seeing at the tail end of the selling market.”
Kupferberg said this particular couple was looking for a single-floor home in a vibrant, upscale gated community, but there were few options and not immediately appealing to them.
“There is nothing that is really meeting their needs,” she said. “They have nowhere to go if they sell, so for now they are staying put.”

The Office Hub and Spoke Model is Getting Another Look

The office hub and spoke model is nothing new. Before the pandemic, corporate occupiers experimented with having a central office in a downtown urban area with scattered satellite offices in nearby suburbs. The idea of a distributed workforce was already gaining steam long before anyone ever heard about the novel coronavirus. By the time the pandemic hit, remote and hybrid work had already risen.

We all know what happened next: The pandemic forced almost every white-collar employee to work remotely, and every company had to plan for the new hybrid work future. Suddenly, the term “hub and spoke” became front and center in the conversation around the workplace.

Some of that talk has since died down as workers begin to make the commute back to their regular offices, but that doesn’t mean the hub and spoke concept isn’t still on companies’ minds. “We haven’t seen many companies who have pulled the trigger yet on the strategy,” said Bryan Berthold, Global Lead of Workplace Experience at Cushman & Wakefield. “Businesses are trying to get aligned first with what’s happening with their workforce rather than aggressively going after a strategy that may not make sense in a few years.”

The office sector certainly has more clarity than it did in March 2020, but attitudes toward returning to the office remain cautious. The number one question for occupiers now is what their employees want. Companies are collecting data and insights on what’s happening with remote and hybrid work and return to the office, and many occupiers may not be ready to make any bold moves. Hub and spoke would, for the most part, entail acquiring new real estate assets, and some firms may not want to expand office footprints just yet.

But hub and spoke may still be on companies’ minds as some executives still aren’t keen on remote work. Hub and spoke would mean more in-person working, which execs are hoping for. The ever-controversial Elon Musk, Tesla’s CEO, is further evidence of some executive’s distaste for remote work arrangements. Musk recently sent an email to Tesla executives that demanded office workers return to their desks or leave the company. “If you don’t show up, we will assume you have resigned,” Musk wrote. Musk’s hardline stance against remote work is an extreme example of a return to office policy, but he’s not alone. Goldman Sachs CEO David Solomon has called remote work an “aberration,” and other big-name executives have challenged it, though many have backed down and caved into at least a hybrid work policy.

“Well-being for employees has actually been going downhill since the pandemic started,” Berthold said. “Workers say they like remote and hybrid, but it’s not working out very well for them to a certain extent.” Of course, employee well-being could be dropping for several reasons, including the persistence of COVID-19 or any number of socio-economic problems currently in the U.S. But Berthold questions whether remote and hybrid work itself isn’t causing problems, including increased loneliness, mental health issues, and burnout.

Big wheel
The hub and spoke model originally described a company with an HQ in the city and satellite offices in the suburbs. But the definition of hub and spoke has expanded during the pandemic. Executives are now asking how to access the best labor pool, and sometimes that means a “hub quarters” in a major metro area and then spokes in different national markets. A company could have a central office in Boston and open satellite offices in growing secondary cities like Austin, Texas, or Nashville. Big corporations like Google and Amazon are already doing this, but the idea has spread to smaller and mid-sized companies.

Utilizing the hub and spoke model means companies would think remote-first when hiring new employees, but focus on specific national markets in their strategy. So, if a company ends up hiring ten or more employees in Denver, why not open a satellite office there? The employees could still work on a primarily remote basis, but they’d at least have a branded, central location to meet that keeps them tied to the company.

This strategy could enable a corporate occupier to take advantage of population shifts and nationwide migration patterns. Secondary markets in the Sunbelt continue to grow in places like Phoenix and Atlanta, so placing satellite offices there allows companies to gain access to those ever-increasing and talented labor pools.

“The mantra could be ‘decide where to live first, and then decide where to work,’” said Adam Segal, Co-Founder and CEO of cove, a tenant experience and building operations tech provider. “It’s fascinating because this really changes things for the future of the office and, arguably, makes the office more valuable.”

Different spokes
Segal said his company set up a hub and spoke for a company in 2018, but they haven’t been asked about them as much lately. He thinks it’s because there’s been such a slow re-entry back to the office. “With the return to the office, we may not have clarity for another 2 to 3 years,” Segal said. “Anecdotally, we see people coming back, but many companies may sit tight for a while before deciding what to do with leasing and long-term planning for their portfolios.”

The companies that sit tight may decide to simply continue with hybrid and remote schedules without adding new real estate assets. After all, with hub and spoke, employees’ homes could be spokes. There may not be a need to spend on new real estate if employees can just work from home and still be productive, despite whatever problems remote work may cause. And with a new wave of virus cases nationwide and uncertainty about the future of the pandemic, the ebb and flow of return to the office and COVID fears are keeping some companies cautious.

Another way to enact a hub and spoke strategy is to use flex spaces as spokes. Some companies are doing this now; it’s a low-risk opportunity to test the market and get employees to work in-person together. Flex space leases are typically much shorter and require less commitment than a traditional office lease, so companies can shed the leases without much hassle if they’re not utilizing the space enough.

Real estate experts say the satellite offices have to be full of amenities for the hub and spoke model to work, and that goes for whether the spoke is in a nearby suburb, in a different national market, or in a flex space. Spokes can’t be in an isolated suburb where it takes a while to drive to lunch spots or other amenities. The location must be ideal. The satellite offices also need to give opportunities to the employees there, allowing them a chance to move up the ranks in the company instead of being a dead-end office cut off from the company’s main headquarters. Otherwise, companies would just churn through the labor pool in the satellite office’s area.

Rolling along
Using a hub and spoke strategy can help draw workers back into the office. The whole idea of the strategy is to service employees, and if satellite offices are opened closer to workers in the suburbs, it cuts down on their commute times. Offices in urban areas where employees tend to live closer to where they work have a higher return-to-office rate, according to a recent Wall Street Journal analysis of combined data from the U.S. Census Bureau and access control platform Kastle Systems.

