Podcast Summary
Exploring Flex Office Spaces, Rent to Retirement, and 1031 Exchanges: Learn about Flex Office Spaces, investing with no money down through Rent to Retirement, and tax savings potential of 1031 exchanges. Stay informed about the latest real estate trends and opportunities.
The real estate industry continues to evolve with new trends and opportunities. During this episode of the BiggerPockets Podcast, David Green and co-host Dave Meyer discussed Flex Office spaces, a subtype of office space that has been tracked as a property type since 2003. While attending BPCON, they also shared information about investing with no money down through Rent to Retirement, and the tax savings potential of 1031 exchanges with 1031 Pros. Despite feeling drained and sick after the conference, both hosts expressed their excitement about these opportunities and encouraged listeners to explore them. Additionally, they mentioned the sponsorship of Airbnb, which can help property owners make extra income by renting out their homes. Overall, this episode highlights the importance of staying informed about the latest trends and opportunities in the real estate industry.
Commercial real estate trends: Medium term rentals on the rise: Stay informed about commercial real estate trends, including the rise of medium term rentals, to gain a competitive edge in real estate investing.
Commercial real estate, which has a significant impact on the overall real estate market, is undergoing significant changes, much like residential real estate did with the rise of short-term rentals. Medium term rentals are becoming more popular, leading to changes in how commercial properties are valued. Kevin Fagan, a senior analyst at Moody's Analytics with a background in architecture, provides valuable insights into these changes. Even if you're primarily a residential real estate investor, understanding these trends can help inform your investing strategy. The key is to stay informed and get ahead of the curve rather than following the crowd and playing catch-up. The commercial real estate industry is evolving rapidly, and being informed can give you a significant advantage. Additionally, in the current real estate landscape, with inflation, increased days on market, and higher interest rates, staying informed through reliable sources like this podcast is crucial.
Office market undergoing nuanced transformation: Stay informed and adapt to the changing office market, as it requires new strategies and approaches.
Change, particularly in the commercial real estate market, can be daunting for those who are unprepared but presents opportunities for those who are informed and adaptable. Kevin Fagan, a senior director and head of CRE Economic Analysis at Moody's Analytics, shared his insights on the current state of the office space market, which has been significantly impacted by the pandemic and the shift to remote work. Contrary to sensational headlines, Fagan emphasized that the office market is undergoing a nuanced transformation rather than a complete demise. He encouraged investors to stay informed and consider the long-term implications of this change, as the office market may require new strategies and approaches. Overall, the conversation highlighted the importance of being prepared and staying informed in the face of market shifts.
Office real estate market resilience during pandemic: The office real estate market has shown resilience during the pandemic, with occupancy rates holding steady and effective rents declining minimally. Remote work has allowed companies to maintain leases despite economic uncertainty.
The office real estate market has shown remarkable resilience during the pandemic, despite initial fears of a mass exodus from corporate offices. The occupancy rate, which is currently around 82%, has only seen a minor decline compared to previous downturns. Effective rents have declined by less than 2%, and some markets, particularly in the Sunbelt, have even seen rent growth. The ability of companies to continue operating remotely has allowed them to keep their leases, even during economic uncertainty. However, it's important to note that the economic outlook is uncertain, and a recession could still impact the office market. Our baseline scenario does not currently assume a recession, but we will continue to monitor the situation closely.
Companies might consider remote work during a recession: Companies may opt for remote work to save on office costs during a recession, but the impact on human capital should be minimized. Occupancy rates could drop to 80-82%, with the potential for an additional full point of vacancy rate, which could significantly affect the value of lower-quality office spaces.
While the likelihood of a recession is currently around 65%, office real estate, which makes up only about 4% of a company's gross revenue on average, may not be the first place companies look to cut costs during a downturn. Real estate is expensive but not the biggest expense for most companies. In a recession, companies might opt for remote work to save on office costs while minimizing the impact on their human capital. The occupancy rate during past downturns dropped to around 80-82%, and the further downside risk could mean an additional full point of vacancy rate, which could have significant consequences depending on the quality of the office space. As we've seen in the past, there may be a separation of the market with some offices experiencing significant value declines while others remain stable.
