Real Estate Trends in Central Ohio - ULI Columbus

Real Estate Trends in Central Ohio
2016
Urban Land Institute
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Suite 500 West
Washington, DC 20007-5201
www.uli.org
ULI Columbus
1196 Hope Avenue
Columbus, OH 43212
http://columbus.uli.org
Cover Image Source: Crawford Hoying Development
© 2015 Urban Land Institute
Real Estate Trends in Central Ohio
2016
A PUBLICATION FROM
TABLE OF CONTENTS
Background
Survey Respondent Characteristics General Business Prospects Key Issues for 2016 Real Estate Sectors Capital Markets Central Ohio Submarkets Hot Topics
1
1
2
3
5
7
8
10
BACKGROUND
Real Estate Trends in Central Ohio takes a pulse of the region's real estate market, including capital markets, various sectors, and
area submarkets. This survey complements the national Urban Land Institute's Emerging Trends in Real Estate, adding an in-
depth local perspective to the national survey's insights on the U.S. economy and real estate markets.
In early October, ULI Columbus distributed a link to an online survey to its full e-mail list, from which 38 responses were collected
from October 6 to November 9. Additionally, 17 interviews were conducted throughout October with key local experts from the
private and public sectors across a range of professional developments, in particular real estate development, management,
finance, and planning.
The information presented in this report comprise quantitative data from the survey and quotes from the interviews as well as the
comment sections in the survey.
SURVEY RESPONDENT CHARACTERISTICS
Private developers represent the largest share of survey
respondents at 32 percent, followed by professional
Respondents by field
Other
University 5%
3%
Government
8%
service firms (30 percent).
Compared to past years, owners and high-level
executives represent the lion's share of survey
Private
Developer
32%
respondents, with 63 percent at VP level and up.
Nearly half or more of the respondents are active in rental
housing, office, and retail. The sector composition in
Professional
Service Firm
30%
general is similar to last year.
Builder
3%
Lender
8%
Brokerage Institutional
Investor
3%
8%
Other responses: historic preservation consultant, nonprofit market research.
Respondents by sector (multiple selections allowed)
0%
20%
40%
60%
Residential - rental
Associate
8%
100%
64%
Office
Other
3%
58%
Retail
Owner
32%
47%
Residential - for sale
28%
Industrial/distribution
28%
Hospitality
25%
Niche/alternative
25%
Institutional/public
80%
Respondents by position
22%
Director/Manager
26%
Vice President
EVP/COO/CFO
8%
10%
President/CEO
13%
1
GENERAL BUSINESS PROSPECTS
Survey respondents' expectations of how 2015 will wrap up
Expected and actual profitability of own business
matches sentiments from a year ago. With "turmoil in the
stock market" and cap rates trending down, real estate has
become a destination for investment as "people try to put
money to work." Another interviewee notes that 2015 has
been "a record year in total commercial square footage
under construction."
Expectations
Excellent
4.02 3.91
4.05 4.06
2013
2014
2015
4.27
3.00
2.50
Expectations for 2016, at an average score of 4.27, are at
Poor
2.00
1.50
series. Interviewees' opinions are more mixed, with some
seeing a leveling off in the market while other predict a
4.00
3.89
3.68
3.50
Fair
an all-time high in the five years covered by this report
5.00
4.50
Good
Actual
Abysmal
1.00
2016
continued but perhaps smaller improvements
Prospects by industry, relative to other markets
Prospects are high across industry areas relative to other markets. Survey respondents view Central Ohio more favorably for
investment, lending, property management, and professional services. Despite an upbeat mood about the market for development
and scores still above neutral (3.00), the gap between Central Ohio and other markets is expected to narrow.
Central Ohio compared to other U.S. markets by industry area
Much worse
Somewhat
worse
About the
same
Somewhat
better
1.00
2.00
3.00
4.00
REITs
5.00
3.30
3.09
Real estate investment management
3.42
3.29
Private local real estate owners
3.42
Commercial bank real estate lenders
Much
better
3.23
3.75
3.50
3.30
3.27
2016
Insurance company real estate lenders
3.30
3.43
2015
Real estate brokers
3.46
3.22
CMBS lenders/issuers
Architects, designers
Real estate consultants
Commercial developers
Multifamily developers
Homebuilders/residential land developers
3.09
3.46
3.39
3.26
3.42
3.54
3.22
3.58
3.21
3.35
2
KEY ISSUES FOR 2016
Top economic issues for Central Ohio in 2016
Economic issues
2016
Job growth is again the top economic
concern among Central Ohio's development
2015
No importance
1.00
2.00
community, reflecting its status as the
ultimate driver of demand across sectors.