Of the ten major U.S. cities with the most significant dip in office occupancy during the pandemic, 8 had an average one-way commute of more than 30 minutes. So, it stands to reason that cutting down commute times will draw employees back to the office. And one way to do this is by opening satellite offices closer to where employees live, including giving them access to flexible workspaces.

Whether or not the hub and spoke model truly comes to fruition is still up for debate. The strategy was utilized pre-pandemic, and while it gained popularity in the business media soon after COVID hit, not many companies have pulled the trigger on it yet. That doesn’t mean it won’t happen, though. The hub and spoke model can be enacted in many ways, and some company executives may be thinking about it differently.

Opening satellite offices in other, growing national markets can allow companies and landlords to lean into the population shifts and national migration trends. Companies could still maintain a presence in gateway metros like New York and San Francisco while catering to secondary cities. This idea could be brilliant as cities like New York and San Fran have struggled to increase office occupancy rates and have seen plateaus or declines in population levels.

Flexibility has become an essential aspect of the office sector since the pandemic started, and the trend of the distributed workplace has taken off. Hub and spoke could be another way for occupiers to service employees, cutting down on commute times and getting them back to in-person work. The hub and spoke model is nothing new, and while it may not be highly utilized at the moment, the potential is there. As office occupiers and landlords gain more clarity on the future of work, hub and spoke is on the menu of options to adjust to the new office workplace reality.

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Inside New York City’s Largest-Ever Office-to-Residential Conversion

One Wall Street. The address is easy enough to remember. But that’s where the simplicity stops.

This is Harry Macklowe we’re talking about.

Known as one of the biggest risk-takers in New York City real estate, few figures are as seminal in Manhattan as Macklowe. He’s best known for building skyscrapers, office buildings, and ambitious residential developments throughout his six-decade career after he founded Macklowe Properties. He’s the man always who looks up, both to the stars and to devise a plan to add yet another floor. Among his past projects included the iconic General Motors Building which holds Apple’s flagship store (you can thank Macklowe for that giant cube out front), and 432 Park Avenue, where Macklowe had bulldozed the iconic Drake Hotel to build the third-largest residential tower in NYC, much to the ire of the neighborhood. He likes big. He likes shiny. And he likes art, so much so that his bitter divorce with his first wife resulted in a record-breaking $922 million art collection.

The fluted limestone tower of One Wall Street is his latest odyssey. At 51 stories spanning two Manhattan blocks, it’s the largest office-to-residential conversion in New York City history. If the sheer size alone failed to convey that, the cost of the whole endeavor will. Macklowe Properties (and their equity partner, Hamad bin Khalifa Al Thani of Qatar Royal) is seeking a $1 billion debt package to refinance the former office tower. This is after Macklowe Properties secured a $750 million loan from Deutsche Bank in 2018 to fund the tower’s reconstruction. It was a project so gargantuan, in a city already known for gargantuan projects, that I had to see it for myself.

By some miracle of the R train, I’m early to my tour. Construction is still underway, not that you can tell. Not a single whirr of a buzzsaw or a clang of a hammer spills into the lobby, or rather the “Red Room,” as it is called. I could dedicate pages to the Red Room alone. Designed by muralist and Art Deco queen Hildreth Meière in 1931, 13,000 square feet of amber, oxblood, and gold mosaic tiles line the 33-foot-high walls in a sharp, dazzling web. The room’s glamor is enough to make a Fabergé egg blush.

I found out later that renovating the Red Room alone was a painstaking 16-month process of mending, re-grouting, and polishing each individual tile with nonchemical and non-abrasive techniques. You can imagine how relieved the restorationists were to find an unopened box containing thousands of original tiles in the building’s basement.

The Red Room is both a relic of a glittering bygone era in New York City real estate and a selling point for prospective buyers. Residents at One Wall Street will have bragging rights of living in a true New York City landmark, one that just won the Lucy G. Moses Preservation Award last April. “It’s the Oscars of landmark awards,” Richard Dubrow, Director of Marketing at Macklowe Properties, tells me as he walks in. Matthew Chook, Senior Vice President of Sales, runs in behind him.

Also there to lead the tour is Lilla Smith, Macklowe Properties’ Director of Architecture and Design, although her official title is “the star of the whole show” according to Dubrow. Smith’s been toiling away at the details of the conversion since Macklowe purchased One Wall Street for $585 million back in 2014. Alongside Macklowe himself, Smith is the mastermind behind the architectural gymnastics needed to make a conversion of this magnitude happen. Essentially, One Wall Street is a 1.1 million square feet of new construction, wrapped in the Art Deco shell of Ralph Walker’s original architecture.

Macklowe’s previous conversions had never gone so far as to completely gut the inside of the respective building. “Before we took existing elevators and existing infrastructure and kind of built apartments around it,” explains Dubrow. “Whereas here, we took the approach to basically take out every elevator, stair, wire, pipe, everything and start over from the inside so that we could optimize the building for residential use.”

So how is Macklowe’s vision for One Wall Street optimized for residential use? For starters, there are a lot of units, 566 condos to be exact, ranging from studios to three bedrooms. “The units start at just over a million, for a studio,” Chook says. In contrast, a 3-bed/3.5-bathroom is listed on One Wall Street’s website for almost $10,000,000. I ask how many units had sold so far, but Smith, Chook, and Dubrow were equally mum on the subject. Macklowe Properties isn’t releasing any numbers yet, but it was insinuated by my tour guides that buyers were already trickling in.

Then there’s the list of amenities that extend past the length of a CVS receipt. An attended lobby. A children’s playroom. A lounge for teens. A co-working space on par with a WeWork. A private health club. A spa. A ritzy bar. A fitness center. A private pool is located on the 38th floor (a rare feat for any developer). And, the gold standard for any New York City apartment, laundry in the building. Of course, that’s without diving into the 174,000 square feet of ground-floor retail space that’s also open to the public.

When I ask Smith what the biggest challenges posed by converting an office building were (besides buffing the Red Room’s mosaic tiles), she tells me point-blank: retail. “The challenge was opening up an ample retail space that could extend along Broadway and wrap around to New Street.” As of now, Whole Foods and Lifetime Fitness have signed leases at the site.

