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Equity Office Daily Brief: May 4, 2018

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Daily Brief

May 04, 2018

  EquilityOffice

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U.S. unemployment rate falls below 4% for first time since 2000 - but for a bad reason

L.A. Times

 

The U.S. labor market improved somewhat last month, adding a solid 164,000 net jobs while the unemployment rate reached a new milestone, falling below 4% for the first time since 2000, the Labor Department said Friday. But while job growth rebounded from...

 



BLOG & ONLINE NEWS

 

Here are LA's 5 biggest construction projects approved in April

The Real Deal

 

Developers secured permits to build projects in Hollywood, Vernon and East Los Angeles last month, with one company resuscitating an otherwise stalled building. Rockwood Capital received a $54 million construction permit to build a third tower on the Water’s Edge campus in...

 


L.A. Top Choice For Private Equity Capital

Globe St.

 

Los Angeles has become the top investment destination for institutional capital, bumping New York out of the number one spot, according to new research from CBRE. In 2017, equity funds accounted for the majority of the institutional investment activity, increasing 60% year-over-year...

 


Washe Raise $3.5M To Expand On-Demand Car Washes In LA

SoCal Tech

 

On-demand, car wash startup Washe, which lets users connect with professional mobile car washers, said this week that it has raised $3.5M in a seed funding, to help it to "greatly expand" its operation sin Los Angeles, as well as expand into...

 


No Way To Run A Factory: Tesla's Hiring Binge Is A Sign Of Trouble, Not Progress

Forbes

 

In a push to deliver cars to waiting customers, Tesla is moving to 24-hour operations at its Fremont, California, assembly facility and plans to hire "400 people per week for several weeks" between Fremont and its battery Gigafactory in Sparks, Nevada. Chief Executive Elon Musk would...

 


Ticketmaster's Former Boss Wants to Create a Rival - to Tickets

Wall Street Journal

 

LOS ANGELES—The ex-CEO of Ticketmaster wants to disrupt the ticketing business—starting with tickets. Nathan Hubbard, who led the ticketing giant for four years after it merged with Live Nation Entertainment Inc., imagines a world where fans can walk up to a Beyoncé...

 


California housing crisis may lead to economic one, says report

Curbed

 

California often claims to be on the vanguard of national issues and trends. If that’s true, a trio of new reports commissioned by Next 10, a nonpartisan nonprofit, suggests substantial economic challenges ahead due to its severe housing crisis. “It’s very straightforward, we just...

 


Will the President's Infrastructure Plan Attract Private Investors?

National Real Estate Investor

 

Despite numerous attempts in the past 18 months to highlight a proposed plan to offer state and local governments nearly $200 billion in funding to stimulate a goal of $1.5 trillion in infrastructure projects nationally, the Trump administration has failed to generate buzz...

 


What Comes After Co-Working To Commercial Real Estate?

Forbes

 

As an entrepreneur, I spend a lot of time thinking about the future and how my business and industry will be impacted by trends that are only just beginning to surface. But here’s the thing about trying to predict the future:...

 

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U.S. unemployment rate falls below 4% for first time since 2000 - but for a bad reason

L.A. Times

 

The U.S. labor market improved somewhat last month, adding a solid 164,000 net jobs while the unemployment rate reached a new milestone, falling below 4% for the first time since 2000, the Labor Department said Friday.

But while job growth rebounded from a disappointing March figure that was revised up Friday to 135,000, other aspects of the closely watched monthly report were lackluster. And the drop in the unemployment rate was for a bad reason: The labor force shrank for the second month in a row.

Overall, the data show a labor market that remains resilient in the face of a potential global trade war but whose growth is slowing as the recovery from the Great Recession this month became the second-longest in U.S. history.

"This jobs report is truly a mixed bag," said Mark Hamrick, senior economic analyst at financial information website Bankrate.com.

The April job gains were below analyst expectations of about 195,000. Still, with upward revisions of a total of 30,000 for February and March, job growth has averaged 200,000 a month this year — well above what's needed to accommodate new entrants to the workforce

The 3.9% unemployment rate in April set a new post-recession low. The rate hadn't been below 4% since December 2000.

And the unemployment rates for blacks and Latinos last month — 6.6% and 4.8%, respectively — were at their lowest levels since the Labor Department began tracking the figures in the early 1970s.

President Trump touted the decline in the overall rate Friday.

"I thought the jobs report was very good. The big thing to me was cracking 4 . That hasn't been done in a long time," Trump told reporters before departing the White House for a speech in Texas. "We're full employment. We're doing great."