The correlation between office attendance and vacancy rates is not definitively established: The relationship between office utilization rates and vacancy rates is complex, influenced by shifting power dynamics, potential layoffs, and changing work preferences.
The relationship between office utilization rates and vacancy rates may not be as straightforward as some assume. While many companies are implementing strategies to bring employees back to the office, such as anchor days, the correlation between office attendance and vacancy rates is not definitively established. The ongoing shift in power dynamics between employers and employees, along with potential layoffs and changing work preferences, will be key factors in determining the future of office space utilization. As the labor market evolves, it will be important for companies to adapt to the new realities and consider flexible, dynamic solutions for managing their office spaces.
Impact of pandemic on office space utilization rate: Productivity and innovation depend on collaboration and networking in offices, making larger communal spaces valuable. Office-to-residential conversions could present opportunities, but high costs and specific requirements limit their prevalence. The office real estate market remains resilient amidst pandemic challenges.
While the utilization rate of office spaces has been impacted by the shift to remote work during the pandemic, it's not clear that tenants will need significantly less space moving forward. Collaboration and networking among employees are crucial for productivity and innovation, making larger communal spaces like libraries and kitchens more valuable. The conversion of offices to residential spaces, such as apartments, could present opportunities for investors, but it's not yet a widespread trend due to the high costs and specific requirements involved. Overall, the office real estate market is showing signs of resilience, despite the challenges posed by the pandemic.
Converting Obsolete Offices to Multifamily or Condos: Investors should look for opportunities to convert obsolete offices into multifamily or condos in high-rent areas on the fringes, while choosing the right partner, like BAM Capital or Host Financial, and utilizing resources like DealMachine, can help secure funding and simplify deal-making.
There will be opportunities for obsolete office buildings to be converted into multifamily or condo properties in high-rent areas, but it's not expected to be a widespread trend. Instead, investors should look for these opportunities on the fringes. Meanwhile, when it comes to real estate investing, choosing the right partner is crucial. BAM Capital, with its successful track record and disciplined investment strategy, is a trusted multifamily syndicator for those seeking generational wealth building or monthly income opportunities. Additionally, Host Financial offers a streamlined lending process, making it easier for investors to secure funding for their deals. Lastly, DealMachine provides valuable contact information for off-market deals, simplifying lead generation and deal-making strategies.
Converting commercial to residential properties as a backup plan: Investors can consider converting commercial properties to residential as a backup plan, considering shifting market trends and economic conditions, but should weigh conversion costs, construction challenges, and changing lending landscapes.
In the current economic climate, converting commercial properties to residential may serve as a viable backup plan for investors. This strategy could become financially sensible if the highest and best use of certain properties no longer aligns with their current state, and if market trends continue to shift towards remote work and residential living. However, it's important to consider various factors, such as conversion costs, construction challenges, and changing lending landscapes. Additionally, investors should be cautious about specific markets with declining populations or urban areas facing safety concerns. Ultimately, the decision to convert properties should be based on a thorough analysis of the local real estate market and economic conditions.
Urban real estate trends shifting towards smaller, more affordable cities: Investors can capitalize on emerging markets with obsolete office buildings ripe for multifamily conversions due to increased household formation in smaller, more affordable cities.
The demand for living in urban areas, specifically in expensive MSAs, is shifting towards smaller, more affordable cities or exurbs. This trend was highlighted by the example of San Francisco, which was once the most expensive residential real estate market in the country but has since seen a significant decline due to various factors including chaos and strict regulations. This shift is important for real estate investors as it presents opportunities in these emerging markets, where there may be obsolete office buildings that can be converted into multifamily housing due to increased household formation. It's crucial to keep an eye on these trends and consider the potential risks and rewards before investing in urban real estate. Additionally, real estate, while often perceived as stable, can evolve rapidly and significantly with technological advancements and changing market conditions.