Great
importance
Moderate
3.00
4.00
4.22
3.95
Job growth
As the economy continues to strengthen,
interest rates and inflation have the greatest
gains in scoring. In contrast, energy prices fall
5.00
Income and wage growth
4.03
3.95
Interest rates
4.00
3.65
to the bottom of the list, reflecting cheaper oil
and gas costs.
Inflation
3.10
3.51
3.19
3.30
Energy prices
State and local budget
problems
3.38
3.18
Land use and development needs
In 2016, workforce rises to the top of the priority list for development. "Every sub trade has the same issue of finding qual ified
workforce." One interviewee claims to "have never seen a tighter sub[contractor] market."
The workforce shortage is leading to higher construction costs being passed on from general contractor to developer and, in the
end, the tenant or buyer. "Material costs for the most part have stayed pretty level, but labor costs are going up quite a bit."
Adding in increased development activity means that "the trades are exercising some pricing power."
Survey respondents rated building regulations and site availability as higher priorities than in years past. As the market
strengthens, developers are running into limits. "Sites are going to be a challenge due to zoning regulations." There is conc ern of
excessive regulation as well: "it’s a fight to get anything done, even if it's routine."
Central Ohio's biggest needs for land use and development
Low priority
1.00
Better building and zoning regulations
High priority
Moderate
2.00
3.00
4.00
3.24
3.67
4.03
4.14
More economic growth
More workforce for construction and skilled trades
3.86
3.78
Better public transportation
4.14
2016
2015
4.14
3.56
3.62
Better parking in downtown/Short North
Greater availability of sites for development
5.00
3.17
3.63
3
The big trends
Demographics
Immigration
6%
For the first time this year, the survey asked respondents to
choose what they think is the most important trend across
demographics, finance, public leadership, design and
development.
Household
formations
62%
Wage growth
32%
In demographics, household formations far outpaces wage
growth. And in finance, despite the increased availability of
both debt and equity, creative financing remains of great
interest. Part of the financing formula may be government tax
credits and incentives which , even with the rising concern
about building and zoning regulations, still rose to the top for
public leadership.
Concepts of building healthy places and green design fare
differently between the design and development categories.
In design, healthy and green draws more than a third of
respondents but does not factor much into development.
These results, at least in part, may be due to the competing
choices. "Mixed use" is the buzzword here and throughout
other parts of this report. In design, many people across the
Finance
Tighter
regulations
34%
Creative
financing
56%
Deleveraging
trends
10%
Public Leadership
Tax credits,
incentives
47%
Zoning reform
34%
office, retail, and rental housing sectors are seeking to create
more value with less space.
Land
availability
19%
Design
Healthy/
green
37%
Space
efficiency
60%
Modular
3%
Development
TOD
11%
Healthy/green
3%
Mixed-use
86%
4
REAL ESTATE SECTORS
Industrial
Investment recommendation for 2016: INDUSTRIAL
The majority of survey respondents gives the
0%
industrial sector a hold rating, with more on the
buy side than the sell side. There is a preference
for larger bulk/distribution or general industrial
space.
20%
40%
60%
80%
100%
All industrial
Sell
Bulk/distribution space
Hold
General industrial
Buy
R&D industrial
Interviewees appear more bullish, stating that
"industrial is huge for us right now" and "industrial
Self-storage
will continue to stay strong." And while industrial
is generally "very attractive on a national scale,"
Central Ohio performs well "even as it relates to
other markets around the country."
Office
Survey respondents and interviews continue to be
down on office generally, but the disparity
Investment recommendation for 2016: OFFICE
between urban and suburban office locations is
0%
increasing sharply.
Fundamentally, the "office environment is
changing. The number of people per square foot
has changed and are downsizing." "I think the
rental rate growth over the past decade is zero."
20%
40%
60%
80%
100%
All office
Sell
CBD office
Hold
Suburban office
Buy
Medical office
However, while "velocity has slowed in suburban
locations," there is a growing trend of companies
"wanting to locate in an urban area for their
workforce, more so than we have seen over the
past 20 or 30 years."
Hospitality
Last year's report noted some concerns about the number of new hotel projects and rooms coming on the market. Again,
going into 2016, "you’ve got a lot of new rooms coming online. They’re building hotels everywhere."