But the reason the unemployment rate dropped from 4.1% in March was because the labor force shrank by 236,000 people.

"That's not good news," said economist Douglas Holtz-Eakin, president of the conservative-leaning American Action Forum think tank. While he acknowledged there was symbolism in breaking 4%, Hotz-Eakin said it would be a positive development if the rate went down while the labor force was growing.

"It's that horse race between jobs created and the labor force, and we went the wrong way this time," he said. Overall, he said he would grade the jobs report "a B in a world where we'd really like to see an A-plus."

During the 2016 presidential campaign, Trump disparaged government reports of a falling unemployment rate as understating the condition of the jobs market because so many Americans were not in the labor force.

"Our real unemployment rate — in fact, I saw a chart the other day, our real unemployment — because you have 90 million people that aren't working, 93 million to be exact, if you start adding it up, our real unemployment rate is 42%," Trump told Time magazine in August 2016 when the Labor Department said the rate was 4.9%.

He was a referring to a monthly statistic of working-age Americans who are not in the labor force. It was 94.3 million in August 2016. Last month it was 95.7 million, up about 410,000 from March.

But most of those people are retired — a figure that is growing as the baby boom generation ages — or don't work for reasons including being stay-at-home parents.

Economists scoffed at Trump's inflated unemployment rate estimates during the campaign. The broadest measure of unemployment from the Labor Department, which includes people who are not in the labor force but want to work, has declined along with the overall unemployment rate from a high of 17.1% during the Great Recession

Last month, that measure — known as U-6 — dropped to 7.8%, the lowest since 2001.

Wage growth, which economists have said should pick up as the labor market tightens, slowed in April, a discouraging sign for workers.

Average hourly earnings increased 4 cents in April to $26.84 after a 6-cent increase in March. Still, annual wage growth held steady at 2.6% for the 12-month period that ended April 30.

Federal Reserve policymakers have been concerned that a faster rise in wages as employers face increasing competition for workers would lead to significantly higher inflation. But Friday's data should ease those concerns for now and keep the Fed on track to continue to slowly raise its key short-term interest rate this year.

"The labor market is heating up with workers in short supply, but companies are still not paying up to bring in help despite one of the tightest labor markets in a generation," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. "Fed officials can rest easy that there is not any wage-based inflation on the horizon and keep the economy on course with their projections for three rate hikes in 2018."

-Jim Puzzanghera

Here are LA's 5 biggest construction projects approved in April

The Real Deal

 

Developers secured permits to build projects in Hollywood, Vernon and East Los Angeles last month, with one company resuscitating an otherwise stalled building.

Rockwood Capital received a $54 million construction permit to build a third tower on the Water’s Edge campus in Playa Vista, according to county records.

In October, the Century City-based developer paid $190 million to DivcoWest and Maguire Partners for the 260,000-square-foot, two-building campus. At the time, it also acquired development rights to build a third 130,000-square-foot building that was part of the project’s master plan, but had stalled due to lack of funds.

Here are the biggest construction permits, ranked by square footage, issued in April by the L.A. Department of Building and Safety. Only commercial and multifamily projects within city limits were considered. Permit valuation is based on the minimum construction requirements set by the Department of Building and does not reflect the total cost of the project.

1. The Academy | 301,530 square feet

Kilroy Realty secured a construction permit for one of the office buildings on its 3.5-acre project in Hollywood last month, reflecting the biggest permit issued in the city in April. The project, dubbed “Academy on Vine,” will span a total of 545,000 square feet and include a mix of offices, multifamily units and retail space. It’s located at 1341 N. Vine Street, which used to house Buzzfeed’s video department. Kilroy’s permit, valued at roughly $116 million, will go toward the construction of Building A. Hathaway Dinwiddie is the contractor.

2. 4051 S. Alameda Street | 248,700 square feet

Pima Alameda Partners received a $16 million permit for its office project last month, designed by O.C. Design and Engineering. The 248,700-square-foot permit will facilitate the construction of Buildings 1 and 2, rising on the vacant plot of land at 1701 E. 41st Street in Vernon. C.E.G. Construction is building the project, which will include office space within a one-story warehouse.

3. Water’s Edge | 132,000 square feet

Rockwood Capital secured a permit to build a third office building at the Water’s Edge office campus in Playa Vista last month. The new construction would span about 132,000 square feet, adding to the 260,000 square feet already completed. McCarthy Building Companies is the contractor for the SPF:Architects-designed property, which is anchored by video gamer Electronic Arts. The modern-looking office building will rise four stories above an underground, two-story parking garage. It’s scheduled for completion in 2020, according to the architect’s website.

