News

The Bisnow Weekender: Will CRE Be In Good Hands When Disaster Strikes? Ask New Orleans

National

May 30, 2024 Mark F. Bonner, Editor-in-Chief

Thanks for reading the Bisnow Weekender, my personally curated roundup of the most impactful news, notable quotes, binge-worthy show recommendations and other colorful highlights from the Bisnow world of commercial real estate and beyond.

Nearly 20 years ago, I was standing near the infamous 17th Street Canal in New Orleans and witnessed a painful moment that unfolded repeatedly in the months following Hurricane Katrina.

An insurance claims adjuster was surveying a simple three-bedroom home in my hometown. A catastrophic levee breach just blocks away had flooded 80% of the city and this home had taken on 15 feet of water and had its roof blown away. Every house on the block suffered the same fate.

The family had flood insurance. They had homeowners insurance. The lifelong residents who had lived in the home for decades thought they would be OK since they made all of the right decisions that come with living somewhere that encounters tropical storms and flooding with regularity.

Not this time. The adjuster, under pressure because the greater insurance industry couldn’t cover the 1.7 million claims generated by the storm, would only sign off on a very small percentage of what the homeowners had counted on: protection from the unthinkable.

Unsplash/Denise Bossarte

It was an ugly scene that is forever burned into my memory: An older man and his wife red-in-the-face angry, openly weeping as they took stock of the life they had built and realized it was all over. Their house wouldn’t be rebuilt. Their insurance, which they had paid tens of thousands of dollars into for decades, was no good. They felt cheated, robbed of a safety net they felt they had earned.

When you witness something like that, it puts the whole “Are you in good hands?” and “Protected from mayhem like me” advertisements into a different light. I thought of this moment this week when I saw the news that more and more homeowners in America, stifled by ever-rising prices, are forgoing homeowners insurance altogether.

Nearly 100 million Americans, or 30% of the country’s population, live in a coastline area, and developers nationwide have followed suit. It makes perfect real estate business sense: Build where people are and where they want to live and work.

Four years ago, the housing market in these places alone was estimated to be valued at $1T. And since the coronavirus pandemic, these areas have swelled both in terms of population and property development. The properties at risk this upcoming hurricane season could have a total possible reconstruction cost of $10.8T.

South Florida is the prime example. It is a peninsula that 10 million people call home, the 12th largest economy in the U.S. and a top 50 global GDP. Even as scientists and governments warn that the waters surrounding South Florida have never been hotter, prime fuel for hurricanes, and that the sea level could be 17 inches higher in 2040 than where it was in 2000, people are still rushing to live in Florida and other places like it, and the real estate development bonanza has followed. But buyer beware: The home insurance market is spiraling toward collapse.

On the eve of what is predicted to be one of the most active, dangerous and consequential hurricane seasons of my lifetime, my memories go back to New Orleans and my experiences covering one of the deadliest and costliest storms in U.S. history, and I think about the grave errors the U.S. government and insurance companies committed during the aftermath.

Hurricane Katrina should have been the final warning about the consequences of overbuilding in low-lying, vulnerable areas of America’s coastline. Once one of the most important cities in the U.S. economy, New Orleans had survived decades of close calls and missed opportunities to protect itself more aggressively before Katrina brought it to its knees. New Orleans never fully recovered, and its population and economy are still less than what they were before Katrina.

For a city of little population and little consequence to the U.S. economy, from a certain perspective, New Orleans and Katrina’s legacy is easy to brush under the rug. But what of South Florida? When the big one eventually barrels down on Miami, will the federal government step in to competently and financially save the region? Will insurance companies make good on their promise to make you, your home and your development whole again?

Unsure? Ask a New Orleanian.

— Mark F. Bonner, Bisnow Editor-in-Chief

The Best Of Bisnow News: May 27 - May 31

WeWork Secures Final Approval To Emerge From Bankruptcy — New York Reporter Sasha Jones

Break out the on-tap kombucha; WeWork is getting out of bankruptcy.

The beleaguered coworking giant's new era as a privately owned, debt-free company can begin after a Thursday morning hearing in a federal courthouse in New Jersey, during which a judge confirmed WeWork’s plan to emerge from bankruptcy.

With the restructuring plan approved unanimously by the company's creditors, the company will have $10B in rent obligations going forward — down $12B from when it entered bankruptcy in November — and has eliminated more than $4B of its pre-petition debt.

“In one of the largest and most complex restructurings, we have achieved extraordinary outcomes,” WeWork CEO David Tolley said.