The success of recent projects may have helped demonstrate that there is demand. Interviewees seem less concerned this
time and expect some continued increase in the hospitality sector.
5
Retail
Investment recommendation for 2016: RETAIL
Neighborhood shopping centers continue to outpace
0%
other retail, with strong survey ratings on the buy
20%
40%
60%
80% 100%
All retail
side. In contrast, retail overall is "very flat." Multiple
Sell
interviewees believe that retail projects of any
Regional malls
Hold
significant scale will rely on "niche" characteristics
Power centers
Buy
around location, design, and tenant base. On this
Neighborhood/community
note, "Easton is a unique animal."
"Financially, retail is very strong" perhaps due to years of discipline enforced on real estate from "downsizing and consolid ation of
tenants caused by online distribution channels." In addition to e-commerce, omnichannel brings on "a two-way consolidation. One
is the shrinking size of retailers, that they are trying to do more or the same in smaller spaces because they approach the r etail as
an omnichannel tool. Second is that you can do this with fewer stores."
Rental housing
Survey respondents continue to cool on rental
Investment recommendation for 2016: RESIDENTAL - RENTAL
housing, with sell numbers starting match or
outnumber the buy side. Many interviewees have
seen continued growth in 2015 and expect more in
2016. Some remain highly optimistic: "I don't see
0%
40%
60%
80% 100%
All apartments
Luxury apartments
anything on the horizon slowing the activity down."
Moderate apartments
New rental housing stock is "white hot."
Tax credit apartments
A smaller number are "cautiously bullish."
20%
Sell
Hold
Buy
Student housing
"Multifamily might slow down a little bit, but the
demand is still out there."
Opinions are mixed on rents. One interviewee sees good increases and stable occupancy, while another believes that rents will
not grow dramatically as more supply enters the market. The rising cost of rent may also be "starting to keep some of that
[renter] demand in check."
As the adage goes, location may be the determinant on how different parts of the rental market perform in the future. "There is a
really strong push to downsize and want the quality of life downtown can provide."
For-sale housing
Interviewees are positive about prospects in for-sale housing, supported by survey numbers, though limited, leaning toward the
buy side. Comments range from "residential sales have been very good" to "the market is hot for residential for sale."
While the market for urban condominiums is re-emerging, there is a clear shift for suburban single-family from previous eras of
housing growth. Compared to when developers stockpiled land purchases and options, "land is getting tougher and tougher to
find."
Moderate growth may be the best forecast: "I don’t think the for-sale model will be as frothy as the early 2000’s, but we are
seeing a growing demand for buyers."
6
CAPITAL MARKETS
Interest rates
Survey respondents and interviewees alike anticipate small increases in interest rates, which will remain low overall. One
interviewee bets on slight increases totaling 50 to 75 basis points.
After years of anticipation now of interest rate rises, the more interesting question is around how everyone will respond. Ma ny
survey respondents will seek to obtain financing or refinance and/or make portfolio adjustments. Strategies may include
"putting in hedges and interest rate caps and swaps" and "locking our rates for existing assets at sub -5% rates." Portfolio
adjustments will also be part of the puzzle, but interestingly enough, no one among the survey is looking to reduce
development activity just yet.
Expected change in interest rates in the next three years
Increase Fall Moderately
Substantially
3%
3%
Remain Stable
19%
Response to interest rate rise
0%
20% 40% 60% 80% 100%
Obtain financing or
refinancing now
58%
Adjust portfolio
Reduce development activity
Increase
Moderately
75%
Scale back risk
47%
0%
21%
Capital availability
Underwriting and credit standards "continue to level and loosen slightly" as "lenders try to get more competitive for the number of
loans out there." Even though Dodd-Frank and other regulations have pushed up some peripheral costs around financing, "the
banks have been more aggressive than they were even in 2013 and 2014, so that has freed up capital to get deals done." A
similar story pertains to the equity side. "For every dollar of equity needed, there are $4 or $5 chasing those deals that could be on
acquisitions or ground-up development.”
While there is plenty of debt and equity capital available, the "blocking and tackling is more difficult" in terms of demonstrating
project feasibility. For example, "lenders are requiring evidence that there is a market for the projects they are financing, so they
have increased their requirements, oftentimes including a market study."