4. 5550 N. Bonner Avenue | 44,000 square feet

Over in North Hollywood, a trust related to Leon S. Kaplan secured a $7.9 million-permit to build 44,000 square feet of office space. The project, designed by Bijan Azadi & Associates, would include 48 units across a five-story building. It’ll also have underground parking. The developer hired P&N Construction to build the project, located at 5550-5590 N. Bonner Avenue.

5. Cielito Lindo Apartments | 27, 460 square feet

East LA Community Corp. lined up another permit for its affordable housing apartment complex, named Cielito Lindo Apartments, last month. The construction permit, valued at roughly $6 million, will allow the developer to advance on Phase II of the residential project. The new four-story building will house 29 units, 28 of which will be for low-income residents, and feature one level of subterranean parking. Westport Construction is building the project, which was designed by Gonzales Goodale Architects.

-Natalie Hoberman

L.A. Top Choice For Private Equity Capital

Globe St.

 

Los Angeles has become the top investment destination for institutional capital, bumping New York out of the number one spot, according to new research from CBRE. In 2017, equity funds accounted for the majority of the institutional investment activity, increasing 60% year-over-year to $6.2 billion. Foreign investment activity also accounted for a significant portion of institutional funds, however, the number fell over prior years. We sat down with CBRE’s George Entis, senior research analyst of capital markets and Michael Longo, VP, to talk about the surge of private equity activity in Los Angeles.

GlobeSt.com: Why is Los Angeles attracting so much institutional capital?

George Entis: Global and institutional capital prefers safe and stable markets and it tends to focus disproportionally on major gateway markets. The nation’s five largest investment markets represented roughly one-quarter of all institutional investment in the U.S. last year. In Los Angeles, high levels of investment and a strong local economy have contributed to a confident investor outlook. According to CBRE’s Investor Intentions Survey 2018, Los Angeles ranked as the top metro for property purchases for the third consecutive year. Nearly half of survey respondents—47%—indicated that strong economic fundamentals driving rental value growth was the primary factor that attracted them to their preferred metros. Global investors are also attracted to Los Angeles because Class A properties can be acquired at a relative discount when compared to other gateway markets, like London, Manhattan and San Francisco.

GlobeSt.com: What types of assets is this capital going to?

Entis: Office product was overwhelmingly the asset of choice, accounting for nearly 60% of institutional investment last year. That is a significant figure when you consider that institutional investment accounts for almost one-third of the entire CRE investment market in Los Angeles. Industrial and multifamily sales accounted for roughly 13% and 12% of the total, respectively.

GlobeSt.com: One of the common criticisms of Los Angeles is that there is not enough institutional quality product. Has that changed, or has it been difficult for institutions to place capital here?

Entis: Los Angeles was the largest destination for institutional capital last year and volumes have been elevated in the $9-10 billion range for the fifth year in a row so there doesn’t seem to be difficulty in placing capital. The velocity of sales has stayed constant; however, the composition of buyers has changed. We are deep into an extended cycle and there is a scarcity of quality core product, so private equity funds are taking on the riskier deals, chasing value-add acquisitions and driving much of the activity in the institutional space.

GlobeSt.com: How much of this activity is from foreign investors, and why is L.A. a top choice for this segment of capital?

Entis: Foreign capital has been particularly active since 2014. About 20% of institutional capital comes from a foreign source, and while that’s down from 37% in 2016, we are still talking about almost $2 billion in sales last year. Total volume last year, however, fell by roughly 50% year over year after seven consecutive years of growth, but the group of foreign investors is more diverse than ever. So, this is not a story of government capital controls restricting outflows from China but one of accelerated growth from private equity funds in a mature cycle.

GlobeSt.com: What is your outlook for institutional investment in L.A. this year?

Michael Longo: As the cycle matures further, there will be fewer value-add opportunities, but the pressure to invest the capital will remain, especially with heightened activity in the closed-end fund space. Also, institutions have doubled their portfolio allocations to real estate since 2010. Combined with record levels of dry powder, it’s easy to have an optimistic outlook of continued, heightened activity this year. There remains great investment appetite for Los Angeles real estate, but because such a large concentration of the institutional commercial market has traded hands within the last 3 years there are less buying opportunities available today. This has created a large supply and demand imbalance, and very competitive bid situations for marketed deals.