***

The Death Knell Is Tolling For Family Sit-Down Restaurants: What's The Future For All Their Empty Husks? — Dallas-Fort Worth Reporter Olivia Lueckemeyer

Eighties and nineties nostalgia was dealt a gut punch earlier this month when nearly 100 Red Lobster locations abruptly went dark amid the company’s Chapter 11 bankruptcy filing.

Restaurants that took the U.S. by storm 30 to 40 years ago are beginning to drop like flies after a whirlwind past few years that forced rapid innovation in response to evolving consumer demands. At least 12 of the nation’s biggest casual chains plan to scale back their portfolios this year, and while reasons behind the reductions vary, the potential real estate impacts grow more layered as closures bloom.

The turnover of space is expected to create opportunities in retail markets where rapid population growth has led to historically low levels of vacancy. But in less desirable markets, the empty carcasses of once-beloved chain restaurants will be harder to reckon with.

***

As Housing Crisis Gains National Attention, Real Estate Lobbies Look To D.C. — National Reporter Patrick Sisson

While the industry’s focus on the federal level used to be around strictly tax issues, housing policy now spans many more parts of the federal bureaucracy. The Biden administration’s Renter’s Bill of Rights proposal from January 2023 included more than 24 commitments from eight different agencies.

As the housing crisis demands more government action, the industry seeks to steer potential policy changes and solutions toward increasing supply and deregulating local zoning barriers, and away from what they argue would be counterproductive policies, such as rent control.

The amounts being spent on political donations remain relatively low compared to many other industries, but lobbying has increased substantially during the Biden administration. Over the last five years, spending by major real estate associations and trade groups has risen, in some cases more than doubling in the last five years.

More Big News From The Week …

— EXCLUSIVE: WeWork Moving Headquarters To Union Square During Final Days Of Bankruptcy

— Bank OZK Outlook Downgraded For $1B In Potentially Troubled Loans

— Lendlease Pulls Out Of UK And U.S. Development. Here Are The Assets Up For Grabs

— RTO Effort Gets Unlikely New Ally As SEC, FINRA Step Up Security Safeguards

— Data Centers Projected To Consume Over 6% Of All U.S. Electricity By 2028

My Slightly On/Off-Topic Media Diet

WeWork’s New Owner Pitches No-Drama Turnaround For Adam Neumann’s Old Company (FT): “After the bankruptcy, [Yardi CEO Anant] Yardi wants to expand WeWork’s marketing to small businesses and to embrace technology used by hotels, such as real-time bookings. The company also hopes to launch an affiliate programme, in which it would team up with other co-working operators. ‘Our view of co-working is that it’s an interesting combination of hospitality or hotelling, apartment leasing and commercial leasing,’ he said. This is new territory for Yardi’s asset-light software company, but he said he had no doubts that he could make a success of WeWork. ‘If there were doubts, I think we would’ve been much more cautious.’”

Big Banks’ CRE Exposure Rises 40% When REIT Debt Is Factored In (Bloomberg): “Big banks’ exposure to CRE lending grows by about 40% when that indirect lending to REITs is added, wrote researchers including Viral Acharya, a professor of economics at New York University. That’s largely been missed in the debate about the risks the troubled industry poses to lenders, they argue. ‘Everyone is focusing on on-balance sheet loans by banks,’ Acharya, a former deputy governor at the Reserve Bank of India, said in an interview. ‘We should not get caught in a blind spot that large banks have relatively less exposure than smaller banks.’”

Big Retail's Hot Summer Thing: Price Cuts (Quartz): “Amazon, Walmart, Target, and others are all duking it out with discount deals — and with each markdown, they hope their bargain will be the one to win over inflation-weary consumers. While some retailers say they’re cutting prices to give shoppers deals, the efforts clearly align with the companies’ needs to offset declining sales as inflation remains elevated.”

‘Inflation’ Doesn't Mean What It Used To (Axios): “Inflation, at least as officially measured by the Bureau of Labor Statistics, has come down sharply from its peak of 9% in mid-2022. It now stands at 3.4%, broadly in line with where it was for the quarter-century between 1983 and 2008. … The headline measure of inflation is based on something pretty arbitrary — where prices were exactly one year ago. The more salient timeframe, especially in an election year, might be what has happened to prices since the pandemic, or since Joe Biden took office.”

Artificial Intelligence’s ‘Bad Data’ Problem For Real Estate Investment (Urban Land): “The current hype around artificial intelligence (AI) has many in the real estate industry dreaming about harnessing it to assist with investment decisions. But there’s a giant stumbling block: too much bad data. AI models require voluminous data to be accurate, and commercial real estate data is not standardized or consistently high-integrity. AI adoption in real estate investment is ‘in diapers,’ says Matias Recchia, CEO of Keyway, an AI-powered investment management company focused on sale-leasebacks.”