Co-working and Flex-Office Spaces: The Future of Commercial Real Estate: Co-working and flex-office spaces offer businesses flexibility and attractive amenities, leading to their continued growth in the commercial real estate market. Apple and over 300 other companies now demand these spaces in new office buildings.
The commercial real estate industry is evolving to meet the changing needs of businesses, particularly in response to the increasing trend of remote and flexible work arrangements. This evolution is reflected in the design of new commercial buildings, which feature more communal spaces and flexible office arrangements, such as co-working and flex-office spaces. These spaces offer tenants the flexibility to expand and contract their office needs as needed, making them an attractive option for businesses of all sizes. The co-working and flex-office market has been growing steadily in the US, with over 300 companies offering these types of spaces beyond just WeWork. Apple, for example, now demands that new office buildings include co-working spaces to accommodate their needs. Overall, these trends suggest that co-working and flex-office spaces will continue to be a significant part of the commercial real estate landscape, providing businesses with the flexibility and amenities they need to thrive in a hybrid work environment.
Long-term stability of office investing with extended lease terms: Office investing offers long-term stability due to extended lease terms, professional management, and predictable income and expense controls. Attractive for institutional and smaller investors, opportunities exist in both large and small cities.
Investing in office space offers long-term stability due to longer lease terms compared to other real estate asset classes. Offices are professionally managed, and tenants often sign leases for extended periods, providing predictable income and expense controls. This stability makes office investing an attractive option for both institutional and smaller investors. While office spaces in large cities like San Francisco and New York tend to be more expensive, opportunities exist in smaller cities and for local businesses. The analysis for investing in an office building includes examining the rent roll, lease expirations, and the location's potential for agglomeration benefits, such as being in a desirable market with good transportation.
Understanding the Office Market's Evolution: Office buildings are more expensive than residential but not as much as one might think. The office market's future is uncertain, but experts are optimistic about new data and trends in 2023.
Offices are generally more expensive per square foot than residential buildings, but the gap between the two is not as wide as one might think. Kevin Fagan, the senior director and head of commercial real estate economic analysis at Moody Analytics, shared insights on the current state of the office market and what to expect in 2023. He noted that while New York City offices traded at $542 per square foot in 2021 compared to $430.4 for median apartment buildings, a significant discount would be needed for offices to be convertible. However, Fagan is excited about the upcoming year as we begin to see real data on the office market's evolution with the return of employees to the office and new floor plates being built. He emphasized the importance of not just looking at historical data but also understanding the underlying reasons for market trends to make informed decisions about where to invest. Fagan's unique perspective, gained from his background in construction, education, and market analysis, makes him a valuable resource in the real estate industry.
Understanding Politics and Macroeconomics in Real Estate: Stay informed about political climate and local trends, engage with city officials, consider creative solutions, and be both data-driven and politically astute for successful real estate investments.
Real estate investing involves more than just crunching numbers. While data is important, understanding the political and macroeconomic factors that influence the numbers can help investors make informed decisions. For instance, changes in zoning laws can impact the potential use and value of a property. In the case of San Francisco, understanding the city's political climate could have prevented commercial real estate investments as the trends indicated a challenging environment. Additionally, considering creative solutions such as office conversions in smaller cities could provide opportunities for residential growth. Staying informed about local trends and engaging with city officials can also provide valuable insights for potential investments. Overall, a successful real estate investor must be both data-driven and politically astute.
Real estate investing isn't a way to never work again: To succeed in real estate investing, dedicate effort and time, learn markets, find advantages, and make informed decisions. Find an agent through BiggerPockets Agent Finder for guidance.
Real estate investing requires effort and dedication, contrary to the misconception that it's a way to never have to work again. While some investors may not work in traditional jobs, they still put in significant time and energy into their investments. Many who have lost money in real estate did so without putting in the necessary work. Instead, the rewarding work of being a real estate investor involves learning about markets, finding advantages, and making informed decisions. To get started, finding an investor-friendly agent through BiggerPockets Agent Finder can help navigate the process with confidence. Remember, it's not about timing the market but rather time in the market, and the best investors understand that financial freedom comes with commitment and knowledge.