Smith, Dubrow, and Chook all guide me throughout the building. When I’m shown a two-bedroom condo, Smith regales me with geographical details about the Calacatta marble in the kitchenette. “It’s only available in one quarry in Italy,” she explains. She ushers me to the bathroom which is lined wall-to-wall with marble slabs, which she tells me that Macklowe picked out himself. “Yeah, Harry likes white.”

Dubrow escorts me to the condo’s balcony, and we’re greeted with the beauty of the Manhattan skyline. In every direction, there’s a historic landmark. The Empire State Building. The Statue of Liberty. Trinity Church. One World Trade Center. The New York Stock Exchange. Even the pharmacy covered in scaffolding on the corner looked iconic. It was all there. Suddenly the insistence to keep the Art Deco details of the original building’s design made perfect sense.

Art Deco’s aesthetic themes were entrenched in the collective optimism of the roaring ‘20s, and later, the eschewal of the austerity that came in the following decade. Sleek symmetrical designs that could only be achieved mechanically were an ode to new technologies and the dawning of a new age. Robert McGregor, one of the late founding members of the Art Deco Trust, had described the movement perfectly. “Art Deco reflects confidence, vigor, and optimism by using symbols of progress, speed, and power.” Standing on that balcony at One Wall Street, I felt the wistful glory of the past and the awaiting future collide.

Harry Macklowe had envisioned One Wall Street to be a mini-Rockefeller Center and an inflection point for Manhattan’s Financial District, or FiDi as it’s also known. Certainly, Macklowe didn’t foresee the onset of the coronavirus and the seismic economic consequences it wrought when he bought One Wall Street almost a decade ago. Nevertheless, One Wall Street seems to be opening up at an opportune time. “The pandemic really drove home the idea that a neighborhood that has mixed-use is going to be a healthier neighborhood,” said Smith, “and that’s what we set out to achieve.”

Office-to-residential conversions are largely written about as a new trend in the wake of pandemic-induced remote work, but Smith informs me that converting older, “less prime” office space into liveable units had started in downtown Manhattan years ago. Just before the tragedy of 9/11, 55 percent of office tenants in downtown Manhattan were in finance or insurance. As of September of last year, that number has dropped to 30 percent. Empty offices became residential buildings, but none as large-scale or complex as One Wall Street.

In its heyday, Manhattan’s Financial District buzzed with office workers and money, but over the last twenty years, the buzzing has dwindled. Now, after COVID-19 slammed the brakes on the financial markets, there’s a glut of empty office space in Manhattan. So does this mean that the redevelopment of One Wall Street was a very, very expensive mistake? Probably not.

We’re in the age of remote work now, and that grants a dynamic shift in power to mixed-use developments. One Wall Street combines residences, retail, and a snazzy co-working space that lends to the live-work-play ethos of post-pandemic life perfectly. Plus, it’s a great location for a mixed-use location. Walkability is a major determiner of the success of any mixed-use development, and you can’t get more pedestrian-friendly than NYC. One Wall Street is expected to remain under construction until the end of this year, so it’s too early to tell if the retail prowess and public amenities of Harry Macklowe’s pet project can really inject new life into the area, but there’s promise.

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Commercial Space: How to Determine Usable vs. Rentable Square Footage

Commercial real estate space is a significant investment and commitment. If you’re an investor or looking for off-market commercial real estate space, it’s important to know what you are leasing before creating rent amounts in a lease. After all the due diligence and property owner background you have collected, it’s crucial to ensure you understand the usable vs. rentable square footage you will be dealing with.

There are multiple types of per square foot space in a commercial real estate lease to understand. You have the rentable square footage (RSF) and usable square footage (USF)… It’s all in the details. While both are important, your calculations for rent cost or income per square foot need to make a clear distinction between both.


The total square footage of any commercial real estate property is the usable square footage of space that a tenant can occupy. In some cases, the size of space compared to the overall space in a building will further expand the definition of usable space.


When a landlord leases commercial space, there are advantages to dividing the space to allow for multiple tenants. This division will determine the usable space calculations and areas each tenant can occupy.

In a partial floor commercial lease, the usable space includes all office space, storage areas, self-contained restrooms, entryways, and internal fixtures.

full-floor commercial lease includes all usable square feet enclosed by the boundaries of the floor. This lease contains space that is not always usable for conducting business. These include-

  • Mechanical areas such as communication rooms and electrical access areas
  • Closets for cleaning and janitorial
  • Storage areas
  • Common areas such as elevator and receptions areas, kitchens, hallways, and common areas

In most cases, some building square footage dedicated to elevator shafts and stairwells is not included in the usable square footage calculations.


The second area of space for commercial leases is the RSF (rentable square feet). This space is- all usable square feet plus a dedicated portion of the common areas in a building.

These common areas include hallways, lobbies, public or nonprivate bathrooms, loading and storage areas, and even athletic areas. The RSF is how the base property rent is determined and is why it’s essential to understand exactly what this area is.

A typical commercial lease will calculate a prorated portion of the overall square footage and assign it to the tenant lease. For example, if a lease is for 5,000 SF in a 50,000 SF property, this lease has10% of the property’s common space in it.


When calculating expenses and or revenues, know that rents are not related to usable square feet but are calculated using the rentable square feet. Remember, rentable space is typically more than usable; use the RSF for all rent calculations.


The landlord tool that defines the distinction between the property’s RSF and USF is the load factor (LF). To calculate a property load factor, divide the building’s total rentable square feet by the total usable square feet. The formula is:

LF= Total Rentable SF/ Total Usable SF

Using the LF multiplied by a lease’s usable square feet determined the RSF space. The formula is:

Lease USF x LF= RSF

Understanding the LF helps commercial real estate landlords in unique ways. The LF ensures the landlord charges a rent rate that accounts for both RSF and USF, ensuring the rate per sq ft covers all areas of the property. As an example, you have a property containing 50,000 RSF and 40,000 USF for lease.

In the property example above, dividing the RSF by the USF, your LF = 1.25. Your lease would detail the LF as a percentage of the common area to market this space correctly.