-Kelsi Maree Borland

Washe Raise $3.5M To Expand On-Demand Car Washes In LA

SoCal Tech

 

On-demand, car wash startup Washe, which lets users connect with professional mobile car washers, said this week that it has raised $3.5M in a seed funding, to help it to "greatly expand" its operation sin Los Angeles, as well as expand into other new markets. The Boca Raton, Florida-based startup said the lead investor in the round was Ron Zuckerman, a technology entrepreneur and investor. Washe currently offers up its services in South Florida, Southern California, Georgia and New Jersey. Washe has been in Southern California since at least July of 2016, when it started offering its services in San Diego and Los Angeles.

No Way To Run A Factory: Tesla's Hiring Binge Is A Sign Of Trouble, Not Progress

Forbes

 

In a push to deliver cars to waiting customers, Tesla is moving to 24-hour operations at its Fremont, California, assembly facility and plans to hire "400 people per week for several weeks" between Fremont and its battery Gigafactory in Sparks, Nevada.

Chief Executive Elon Musk would have us believe the hiring spree is a sign of confidence in Tesla's ability to boost production by the end of June to meet demand for Model 3, its entry-level electric car. But make no mistake: it's a sign of desperation. The Model 3 launch has been a disaster, and hiring a bunch of people in a hurry is only going to make things worse for Tesla, not better.

Financially, it could get ugly fast. Already, Wall Street is bracing for disappointing first-quarter results on Wednesday due to lower-than-expected Model 3 production. Now, after Musk admitted the company bet too heavily on automation, Tesla's second-quarter results will be under pressure, too. Not only will the company face higher labor costs, it will probably also have to write down millions of dollars' worth of automated machinery that is being ripped out of the factory on Musk's orders.

Humans are underrated, the billionaire boss now says, but throwing more people at the job won't necessarily make Tesla more efficient. The company tripled its headcount between 2014 and 2017, but since it's still not producing many cars, revenue per employee is stagnant, far below that of General Motors and Ford Motor, as noted in a Bloomberg story examining the risk that Tesla might soon run out of cash.

On Twitter, Musk confidently predicted that Tesla will be profitable and cash flow positive in the second half of this year and won't have to raise additional money from investors. But his marching orders to employees suggest money is tight: beginning immediately, any expenditures over $1 million must get Musk's prior approval. (That reminds me of the austerity measures that governed GM during its 2009 bankruptcy.)

Meanwhile, state and federal labor officials are scrutinizing Tesla's factory operations after reports of unsafe conditions. What could possibly go wrong by flooding the assembly line with 1,000 or more newbies in a matter of weeks?

"This is a recipe for disaster," said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Michigan. "You don’t have a smooth running ship and then you add a bunch of new untrained people? That doesn’t right the ship."

It's reasonable to ask whether Tesla will even be able to hire 1,200 or more qualified workers in time to meet Musk's aggressive objectives. In a recent email, Musk told employees the goal is to achieve a "burst-build rate" of 6,000 vehicles per week, triple the current rate, by the end of June. (Notably, that includes a 20 percent margin for error to make sure it nets 5,000 cars per week, a failure rate no established automaker would tolerate. Tesla says Model 3 quality has improved dramatically in recent months. An independent benchmarking study of a model built in late 2017 found examples of both engineering brilliance and manufacturing incompetence.) 

To meet that target, Tesla is adding another shift of workers in Fremont, which will now operate 24 hours a day, 7 days a week. But where will it find all those workers in a tight labor market? The unemployment rate in the East Bay counties of Alameda and Contra Costa is 3 percent, lower than the state and national rates. And the cost of living in the region is prohibitive for many manufacturing workers. Union organizers say many Tesla employees live an hour or two away from the factory or share housing with fellow workers to make ends meet on their $19-an-hour paycheck. Tesla recruits at job fairs as far away as Fresno or Modesto, which are farming communities.

Then there's the question of training. I asked other automakers how long it takes to get new hires ready for the job when they're preparing to add an extra shift at a factory. (Tesla declined to provide details on its hiring process.)

In the old days (1984 to 2009), GM, Ford and Chrysler had thousands of laid-off union workers getting paid for doing nothing. The Jobs Bank, as it was called at GM, was where automakers found able, trained workers during periods of expansion.

Now, it's harder to identify, screen and train new workers for assembly work, even in the industrial heartland. "The fastest we would hire 400 people would be 12-13 weeks," a Ford spokeswoman told me. (Tesla plans to hire 400 people per week.)

Why so long at Ford? The company said it takes about two weeks to collect enough résumés from state employment agencies, minority and veterans groups and employee referrals. Then each job candidate must pass a basic reading comprehension and problem-solving test. That preliminary screening takes at least a week, likely longer, Ford said. Those who pass the written test must then be cleared by a doctor for physical activity and pass a drug test. To get 400 drug-free employees, Ford said it probably has to test 600 or 700 job candidates, a process that takes another two weeks.

