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Weekly Market Report - September 12, 2019

While opportunity zones were created to increase development in troubled neighborhoods, some areas are finding it hard to interest new tenants for its new properties. One way these developers are filling their spaces are renting out the space to co-working companies. In the first six months of 2019, co-working space accounted for more than 10.1 million SF nationally. This idea is drawing more potential clients to properties, including start-ups and established companies who are looking for short term space. Also, investors can defer taxes on capital gains that are “invested in a qualified opportunity zone fund until December 31, 2026”. The opportunity zone program was created as a part of the federal tax overhaul in December 2017. Because of this, there are now more than 8,700 zones nationwide.

Jeff Bezos is Now in NYC

In February, Amazon decided not to pursue their plans for building a headquarters in Long Island City, which New Yorkers celebrated. However, Jeff Bezos still wanted to leave his mark in NYC. In the past quarter, he closed the biggest residential sale with spending $80 million on three units at 212 Fifth Avenue. While he lives in Seattle, these three units combined gives him over 17,000 SF and 12 bedrooms to relax in when he’s in the city.

Recently, workers all over the country have been moving out of bigger cities to smaller, cheaper ones – and they are taking their jobs with them. In 2017, 5.3% of adults in metro areas, between 500k and 3 million people worked from home. That is a 3.7% increase from the previous decade. Some smaller regions see remote workers as a way to lure people in who otherwise wouldn’t move there. While this has brought a boom to these cities, it does come with a few downsides, for example fast-rising home prices, more traffic, and one big downside is that these people are technically not joining their new community’s workforce.

From increasing demand from both foreign and domestic investors for office and industrial assets, U.S. net-lease investments are outpacing the broader commercial real estate market in 2019. Net-lease investments, which include office, industrial and retail properties, rose 17.2% year-over-year in the first half of 2019 to $33.4 billion. The total commercial real estate volume growth was 13.4%. In Q2 2019, the net-lease investment was the second-highest quarterly total on record at $20.6 billion and up 33.8%. For the year-ending Q2 2019, it totaled $74.2 billion, the highest fourth quarter since 2002. This high volume “is a byproduct of an aggressive capital market environment coupled with an influx of capital, both foreign and domestic, seeking compelling risk-adjusted returns”. The volume in Q2 2019 was driven by the gains in the office sector (65.7%) and retail (52.2%), while industrial stayed at .6%.

Amol Sarva, co-founder of Knotel, says the company is continuing to revolutionize. Sarva said flex office space can grow to compromise 30% of the market by 2030. Knotel’s goal is different than other co-working companies: “They are offering flexible office space to enterprises, rather than three-person companies, through partnerships with landlords and brokers in profit sharing agreements”. He also said that they are looking for new market opportunities to expand abroad in cities like Sao Paulo, Madrid, and Paris. It currently has a footprint of 4 million SF worldwide. Recently, Knotel completed its Series C funding round, which brought the company to “unicorn status” with a valuation of over $1.3 billion.

In the first half of 2019, six of the top 10 U.S. metro markets for commercial and multifamily construction registered greater activity compared to a year ago. Construction during the first half of 2019 was down 6 percent from last years $107.4 billion to $101.4 billion. In the New York NY metro area, with $15 billion, it stayed as the number one ranking by dollar volume, even though it decreased 8 percent from a year ago. Several large projects boosted NY’s first half of 2018 total, which included Hudson Yards Spiral office tower at $1.8 billion. In 2019, the creation of the TSX Broadway Hotel in Times Square came in at $1.1 billion. Commercial and multifamily include office buildings, stores, hotels, warehouses, commercial garages, and multifamily housing.

New York developers and owners are thinking about leaving the city. Gary Barnett, one of the city’s most prolific builders, has moved to other markets, such as Vail, CL; Park City, UT, and Dallas. JDS Development developer Michael Stern moved to Florida last year and is now focusing on Miami, while still finishing his New York slate. Steve Witkoff, landlord, has moved his residency to Florida and is building in Las Vegas as well. Gatsby Enterprises, a private, family-controlled real estate firm that owns several Manhattan apartment buildings and commercial properties, just purchased a building in Miami where they will focus and prioritize its investments.

One big change that is forcing these big players to move is the rent regulation law that passed in June and a law that passed in Albany, which raised the transfer tax on multi-million-dollar homes. Developers have complained about how communities and elected officials have interrupted projects that have been put in opportunity zones. Extell Development has been sued over an 800 ft wall. JDS Development was sued to block three apartment towers to be built, and the company lost after a Supreme Court judge ruled with the city.


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