A commercial space with 5,000 USF would have a rental calculation as follows:

5,000USF x1.25= 6,250 x rental rate per sq ft.


While not important for a tenant unless the lease is for an entire building, a landlord or investor knowing the gross square foot of the property knows precisely what they have. This GSF or gross area of your property is the total square footage of everything. It includes all usable and rentable square footage. Usual exclusions to this GSF include:

  • Outdoor parking lots
  • Truck loading zones
  • Exterior lighting wells
  • Athletic areas

Taking the Measure of Your Investment

Get the space measured before investing. A good tip is to maximize your investment with modern measuring tools as an investor. Using today’s laser measurement devices will ensure you have captured the exact space sizes. Don’t rely on others’ antiquated measuring devices. With solid space numbers, the new leases can generate increased rent rolls.

 When measuring space for leases, a standardized process is the best option. One way to do this is to use The Building Owners and Managers Association (BOMA) standards for measuring commercial buildings’ lease space. BOMA has two standard measurement methods:

  • Method B: The Single Load Factor Method calculates the rentable space for each tenant using a standard approach to measure floor area. All floors on a building keep this standard.
  • Legacy Method A: The 1996 standard uses separate prices for the USF and common square footage

Leasing by the Numbers Benefits

A landlord who knows their exact rentable square footage, usable square footage, and load factor is ready to rent their space. Marketing the space using the RSF is the best option. However, detailing the usable square feet to potential tenant ensures there is no misunderstanding of what you’re charging for and what the tenant is paying for. The best way to maximize the rental rate and increase space utilization is by leasing with the RSF.

ProspectNow has been around for over a decade (since 2008). ProspectNow is a vital tool for their business success in real estate or real estate marketing. The data that users can get from ProspectNow is a lot more expensive on other competing platforms. From information on finding phone numbers to how to close more deals. Find out today how ProspectNow users close more deals and make more money! Additionally, ProspectNow is trustworthy, easy to do business with, and a reliable data provider.

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Spring Checklist: Prep Your Home for Warm Weather

Get your home, lawn, and garden ready for the milder, wetter days on the way

Make a clean start at the front entry
Muddy footprints, salt stains, grime from who knows where: That’s winter’s legacy to your front entry. To clean this area, remove the furniture and mats, then sweep away cobwebs and dirt.

Dip a soft-bristled brush into a solution of oxygen bleach—1/2 cup of powder per gallon of warm water; scrub the walls, window frames, door, and floor.

Start low and work up, so runoff won’t leave streaks, and rinse wellwith a hose before the solution dries. Use glass cleaner on windows; scrub furniture with mild soap and water. Launder or brush out mats before setting them back in place.

Fill low spots in the lawn

Yard areas that puddle after a rain and stay that way for even a few days make ideal breeding grounds for mosquitoes come summer. Fill them in now, in one of two ways.

For shallow depressions of no more than 3 inches, spread ½ inch of a loose, dry divot mix, such as Fast Fix ( Rake this blend of sand and grass seed into the soil with a metal lawn rake; water as needed. Repeat in six weeks.

For deeper depressions, strip off the low spot’s existing turf layer and set it aside. Level the area with topsoil, then replace the turf and water well.

Check your sump pump

During the rainy season, a failed sump pump increases the risk of a flooded basement. Make sure your pump is working with this simple test: Pour a bucket of water into the sump (the pit the pump rests in) to lift the float switch; that should turn the pump on.

Make sure the float moves up and down freely, the pump runs smoothly with no unusual noises, and the sump empties swiftly. If that doesn’t happen, you could have a clogged pipe, a stuck impeller, or a broken check valve. Call a sump-pump repair service to get a diagnosis. And if you don’t already have a backup battery for your pump, consider getting one: An overflowing sump is the last thing you need to worry about if the power fails.

Give garden soil a boost

By adding biochar, a type of highly porous charcoal, you can improve your soil’s water-holding capacity, fertility, and microbial activity while keeping nutrients from leaching out. First, blend the char ( with an equal amount of compost and let it rest for at least 10 days while the char locks in the compost’s nutrients. Then add more compost to the fortified blend to make an 80-20 mix and rake it into the soil.

Cover your window wells
These basement openings allow in natural light, but also collect debris that has to be cleaned out regularly, expose windows to rain and snow, trap small animals, and pose a trip and fall hazard.

As a preventive measure, install window-well covers made of tempered glass or polycarbonate plastic. They still give you light while keeping everything else out of the well. If you have a below-grade living area that requires emergency egress, make sure that the cover you get can be opened or removed from the inside.

Time to do a termites check

These tiny insects can nibble on wood undetected, unless you keep an eye out for their telltale signs each spring. Outside, look on foundation walls for the mud tubes made by subterranean termites traveling from their nests up into your house.

Inside, a different type—the dry-wood termite—leaves tiny pellets resembling salt and pepper on floors and near window- and doorframes. As the weather warms, both kinds fly off in search of a new home, then shed their wings, leaving them in piles on windowsills. See any of these signs? Call in a professional exterminator.

“If a nailhead pops up on your wood deck, don’t just hammer it back down. Pull it out and replace it with a longer nail or screw. If the wood in the nail hole is soft and wet, fill the hole first with a wood splinter covered with polyurethane glue to get a tight fit.” – Tom Silva, This Old House General Contractor

Keep conifers in shape

Cut back these evergreens, when they’re pushing out new growth, but take it easy when you do; conifers don’t recover quickly from pruning mistakes. To control the size of those with whorled branches, like pine and spruce, remove just ½ to 1⁄3 of the new growth’s tips once they’re 2 to 4 inches long.

To maintain the plant’s current size, remove the entire tip when it’s an inch long. On random-branching conifers, like juniper and arborvitae, prune anywhere along a branch ahead of a dormant bud. When you prune only the green branches early in the season, new growth will hide any cut ends.


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Can You Truly Own Anything in the Metaverse?

In 2021, an investment firm bought 2,000 acres of real estate for about US$4 million. Normally this would not make headlines, but in this case the land was virtual. It existed only in a metaverse platform called The Sandbox. By buying 792 non-fungible tokens on the Ethereum blockchain, the firm then owned the equivalent of 1,200 city blocks.