Those who are hired must then go through a weeklong orientation. The session is in-depth, so Ford schedules 100 people at a time, meaning it would take four weeks to get 400 people through orientation. After orientation, new hires are finally ready to begin job-specific training, which typically takes another two weeks.

When you spell it out like that, it begins to make sense. Or perhaps more succinctly, Tesla's timeline makes less sense.

-Joann Muller

Ticketmaster's Former Boss Wants to Create a Rival - to Tickets

Wall Street Journal

 

LOS ANGELES—The ex-CEO of Ticketmaster wants to disrupt the ticketing business—starting with tickets.

Nathan Hubbard, who led the ticketing giant for four years after it merged with Live Nation Entertainment Inc., imagines a world where fans can walk up to a Beyoncé concert or a Super Bowl game and get in by showing nothing more than their faces. He has built what he hopes will be the first serious competitor Ticketmaster has faced in decades.

His new company’s name is a blunt mission statement: Rival.

The startup has attracted high-profile backers including top Silicon Valley venture-capital firm Andreessen Horowitz and Santa Monica, Calif.-based Upfront Ventures, so far raising some $33 million. Teams from every major sports league in the U.S. and the English Premier League have signed on as clients, along with their home arenas and stadiums.

“No one has materially made a big run at Ticketmaster in the past generation,” says Upfront Ventures partner Greg Bettinelli.

Ticketmaster, a unit of Live Nation Entertainment Inc., declined to comment.

Today, venues ranging from nightclubs to stadiums enter long-term contracts giving a ticketing provider—usually Ticketmaster, which holds an estimated 80% of the market—the exclusive right to sell tickets to any event they host. Prices are set by concert promoters or sports teams, based on a combination of gut instinct and past demand for similar events. Ticket providers make their money from additional service and delivery fees.

As event promoters struggle to price and distribute tickets efficiently, some events take place in half-empty venues while others generate billions of dollars for scalpers through sites like eBay Inc.’s StubHub. Many fans searching online don’t know whether the tickets they find are coming from a scalper at a steep markup, and artists and teams have little idea who ends up in the crowd.

Mr. Hubbard, 42, wants to change all that. He believes fully digitizing tickets—and in some cases replacing them with facial-recognition technology—could address inefficiencies in how live events operate, and make them safer, by connecting identity, payment and location data.

Rival won’t sell tickets to the public itself. Instead, it will distribute them through various outlets, including potentially StubHub, Amazon.comInc., Expedia Inc., Twitter Inc., an artist’s or team’s own site, and even Ticketmaster.

Artists and teams would set the prices—and terms for resale—and monitor and adjust them in real time. Instead of letting scalpers snap up swaths of tickets and flip them for a profit, an artist could list a few tickets from each section and gauge demand, then release more tickets at a closer approximation of their true market value.

When searching for tickets for an event, fans could use an augmented reality overlay of the venue that shows the view from any given point and where the artist or players will be. Customers could swipe around the arena or stadium for various seating positions while the price for each view updates before buying a ticket.

Rival has built its system and begun to integrate it with teams and venues; customers will see tickets beginning next year.

Mr. Hubbard envisions a day when there is no ticket at all—not even a digital one. With facial-recognition technology, your face can now be your ticket. (Rival will be capable of generating paper or mobile tickets, if clients choose.)

Facial-recognition software has frequently generated controversy, since it tends to raise the specter of Big Brother-style surveillance. Mr. Hubbard says Rival won’t be storing customers’ photos, but rather a set of data points derived from them, which events can use to verify attendees’ identity and get customers through the gates quicker—and keep out people on watch lists maintained by law enforcement or the venue itself.

Live Nation on Thursday said it invested in facial-recognition software company Blink Identity.

The industry is ripe for disruption. People are spending more than ever on experiences, even as concern is rising about security at crowded live events. At the same time, artists and teams today have little control over how, to whom or for how much their tickets are sold.

The size of the market for reselling tickets—an estimated $15 billion a year—indicates “there’s a whole bunch of money that’s being pocketed by middlemen on the backs of artists and teams,” says Mr. Hubbard.

Rival aims to address another business issue that has vexed live events for years: not knowing the customers well, if at all. With tickets changing hands artists and teams often end up knowing fewer than 10% of the people in front of them, says Mr. Hubbard.

“We’ve basically not changed the format of the access credential since the Roman Colosseum,” he says. “They used rocks. We use flat pieces of wood.”

That is a problem for security, and it means teams and artists are losing out on opportunities to sell more to them. Venue owners have spent billions revamping their stadiums and arenas, and are now seeking ways to draw more people into the bars, restaurants and shops in and around them.