The Loneliness Of The American Worker (WSJ): “Employers and researchers are just beginning to understand how workplace shifts over the past four years are contributing to what the U.S. Surgeon General declared a loneliness health epidemic last year. … More than 40% of fully remote workers polled in a 2023 survey of working parents by Bright Horizons said they go days without leaving the house. Those who work in-office spend nearly a quarter of their time in virtual meetings, while face-to-face meetings account for only 8% of their time, according to data from real-estate company Cushman & Wakefield. Americans have tripled the time spent in meetings since 2020, data from Microsoft’s suite of business software show — leaving less time for the casual interactions that social scientists say foster happiness at work.”

Can Shame Make You A Better Person? (The Guardian): “This is also an optimistic takeaway from the Confucians: we are all capable of betterment. ‘Don’t think of yourself as this fixed thing that never changes,’ said [Jingyi Jenny Zhao, a philosopher at Needham Research Institute in Cambridge, and author of Aristotle and Xunzi on Shame, Moral Education, and the Good Life]. ‘Rather, shame helps you review what’s gone wrong — preserving the good, and getting rid of the bad.’”

Bisnow Weekend Interview Preview

San Francisco’s office market has been through the wringer in the last four years, but now many in the market believe the worst is behind them, leaving nowhere to go but up. Connor Kidd, CEO of the Swig Co., is among the believers, viewing investments through a multigenerational lens that allows his company to look beyond today’s market downturn.

Bisnow Bay Area Reporter Stacey Corso sat down with Kidd to understand more about how his company views the long-term prospects of the office market in a city built on boom and bust.

Bisnow: We are at a pivotal point in San Francisco. In the midst of the ongoing recovery, what is The Swig Co.’s investment strategy?

Kidd: We believe in the long-term nature of San Francisco and have always been a conservatively managed company. Therefore, we think about multigenerational investments. For example, we acquired our interest in the building we’re sitting in [220 Montgomery St.] back in the 1950s. Generally speaking, when people say “long-term,” they mean longer than five years. For 220 Montgomery, we’re talking about 70-plus years of ownership.

We have a different horizon and perspective than other investors. That's not to say that we don't look at our returns — we do. From a returns perspective, this long-term view has served us well.

Four or five years ago, buildings were trading from $800 to $1.2K a foot. We recently bought 350 California for roughly $200 a foot, and that seems to now be the bottom. Values have since moved closer to $300 per SF.

The Weekend Interview goes live every Friday evening — head to www.bisnow.com over the weekend to check it out!

Jobs! Jobs! Jobs!

Here are this week’s top jobs over at Bisnow's careers platform, SelectLeaders. Reach out to SelectLeaders Managing Director Ryan Neale to learn more. You can email him at ryan.neale@bisnow.com.

Managing Director, Multifamily Operations — Oversee the establishment and operation of a property management affiliate including all asset management functions.

Chief Financial Officer — Oversee all aspects of financial operations, with a focus on supporting commercial real estate acquisitions and investment.

Executive Director — Provide strategic and thought leadership for ULI LA, guiding its program of work for the future.

Associate Vice President, Investments — Lead real estate investments, financial analysis and underwriting for ground-up rental developments, adaptive reuse and residential alternatives across the Sun Belt and East Coast.

Hey, Louis, What Are You Going To Binge This Weekend?

I am hooked on reading David Grann’s The Wager. The tale of “shipwreck, mutiny, and murder” is a fascinating (and somehow) true story about the high seas and the hardships of privateering — a topic that captivated my interest when I studied history at the University of Bristol. To prevent any potential scurvy, I am planning to binge-eat fruit at the cinema and watch Kingdom Of The Planet Of The Apes. I loved the trilogy released across the 2010s, and I hope that they can recreate the magic of those films. A weekend of adventure and apes, What A Wonderful weekend to look forward to!

— Louis Chandor, UK Events Manager

Upcoming Bisnow Events And Webinars

Tuesday, June 4 (Atlanta): Expanding The Perimeter

Tuesday, June 4 (Dallas): DFW Experiential Retail and Mixed-Use Conference

Tuesday, June 4 (San Jose): National DICE Construction, Design and Development - West

Tuesday, June 4 (Phoenix): Phoenix Single-Family Rental and Build-to-Rent Summit

Tuesday, June 4 (San Francisco): San Francisco State of the Market

Wednesday, June 5 (Boston): Boston Summer Cocktail

Wednesday, June 5 (Arlington, Virginia): Mid-Atlantic Healthcare Summit

Wednesday, June 5 (Denver): Mile-High Construction and Development

Thursday, June 6 (Austin): State of Austin Office

Thursday, June 6 (Seattle): Seattle Architecture and Design Summit