But did it? It turns out that legal ownership in the metaverse is not that simple.

The prevailing but legally problematic narrative among crypto enthusiasts is that NFTs allow true ownership of digital items in the metaverse for two reasons: decentralization and interoperability. These two technological features have led some to claim that tokens provide indisputable proof of ownership, which can be used across various metaverse apps, environments and games. Because of this decentralization, some also claim that buying and selling virtual items can be done on the blockchain itself for whatever price you want, without any person or any company’s permission.

Despite these claims, the legal status of virtual “owners” is significantly more complicated. In fact, the current ownership of metaverse assets is not governed by property law at all, but rather by contract law. As a legal scholar who studies property law, tech policy and legal ownership, I believe that what many companies are calling “ownership” in the metaverse is not the same as ownership in the physical world, and consumers are at risk of being swindled.

Purchasing in the metaverse

When you buy an item in the metaverse, your purchase is recorded in a transaction on a blockchain, which is a digital ledger under nobody’s control and in which transaction records cannot be deleted or altered. Your purchase assigns you ownership of an NFT, which is simply a unique string of bits. You store the NFT in a crypto wallet that only you can open, and which you “carry” with you wherever you go in the metaverse. Each NFT is linked to a particular virtual item.

It is easy to think that because your NFT is in your crypto wallet, no one can take your NFT-backed virtual apartment, outfit or magic wand away from you without access to your wallet’s private key. Because of this, many people think that the NFT and the digital item are one and the same. Even experts conflate NFTs with their respective digital goods, noting that because NFTs are personal property, they allow you to own digital goods in a virtual world.

NFTs and the hype about the metaverse have sparked a virtual land rush.
However, when you join a metaverse platform you must first agree to the platform’s terms of service, terms of use or end user license agreement. These are legally binding documents that define the rights and duties of the users and the metaverse platform. Unfortunately and unsurprisingly, almost no one actually reads the terms of service. In one study, only 1.7% of users found and questioned a “child assignment clause” embedded in a terms of service document. Everyone else unwittingly gave away their first-born child to the fictional online service provider.

It is in these lengthy and sometimes incomprehensible documents where metaverse platforms spell out the legal nuances of virtual ownership. Unlike the blockchain itself, the terms of service for each metaverse platform are centralized and are under the complete control of a single company. This is extremely problematic for legal ownership.

Interoperability and portability are defining features of the metaverse, meaning you should be able to carry your non-real-estate virtual property – your avatar, your digital art, your magic wand – from one virtual world to another. But today’s virtual worlds are not connected to one another, and there is nothing in an NFT itself that labels it as, say, a magic wand. As it stands, each platform needs to link NFTs to their own proprietary digital assets.

Virtual fine print

Under the terms of service, the NFTs purchased and the digital goods received are almost never one and the same. NFTs exist on the blockchain. The land, goods and characters in the metaverse, on the other hand, exist on private servers running proprietary code with secured, inaccessible databases.

This means that all visual and functional aspects of digital assets – the very features that give them any value – are not on the blockchain at all. These features are completely controlled by the private metaverse platforms and are subject to their unilateral control.

Because of their terms of service, platforms can even legally delete or give your items away by delinking the digital assets from their original NFT identification codes. Ultimately, even though you may own the NFT that came with your digital purchase, you do not legally own or possess the digital assets themselves. Instead, the platforms merely grant you access to the digital assets and only for the length of time they want.

For example, on one day you might own a $200,000 digital painting for your apartment in the metaverse, and the next day you may find yourself banned from the metaverse platform, and your painting, which was originally stored in its proprietary databases, deleted. Strictly speaking, you would still own the NFT on the blockchain with its original identification code, but it is now functionally useless and financially worthless.

While admittedly jarring, this is not a far-fetched scenario. It might not be a wise business move for the platform company, but there’s nothing in the law to prevent it. Under the terms of use and premium NFT terms of use governing the $4 million’s worth of virtual real estate purchased on The Sandbox, the metaverse company – like many other NFT and metaverse platforms – reserves the right at its sole discretion to terminate your ability to use or even access your purchased digital assets.

If The Sandbox “reasonably believes” you engaged in any of the platform’s prohibited activities, which require subjective judgments about whether you interfered with others’ “enjoyment” of the platform, it may immediately suspend or terminate your user account and delete your NFT’s images and descriptions from its platform. It can do this without any notice or liability to you.

In fact, The Sandbox even claims the right in these cases to immediately confiscate any NFTs it deems you acquired as a result of the prohibited activities. How it would successfully confiscate blockchain-based NFTs is a technological mystery, but this raises further questions about the validity of what it calls virtual ownership.

The Conversation reached out to The Sandbox for comment but did not receive a response.

Legally binding

As if these clauses weren’t alarming enough, many metaverse platforms reserve the right to amend their terms of service at any time with little to no actual notice. This means that users would need to constantly refresh and reread the terms to ensure they do not engage in any recently banned behavior that could result in the deletion of their “purchased” assets or even their entire accounts.

Technology alone will not pave the way for true ownership of digital assets in the metaverse. NFTs cannot bypass the centralized control that metaverse platforms currently have and will continue to have under their contractual terms of service. Ultimately, legal reform alongside technological innovation is needed before the metaverse can mature into what it promises to become.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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What Do Historical Mortgage Interest Rate Trends Tell Us About What’s Coming Next?

If you didn’t take advantage of the historical low mortgage interest rates over the past several years, you may think you missed the proverbial home buying boat and decide to wait in hopes the market will become more favorable again. Taking a look at trends over the past 50 years as well as understanding why rates fell so low in the first place may help in your decision-making process.

In 2019, average mortgage rates were already quite low compared to the historical average, just under 4%. When Covid hit and the pandemic era became the norm with quarantines, supply chain issues, businesses shutting down and the like, the Federal Reserve quickly implemented policies to keep money flowing through our economy which in turn lowered rates even further.

By July 2020, the 30-year fixed rate fell below 3% for the first time in our nation’s history and by January 2021 it had plummeted all the way down to 2.65%.