Mr. Hubbard thinks his system offers a way to tailor marketing offers to individual fans, whether it is a free drink for someone at his or her 10th game of a season or backstage access to a 12-year-old mega-fan. The ticket, he said, “has to engage with that fan before, during and after the event to facilitate commerce, because that’s where the event owner actually makes money.”

-Anne Steele

California housing crisis may lead to economic one, says report

Curbed

 

California often claims to be on the vanguard of national issues and trends. If that’s true, a trio of new reports commissioned by Next 10, a nonpartisan nonprofit, suggests substantial economic challenges ahead due to its severe housing crisis.

“It’s very straightforward, we just don’t have enough housing supply,” F. Noel Perry, the founder of Next 10, told Curbed.

While the new series of briefs, entitled “Growth Amid Dysfunction: An Analysis of Trends in Housing, Migration and Employment,” paint a picture of a state with both significant economic growth and heavy burdens, housing is at the center of nearly every issue.

Research finds that across the state, the shortage of affordable and accessible housing is restricting growth, inflicting economic and environmental damage, and causing many low-income and middle-class residents to seek opportunities elsewhere.

While Perry sees solutions, none are easy or immediate.

“I don’t think there’s any silver bullet,” he says. “But I think we can draw a picture of how great the challenge is. California is sinking deeper into a housing crisis, and this raises questions about the sustainability of the state’s overall economic growth.”

An update from a similar series of studies undertaken in 2016, the report shows the many ways California continues to stratify. The tech industry is booming, while low-wage workers are falling behind. California continues to draw in high-earning, educated people from other states, while long-time Californians leave for affordable housing and opportunity. The state is still performing well overall, says Perry, but if this continues, there’s fears of a brain drain and a shortage of workers on the horizon. “A strong economy,” the report states, “can also be dysfunctional.”

By themselves, employment statistics paint a rosy picture. The booming high-tech industry in adding more jobs, increasingly concentrated in fewer industries and companies, and many low-wage sectors are also booming, including leisure and hospitality, retail, healthcare, and agriculture.

But pay for low-wage workers just isn’t keeping up with California’s high cost of living. Over the last 10 years, wages for low-income workers, who make an average of $27,000 a year, increased by 17 percent. Compare that to high-income Californians, who make $83,000 annually on average, and have seen their wages rise 42.5 percent in the previous decade.

Factor in slow wage growth and inflation with a persistent housing shortage—one with no immediate end in sight—and that has led to significant out-migration for many caught between less purchasing power and higher rent payments. More than 180,200 former Californians working in lower-skilled, lower-paying fields left between 2006 and 2016.

There has been some slight relief from higher housing costs, or more accurately, things are slightly less terrible than they were a few years ago. Californians are paying less, as a percentage of what they earn, on housing. Homeowners put 21.9 percent of their income toward housing in 2016, as opposed to 22.5 percent in 2014, while renters put 32.8 percent of their paycheck toward rent in 2016, a slight dip from 33.6 percent in 2014.

But a lack of new supply has meant homeownership is becoming a fleeting dream for many. Only 24.7 housing permits were filed for every 100 new California residents, well below what’s needed to keep up with new arrivals, and half the U.S. average of 43.1 permits per 100 new residents. California issued as many housing permits last year as the whole state of Florida, which has 18 million less people.

California renters face similar pressure, with 52.6 percent considered rent-burdened (paying more than 30 percent of their income on housing), the highest rate in the nation.

These job trends and migratory patterns have created differing scenarios for the state’s major metro areas. While all face rising housing costs, San Francisco has attracted more high-paid, highly educated workers, while LA and San Diego have seen some employment opportunities contract.

The report concludes that if California is not able to support its growing population, residents will continue to see home prices increase, and those who turn to the rental market will find little relief. It’s a dire situation. But Perry believes that the state—and the legislators who have proposed dozens of housing laws in Sacramento—are at least finally starting to wake up to the severity of the challenge.

“I’m optimistic that California can rise to the challenge,” he says. “I do have some level of optimism, along with being very cognizant of the challenges.”

-Patrick Sisson

Will the President's Infrastructure Plan Attract Private Investors?

National Real Estate Investor

 

Despite numerous attempts in the past 18 months to highlight a proposed plan to offer state and local governments nearly $200 billion in funding to stimulate a goal of $1.5 trillion in infrastructure projects nationally, the Trump administration has failed to generate buzz and momentum for its vision. Moreover, questions remain as to whether some of the plan’s components will draw the needed private sector funds to get projects off the ground.