Overall state of capital availability through 2016
Substantially
Undersupplied
3%
Expected change in the availability of capital
Some Decline
9%
Oversupplied
18%
Some Increase
35%
Undersupplied
24%
In Balance
55%
No Change
56%
7
CENTRAL OHIO SUBMARKETS
Best prospects for 2016 and beyond
Downtown Columbus takes the top spot
Prospects for submarkets in 2016 (vs. past years' prospects for 2015 and 2014)
Abysmal
1.00
for development and investment
prospects in 2016. "There is a
tremendous amount of momentum and
it's on its way to becoming a great
neighborhood."
Poor
Fair
2.00
Good
3.00
transportation and parking, which "will
continue to be a main factor in solving for
4.33
4.27
UA/Grandview
4.26
Easton
4.21
Dublin
4.12
New Albany
how people live and work downtown."
Polaris
Compared to last year, the Upper
Powell
3.94
3.80
Arlington/Grandview Heights area sees
the greatest boost in prospects, with
average scores up 0.39 points. As in
downtown, the continued and highly
visible development in Grandview Yard
appears to be raising prospects.
3.75
Worthington
3.73
Westerville
3.66
Gahanna/ Airport
3.50
Columbus -North
After Easton, there is a string of suburbs
across the north side of I-270 and in
Delaware County where prospects are
high. The map on the next page illustrates
a clear north-south divide in Central Ohio.
5.00
Downtown Columbus
The only constraint for downtown and
surrounding neighborhoods may be
Excellent
4.00
3.50
North Delaware
3.41
Hilliard
3.34
Union
3.34
Grove City
3.13
Groveport/ Obetz
3.07
Fairfield
3.07
Licking
2.91
Reynoldsburg
2.81
Columbus -East
2.74
Madison
Columbus -West
Pickaway
Columbus -South
2.72
2.70
2.44
8
Prospects for Central Ohio submarkets in 2016 (with change in score from 2015 prospects)
North Delaware
3.50 (+0.08)
Union
3.34 (+0.06)
Powell
3.80 (+0.03)
Dublin
4.21 (+0.21)
Worthington
3.75 (+0.33)
UA/Grandview
4.27 (+0.39)
Hilliard
3.41 (-0.18)
Westerville
3.73 (+0.08)
Cbus North
3.50 (-0.32)
Cbus West
2.72 (+0.22)
Licking
3.07 (+0.31)
Polaris
3.94 (+0.02)
Easton
4.26 (-0.11)
Downtown
4.33 (+0.12)
Cbus East
2.81 (+0.17)
New Albany
4.12 (-0.15)
Gahanna/CMH
3.66 (+0.22)
Reynoldsburg
2.91 (+0.26)
Cbus South
2.44 (+0.12)
Madison
2.74 (-0.06)
Grove City
3.34 (+0.15)
Groveport/Obetz
3.13 (-0.06)
Fairfield
3.07 (+0.23)
Pickaway
2.70 (-0.10)
Prospects elsewhere in Central Ohio
Outside of downtown and north side neighborhoods, other areas of Columbus continue to score lower in their development and
investment prospects. "There is a stigma against single-family development ground in the Columbus public school system.”
However, a couple of interviewees highlight opportunities in central Columbus neighborhoods such as the Near East Side and
Franklinton, which are already benefiting as downtown and the Short North area build out and prices rise.
As suburbs and outer counties see that "anything urban is hot," "it will be interesting to see the willingness of further out suburban
communities to urbanize." More areas around central Ohio may be taking note of millennials and baby boomers currently headin g
to urban settings and, in turn, seek to capture some of that market. "Mixed-use development in urban centers is a trend that is
going to continue for quite a while.”
9
HOT TOPICS
Housing affordability
While survey respondents generally feel that the multifamily housing market has been too focused on high-end rental units, the
concern is more from a social than a market perspective. Similar to the survey, interviewees are confident about the demographics
and that demand will continue to be there, even for the smaller rental product. "The vacancy rate downtown is pretty low, so I think
that the market is able to satisfy the creation of these luxury apartments." "We haven’t overbuilt because everything is filling."
However, interviewees also recognize that high "costs are keeping some of that demand in check." "There needs to be affordable
peppered into there somewhere." Developer interest in larger scale development projects could provide an opportunity "to be able
to mix in affordable housing." In part due to the labor shortages discussed earlier (page 3), the "cost of construction and land is
becoming more and more difficult to make [housing] affordable." Public incentives and subsidies will be required because private
developers "simply can’t build the [affordable housing] product. We can’t afford to do that."