These Covid-era policies were only meant to be temporary and once the economy started regaining its footing as restrictions eased, the Federal Reserve had plans to slowly adjust interest rates upwards. However, add a surprisingly rapid 40 year high spike in inflation, rates moved faster than almost anyone anticipated.

According to Freddie Mac, the average 30-year rate jumped from 3.76% to 5.11% between March 3 and April 21 — an increase of 1.35% in just eight weeks.

Yet looking at the data (see chart) from Freddie Mac’s Mortgage Market Survey dating back to 1971, we are still below the five-decade average of just under 8%. Mortgage rates can fluctuate daily as well as yearly, and some years have fluctuated much higher than what we are currently experiencing.

In the late 1970’s, inflation was rampant and the Fed took drastic action in hopes of bringing the economy under control. By 1981, this translated to the highest 30-year fixed mortgage rate averaging a whopping 16.63%. (Proud daughter moment, my mother was an agent at this time with Harry Norman, Realtors and managed to persevere through this incredibly challenging period with her love of real estate intact.)

Will interest rates skyrocket back up to those early ‘80’s levels? Most experts say that is highly unlikely as there were multiple, decade long factors leading to this particular perfect storm back then, but also…never say never.

So, back to the decision you may be considering, should you wait for mortgage rates to go back down? Taking a look at the historical data as well as our nation’s current economic situation, all signs point towards higher mortgage rates in 2022. Although there may be small percentage point dips here and there, the trend appears to be heading upwards in the coming months. Combine that fact with predicted annual home value appreciations still clipping along at a robust pace (estimates for the Atlanta area hovering over 15%), waiting may be much more costly than moving forward, at least for the next 5-10 years.

If you have any questions or would like to take the next steps, reach out. We would love to help!

By Holly A. Morris, Realtor

The Meridian Real Estate Group

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How Serious is the Threat of Obsolescence in the Office Market?

To say there’s uncertainty in the office market is an enormous understatement. Companies and landlords are beginning to get more clarity as hybrid work models firm up and workers slowly trickle back to offices. But vacancy rates remain stubbornly high, and there’s been a vast difference in occupancy for newer and older buildings. The speculation about the future of work and the office market is endless. And one increasing question is whether or not a large swathe of office buildings faces obsolescence.

When something becomes “obsolete,” it has lost its function or desirability due to changing technologies, requirements, or market preferences. Eight-track tapes were the primary music delivery device from the mid-1960s to the mid-70s. Then, technological advances replaced the eight-track, giving way to cassette tapes, the compact disc, and eventually digital files like MP3s and streaming services like Spotify. Each tech shift made the previous era’s listening devices obsolete, tossing them into the dust bin of history.

The same thing can happen to buildings. Economical, functional, and physical factors can render buildings obsolete. The obsolescence can be curable or incurable, depending on the severity. Some factors like a traffic pattern shift or neighborhood zoning could be terminal because it’s outside the control of investors and building owners. They can lobby city officials for changes, but the decision is up to someone else. Other factors, like the physical aspects of a building, can sometimes be fixed as long as they can be resolved quickly and at a reasonable cost.

For the office market right now, the pandemic has accelerated the flight to quality and created conditions for possible obsolescence that may or may not be curable for some buildings. It may be hard to motivate employees to return to a 1970s-era office that’s not compelling and doesn’t have all the dazzling amenities that many corporate occupiers are investing in right now. Plus, there’s the sustainability aspect. More regulations from state and local jurisdictions on lowering carbon emissions, such as New York City’s Local Law 97, push expensive energy efficiency upgrades on office buildings, making inefficient older buildings much less attractive to corporate tenants.

Out with the old
The process of auditing building portfolios for obsolescence has already begun, according to Lonnie Hendry, Head of CRE & Advisory at Trepp, a provider of commercial real estate data and analytics. “Property owners are identifying buildings with red flags,” Hendry said. “We won’t see historical price drops in Class B and C offices tomorrow, but it’ll happen soon.” Hendry said an excellent example of the obsolescence trend is what happened at 1740 Broadway in NYC’s Midtown West. Blackstone lost two large tenants at the 600,000 square foot office and then handed the keys back to the special servicer on its $308 million commercial mortgage-backed security.

Blackstone has extensive Manhattan office holdings, and giving up on the 1740 Broadway property was a “one-off occurrence,” a source told Commercial Observer. The real estate firm said the building had a “unique set of challenges.” While Blackstone said it was a one-off occurrence, Hendry told me the loss was “indicative of what we’ll be seeing” in the office market. “When tenants move out, owners may start bailing on older properties,” Hendry said.

The challenging thing for investors and building owners is that with interest rates rising, they may not be able to refinance loans at favorable rates, putting more pressure on underperforming assets. Though, owners of Class B and C offices do have options besides foreclosure. Most of them can reinvest their capital in upgrades to make buildings into solid B-plus or A-minus offices and still develop a stronghold depending on pricing. But another challenge is how building owners will pass all these improvement costs to tenants. There’s still a lot of downward pressure on office rents, and tenants have leverage in today’s market, leading to situations where owners may be forced to sell due to insufficient cash flow.

Institutional owners will be better able to absorb a drop in prices and rents, but it may be more challenging for individual owners to hold on. Something similar happened with hotels throughout the pandemic, as big operators withstood the impact of high vacancy rates, but smaller owners were forced to sell at a loss. “Institutional office owners can probably survive and pivot,” Hendry said, “but smaller owners will see significant cap rate increases and could fare much worse.”

Re-pricing on the horizon?
A new report from Zisler Capital Associates, a commercial real estate consultancy, delved into office market obsolescence. They estimate that as much as 70 percent of existing office stock will suffer from accelerating obsolescence. The report says the re-pricing of space and assets will require office owners and investors to decide which to hold, renovate, or sell. The effects of COVID and sustainability standards have created an increasingly bifurcated office market. Energy-efficient and healthy offices are in high demand, while older buildings are becoming obsolete with aging systems, poor energy performance, and a failure to recognize changing tenant demands and government standards. “Regardless of the number of people returning to the office, many will demand updated, sustainable, healthy space, as demonstrated by large tech firms signing mega leases during the pandemic,” the report said.