The overall architecture of Trump’s plan marks a major change in the federal government's traditional role in funding infrastructure, passing off the financial burden to state and local governments and ultimately private investors, with less project funding coming from federal coffers.

Half of the plan’s funds, or $100 billion, are devoted to a new “Incentives Program,” with approval authority divided among the U.S. Department of Transportation, the Environmental Protection Agency (EPA) and the Army Corps of Engineers. These agencies will competitively award the funds. In reviewing competing projects, the agencies will apply evaluation criteria 70 percent of which will pertain to the project’s ability to secure new, non-federal revenue sources.

According to Fred Springer, an attorney at the Florida law firm of Bryant Miller Olive, which specializes in assisting public entities in financing infrastructure projects, this requirement would make it harder to access federal funds for infrastructure. “Private investors will require a return on investment,” Springer says. “A project that generates a significant revenue stream may attract private investment, but many infrastructure projects do not generate revenues.”

There are other mechanisms to boost a project’s credit-worthiness, such as federal loan programs. An example is TIFIA (Transportation Infrastructure Finance and Innovation Act), a federal loan program that provides partial funding loans to infrastructure projects that expand the economy or can transform a community. Examples of projects that meet TIFIA criteria include the D.C. Metro system, which initiated the city’s urban renewal process, and the Port of Miami Tunnel, which segregates port traffic from passenger vehicles, improving cargo movement from the Port, while reducing traffic congestion for other vehicles.

Springer notes that in the absence of federal funding, the burden to pay for infrastructure will fall on state and local governments, which have limited revenues. States have historically supported bonds with special fund revenue to leverage future receipts of revenue for current infrastructure projects, such as a gas tax—a resource declining as auto fuel efficiency increases. Local governments use municipal bonds to fund large capital projects, but also leverage their power over real estate developments to generate funding for smaller infrastructure initiatives with impact, entitlement and permit fees.

Government bonds have been popular with investors for many years because money invested is excluded from federal income tax and many state income taxes. But in recent years, governments have been challenged to raise money through bond issues due to decreasing revenues, fluctuations in yields and lower returns than in the past that are attracting fewer investors, says Springer. According to Barclays Municipal Bond Index, for example, in 2013 municipal bond yields fell to a negative 2.55 percent.

As a result, Springer notes that local governments are relying more and more on private investors to fund infrastructure through both fees on real estate and public-private partnerships, or P3s.

“Over the last 10 years, the 3P model, which is featured in the Trump infrastructure proposal, has gained momentum among public entities,” says Palo Alto, Calif.-based real estate attorney William Eliopoulos, a partner at the law firm of Rutan & Tucker.

He notes that there is a strong movement afoot to build infrastructure through 3Ps, but this funding mechanism usually only works for projects that generate lots of money, such as student housing, publicly-owned healthcare facilities and airports. Transportation projects, including toll roads and bridges and light rail construction, require bond measures because they don’t generate enough revenue above operational and maintenance costs to pay back private investors, Eliopoulos says.

Cities are getting smaller public transportation projects done on the 3P model by sweetening the deal with government-owned assets, according to Al Maloof, managing partner with Miami-based GJB Consulting, an affiliate of law firm Genovese Joblove & Battista P.A. He notes that developers are good at creating value to compensate for fronting money for public projects. For example, a developer may build a light rail station in exchange for land around it to develop a mixed-use, transit-oriented project.

Eliopoulos notes that public entities are getting very creative in securing 3P financing for public projects that generate little or no revenue, such as civic centers, prisons and courthouses.

The City of Long Beach, Calif., for example, formed a 3P with a developer to build a new city hall, library, park and underground parking structure. The city is paying the developer back over a 35-year period, the expected “full life” of the project, with general funds formerly used for maintenance and other expenses on the old building and energy savings provided by the new building’s high energy performance. The city is also transferring some city-owned property to the developer.

The developer was willing to provide upfront funding for this project because those types of developments generally provide good returns and are low risk, Eliopoulos notes.

He adds that the most interesting piece of Trump’s infrastructure plan is the $20 billion earmarked for bold, transformational projects, like San Francisco’s proposed city-wide broadband Internet project. That project, which requires voters to approve a special tax district this November, would provide a faster bandwidth than any current Internet service provider in the city and is expected to generate a lot of revenue.

Commenting on the impact of the overall plan, Omer Amsel, co-founder and COO of the real estate investment firm StraightUp, says, “This plan is convoluted, and its potential implications are still unknown.” He notes that the $50 billion focus on rural infrastructure projects appears aimed at encouraging migration to the suburbs, but statistics show that cities are getting more crowded, so transportation options that get people to urban employment centers quicker would be money better spent.

Amsel suggests that the plan’s limited focus on infrastructure with socio-economic benefits suggests a lack of understanding of the modern investor’s focus on a double bottom line. “Social impact has become a large influencer for younger investors,” he notes. “Projects that have social and economic benefits appeal to young investors, giving then both an economic incentive and sense of a positive impact.”

-Patricia Kirk

What Comes After Co-Working To Commercial Real Estate?

Forbes

 

As an entrepreneur, I spend a lot of time thinking about the future and how my business and industry will be impacted by trends that are only just beginning to surface. But here’s the thing about trying to predict the future: Even the smartest people get it all wrong, because they focus on the headlines while failing to truly understand what’s driving the trends and where they may lead us 5 or 10 years down the road. For instance, in the commercial real estate industry, 2017 was a significant year for the co-working segment. But I believe that there is an industry shift happening that most people are not seeing.

First, I want to first share an important lesson from a different industry: telecommunications. In November 2007, Forbes ran a cover story with the headline, “Nokia 1 Billion Customers — Can Anyone Catch the Cell Phone King?" Back then, Nokia was the dominant player in the market, producing nearly 50% of all mobile phones globally. Apple, scrappy and new to the phone market, had launched the first iPhone in June. The rest is history. Nokia wasn’t just “caught,” it was steamrolled by Apple. Even Steve Ballmer, Bill Gates’ Microsoft co-founder, didn’t see it coming, declaring that, “There’s no chance that the iPhone is going to get any significant market share.”

The massive transformation in the mobile telecommunications industry coincided with a shift in form factor — in design and how people interact with that design — that we tend to underplay or miss entirely. Apple beat Nokia with hardware and software design that spoke to needs and wants that customers didn’t even know they had. In the process, Apple transformed an industry. I believe the commercial real estate industry is currently going through a similar transformation. 

Our economy is now driven more by innovation and information, less and less by manufacturing. And yet, the majority of our workplaces are modeled on the “old” economy assembly line, where workflow was linear and corporate structures were hierarchical. But the nature of work has changed, and our workforce has changed. Every day nearly 10,000 baby boomersretire. Their millennial children are currently the largest segment of the labor force and are predicted to comprise 75% of the workforcewithin the next decade. They’re digital natives who have little memory of life without mobile technology — they carry everything they need for work in their back pockets and their concept of work is no longer a physical place but an activity that, for better or worse, follows us everywhere 24/7/365. Old economy office buildings just don’t make sense anymore, and what doesn’t make sense gets disrupted.

For all knowledge workers, including millennials, the primary purpose of the office is no longer to provide a physical space that allows us to be in close proximity to our colleagues in order to get work done, because work can be done anywhere. Today, the office — better yet, let’s call it the workplace — plays a far more strategic role: CEOs must use it to attract, retain and inspire the best and the brightest talent. Talent is the customer and as the customer changes, the building must also change.

What does that look like? The very definition of occupancy is starting to change. The one-employee, one-desk office model will die, and the modern office will begin to feel more like a college campus, where employees use space according to the work that needs to be done: offices for heads-down work, collaborative spaces for brainstorming, conferences rooms for formal meetings, cafes to catch up on reading.

The future workplace policy will revolve around choice and flexibility. Big tech companies like Google and Apple are famous for their campus-like workplaces, but the model is also replicable within office buildings, where landlords can recreate Googleplex-like environments by building out amenity-rich spaces vertically instead — cafes, meeting spaces, classrooms, lounge areas, gyms — that are shared by all tenants, whether they are huge anchor tenants or small startup companies.

This is the form factor shift that our commercial real estate industry should be preparing for — and where there’s also an abundance of opportunity. The landlord’s role will need to change from a commodity seller of space to a provider of a “vertical campus” workplace experience.

It can certainly be argued that the unit economics change by rebuilding buildings to become vertical campuses. In fact, most commercial real estate investors currently feel that the market is priced outside of what makes sense. However, it is possible that the peak of the commodity price point becomes the baseline of the experiential price point. A better, more seamless experience is what consumers will pay a higher premium for, as Apple has taught us. Nobody had ever imagined paying more than $1,000 for a phone.

Commercial real estate landlords should be next to build from the foundation up in anticipation of shared services, and flexible space is already happening. Landlords will need to become brands in order to better compete. Tenants will be treated as guests, and the workplace will be a customer-centric service that provides a work/life integration experience.

-Christopher Kelly

Daily Brief May 04, 2018 unsubscribe

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