The report estimates that of older and smaller office buildings, prices could decline on average by at least 20 percent over the next 3 to 5 years based, in part, on historical cap rates and building quality ratings. “If local governments don’t require changes for energy efficiency, firms and workers will discriminate in building selection, and that’ll manifest in pricing,” said Randall Zisler, Chairman of Zisler Capital Associates and a former Executive Director of Real Estate Research at Goldman Sachs. “There will be a big sorting in the market. There could be a lot of office buildings sold at a loss.” Zisler said his firm used CoStar data and looked at more than 220,000 square feet of office buildings for the study’s methodology.

The popularity of hybrid work is one of many factors contributing to office obsolescence. If hybrid is indeed the future of work, companies will likely need on a per-employee basis 9 percent less space, according to Stefan Weiss, Senior Economist at CBRE. This could easily lead to higher vacancy rates for lower-quality buildings. “Owners may have to severely drop rents or invest money back into the building,” Weiss said. “Or they could make a case for conversion.” Landlords and owners are also repositioning office buildings with an eye toward 2050 and reaching reduced carbon emissions targets. Higher-end offices will come with a so-called ‘green premium,’ while lower-end, energy-hog buildings could have a ‘brown discount.’

As for office conversions, Weiss thinks some landlords could make the case to adapt Class B and C properties. “If floor plates are conducive, office to multifamily conversions make sense,” Weiss said. Converting to lab space could work, too, given that life sciences is a hot market right now, even though it’s still a minimal share of U.S. office inventory.

Change isn’t easy
Not everyone agrees that office conversions will catch on. “We’re not scoffing at the idea of office to multifamily conversion, but we think it doesn’t pencil out most of the time,” said Kevin Fagan, Head of CRE Economic Analysis at Moody’s Analytics. Moody’s studied office to multifamily conversions in the New York City metro area and discovered that only about 3 percent (or 35 of the nearly 1,100 NYC office buildings they track) would meet what they consider characteristics of a potentially viable apartment conversion. Even in a down year for offices when multifamily has thrived, the report says not many office properties have transacted deep enough discounts to warrant profitable conversions.

There’s also the matter of the size and shape of typical office buildings, which limits potential conversions. Offices usually have deep floor plates and little natural light for interior offices and storage rooms. And natural light is essential for apartments. Much of an office building may be rendered unusable or very low value because of floor plates up to 120 feet wide. “The office-to-apartment conversion trend will likely be minor unless office values and rents see some major, permanent decline after the pandemic,” Moody’s report concludes. Outside of New York, a less economically diversified market may pose more conversion opportunities.Besides conversions, Fagan also doesn’t think the office market is in dire straits as some make it out to be. Commercial mortgage-backed securities (CMBS) loan defaults are about 2 to 3 percent for offices. That’s a far cry from the last down cycle during the Financial Crisis of 2008, when loan defaults were about 10 percent. There has been a national dip in many leading office market indicators, but there are indications of recovery. “People forecasting major declines for the office are speculating,” Fagan said.

Fagan said that the reality of reducing office footprints is complicated and plays out over a long period. Typically, only about 4 percent of most corporate occupiers’ revenue is spent on real estate, while the highest cost is 20 to 30 percent on people and the labor force. Companies are trying to figure out what’s best for their workforce right now. Some firms will shrink office footprints, but others will expand, as evidenced by Big Tech companies gobbling up office space recently. “It’s not an apocalypse for the office,” Fagan continued. “Real estate costs aren’t killing the average company.”

There’s a potential that lower office occupancy rates could remain, but Fagan thinks we could be back to the pre-pandemic normal about 3 to 5 years from now. There are anecdotes of good and bad in the office market, andd the data doesn’t support all doom and gloom. For instance, there has been much speculation about shorter lease terms, but Fagan said shorter leases signed during the pandemic mainly were isolated to smaller companies. Small firms were inclined sometimes to sign “bridge leases” of less than a year while they figured out the implications of the pandemic. But larger and mid-sized companies were still signing leases during the pandemic for 9 to 12 years.

Uncertain times for offices
The road ahead for the office market is still hazy for now. The office is maybe in last place among the 5 major commercial real estate asset classes, according to Huber Bongolan, Director of Capital Markets & Underwriting at StackSource. Hospitality and office took the biggest hits from the pandemic, but lenders are starting to see the light at the end of the tunnel for hotels. Bongolan explained that the same narrative isn’t there for the office yet, even though people are beginning to return to their desks. “Many investors really don’t like Class B and C suburban offices; they’re very tough to get financing for,” he said. “There’s less incentive to maintain a building unless it’s Class A.”

The claims that a vast swathe of buildings will face alarming re-pricing or worse may just be speculation. The study by Zisler Capital Associates estimates that about 30 percent of office buildings can be categorized as “endangered,” being all but obsolete and incurable. This is an alarmingly big number, so big that it is somewhat hard to believe. “That seems like an awfully broad number,” Bongolan said, adding “an old real estate professor of mine always used to say drill the number down as much as possible to get specific.”

The flight to quality is very real, leading to a bifurcated market with Class B and C properties having difficulty catching up. Tenant demands and improvements will likely increase, given regulations for carbon reduction and the push to get employees back in buildings. Tenants may leave older offices for newer properties, leaving owners with large vacancies and insufficient cash flow. Obsolescence audits can help property owners know if the worst comes to pass but no matter how much market analysis is done the uncertainty around the future of office buildings will remain, and so will the speculation about what will happen next.

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Battle for Parking Unites Developers and Affordable Housing Activists

Last November, Boston’s Zoning Board of Appeals made a decision that brought the city’s real estate developers and affordable housing advocates together in a somewhat rare moment of unity. It rejected a 31-unit, solar-powered, mixed-use project in the city’s Roslindale neighborhood simply because it did not include any on-site, off-street parking. The Zoning Board’s decision to deny the project came in direct opposition to Boston Planning and Development Agency (BPDA), the city’s authority on development review, which had already granted approval.

The project in question, referred to by the site’s address at 4198 Washington Street, is a good candidate for redevelopment for a number of reasons. The location is currently a signal-level retail space, home to two locally owned businesses, and is in the center of a walkable neighborhood, flanked by multiple bus routes and a transit line. Roslindale is one of the most expensive neighborhoods in the city with the lowest percentage of affordable housing units of any neighborhood (12 percent in Roslindale vs. 18 percent citywide). It is also a neighborhood with more single-family homes than a typical Boston neighborhood, spurring higher-than-average housing values and residents with higher median household incomes.

The decision to not include parking in the plans was not a win either. The developer’s vision for 4198 Washington was rooted in two years of community conversations, including a tight partnership with the site’s current tenants to give them each new, modern space at below-market rent. The plan would have added much-needed housing to Roslindale with 40 of the proposed units offered to those earning less than 60 percent of the area median income. That is well above the city’s 13 percent affordability minimum for new developments with ten or more housing units.

Through their conversations with the community, the developer responded to neighbors’ concerns, reducing the height of the project from seven stories to four in the front, and five in the back (as to be not visible from the street). They also promised to subsidize public transit passes for all future residents and provide 20 leased parking spaces just a half-mile away. The new building would have been 100 percent electric, powered by solar, setting a new standard for sustainability in the neighborhood.

But it still wasn’t enough to sway the zoning board to vote in favor of the project and grant the zoning relief regarding parking needed to build.

Benjie Moll, Principal at Arx Urban, the developer for the project, shared his frustrations and the bigger implications for real estate development in Boston. “There seems to be a disconnect between the city’s goals for greener projects with less parking and what the zoning board views as a reasonable development,” he explained. “One of the keys to solving our housing crisis is to ensure there is predictability in permitting, especially after a multi-year process.”

Many high-profile neighbors spoke out in opposition to the decision including City Councilor Richard Arroyo and housing advocates including Jesse Kanson-Benanav, Executive Director of Abundant Housing Massachusetts. Kanson-Benanav highlights the significance of the project, “The Arx Urban project checks off all the boxes in terms of what the city wants a development project to be. If 4198 Washington can’t get approved, then what will?”

A city built by variance

Unlike New York, Boston doesn’t operate under a by-right development model. Jonathan Berk, Vice President at Patronicity and an outspoken advocate for placing the importance of creating housing for people over parking for cars, explains, “Almost every development in Boston requires zoning variances to be built and that opens up the project to criticism and litigation. Fundamentally, the city’s zoning code doesn’t reflect a growing Boston because it was created in the 1960s when the city was shrinking.”

In fact, the zoning code is in direct opposition to the Imagine Boston 2030, the master plan that is supposed to be guiding development and planning decisions. Finalized in 2017, the plan puts a premium on sustainability and housing affordability, two driving forces that weren’t even considerations when the city’s zoning laws were inked nearly 60 years beforehand.

The process for getting zoning relief not only extends development timelines, but it also jeopardizes project financing. Real estate investors and financiers don’t want to fund projects that may never break ground. When there’s no predictability about what a developer can actually build, capital is harder to secure.

The price of parking

The total price tag of parking can make a project impossible to pencil out. In Boston, on-site parking can cost $75,000-$100,000 per space to build, particularly because it usually means digging for an underground garage.

Kanson-Benanav explains that parking requirements are directly contributing to housing shortages in Boston and other cities across the country. “We are pushing the city toward eliminating broader parking requirements because it will reduce the cost of producing new housing and trigger more production of the missing middle of housing.”

In December, Boston did eliminate the requirement for on-site parking in multifamily projects with 60 percent income-restricted units, but that represents an insignificant number of all proposed housing projects currently under review in the city. In the case of 4198 Washington Street, this rule would not have applied.

One reason why parking minimums are so frustrating for housing advocates is that most spaces go unoccupied. According to the Metropolitan Area Planning Council, the regional planning agency for Greater Boston, 30 percent of parking spaces at new apartment buildings in the city are unused.

Parking remains a hot topic for projects going before the zoning board. In March 2022, a proposed 26-unit development in Boston’s Dorchester neighborhood was rejected by the ZBA because it lacked on-site parking even though the site sits directly between two subway stations on Boston’s red line. It’s less than a five-minute walk to either stop.

“Developers are buying sites that they can’t build on because they can’t get the permits or what’s permitted is unbuildable because of construction costs. Unless something changes, there will be fewer and fewer units built in Boston,” said Moll.

The new school of thought when it comes to parking goes back to basic economics: whether or not parking is included in a new development should be determined by the market. If people are willing to live in a place with no dedicated parking then they should have the chance. The argument against reducing parking usually has to do with increased pressure on city services like on-street parking. These worries can be easily eliminated by taking steps like those used by the developers of 4198 Washington Street.

Other cities including Minneapolis and Buffalo have eliminated all parking requirements from their zoning laws in an effort to reduce the cost of housing production and promote a lower dependence on cars. However, It’s too early to tell if those changes have made a significant improvement in those cities. A better comparison is looking at European cities like Amsterdam which is taking a systematic approach to not only reducing car parking on its streets but also banning cars entirely from certain areas of the city. These changes to parking availability are met with less pushback because Amsterdam’s residents rely less on their cars, with only 19 percent of residents driving daily.

There is a growing sentiment in the U.S for less car-centric development. But this doesn’t usually translate to development conversations when the lack of parking combined with proposed added density is weaponized by NIMBYs that don’t want change in their neighborhoods, even in urban centers like Boston. No matter how much we push for sustainable, affordable development, when people who oppose development sit on zoning boards, what happened to 4198 Washington Street becomes the norm, rather than the exception.

With housing production, particularly the affordable and workforce kind, years behind where it needs to be to ease the housing crisis, our communities will continue to suffer. Low-income families and seniors sit on housing waiting lists that are 5-6 years long. The American dream of homeownership is transforming into a nightmare for wishful first-time homebuyers. The typical family of four often can’t find a place to live, buy or rent, that’s under 50 percent of their take-home pay. But still, parking cars often trumps new housing because we allow that to happen. For cities, the question becomes more basic. What matters more: creating housing or parking cars? Sadly, the answer to this question for most American cities still isn’t clear.

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