Sentiments on statements about multifamily rental product
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Development is in line with demographic trends and
market demand
Strongly disagree
Disagree
Neutral
There has been too much focus on high-end rental units
Agree
Strongly agree
Much of the new rental product is too small to continue to
be competitive in the market as millennials age
Job access
Recent initiatives at New Albany Business Park and
Level of support for job access solutions
Rickenbacker point to possible solutions around the link between
housing and employment. The combination of extended COTA
service and employers helping to resolve the "last-mile" problem
is a major step in connecting workers to jobs. "The New Albany
Smart Ride program is up from seven people when we launched
to 2,000 today, a huge increase and really needed for economic
development."
Car-wise "nobody is easy to get around as we are. It’s a dream
0% 20% 40% 60% 80% 100%
More affordable housing
near employment centers
Better COTA service
Employer contribution to
transportation alternatives
62%
53%
38%
moving around this city." For those without their own reliable
transportation, including people in lower-wage distribution,
packaging, or call center jobs, "we have to come together with a
real transportation plan." "How we handle transit will have
everything to do with the success of our city or not. It's going to
create a lot of opportunity."
10
REAL ESTATE TRENDS IN CENTRAL OHIO 2016 TEAM
Jung Kim *
Columbus 2020
Becca Capriniz *
The Ohio State University
Jack Clark *
The Ohio State University
Derek Ehlers *
American Structurepoint
Jordan Fromm *
JNF Creative
Autumn Glover *
The Ohio State University - PACT
Jana Hrdinova
Center for Real Estate
The Ohio State University
The Ohio State University
Pete LaRose *
LaRose Companies
MANAGEMENT COMMITTEE
Peter Lohman *
RL Partners
Terry Feogler *
Chair
Patrick Lynch *
Lifestyle Communities
Jonathan Barnes *
Chair for Mission Advancement
Julie Mickley *
Borror Properties
Michael Martin *
Treasurer
Michael Reeves *
Civil & Environmental Consultants
Joseph Reidy *
Governance Committee Chair
Allison Srail *
Crawford Hoying
Jung Kim *
Programs Cochair
Jason Wells *
US Bank
Jennifer Knittle *
Membership Cochair
Phil Larger *
Center for Real Estate
Cheryl Pentella *
Communications Chair
INTERVIEWEES
J. Jeffery McNealey *
Programs Cochair
William Brennan
CFO
Pizzuti Companies
Keith Myers *
Associate Vice President of Physical
Planning and Real Estate at The Ohio
State University
Tom Caldwell
Executive Vice President of Finance John Royer *
President
and Development
Continental Real Estate Companies Kohr Royer Griffith
Don Casto, III *
Principal
CASTO
Justin Metzler *
Membership Cochair
Michael Simpson *
Sponsorship Chair
Allison Srail *
Young Leaders Group Chair
Michael Simpson *
President
NAI Ohio Equities
Yaromir Steiner *
Jennifer Chrysler
Director of Community Development Founder and CEO
Steiner + Associates
City of New Albany
William Ebbing *
President
New Albany Company
Brian Ellis
President and COO
Nationwide Realty Investors
Terry Foegler *
Director of Strategic Initiatives/
Special Projects
City of Dublin
Brett Kaufman *
Owner
Kaufman Development
Steven R. Schoeny *
Director
Department of Development, City of
Columbus
ULI LEADERSHIP
Robert Vogt *
Partner
Vogt Strategic Insights
ULI DISTRICT COUNCIL LEADERSHIP
Bob White Jr.
President
Daimler
Mark Wagenbrenner
President
Wagenbrenner Development
Randall K. Rowe
Chairman
Eric Swanson
Chair
District Councils
Patrick L. Phillips
Chief Executive Officer
Marilee Utter
Executive Vice President
District Councils
ULI COLUMBUS PROJECT STAFF
Alicia Gaston
District Council Coordinator
* ULI MEMBER
SPECIAL THANKS TO:
Jung Kim, ULI Columbus Management Committee Member, Jana Hrdinova and Phil Larger of Center for Real Estate at The Ohio
State University, for their advisory and technical roles throughout the project. All the online survey respondents and individual
interviewees. Members of the ULI Columbus Young Leaders Group who conducted the interviews.
Urban Land Institute
1025 Thomas Jefferson Street, NW
Suite 500 West
Washington, DC 20007-5201
www.uli.org
ULI Columbus
1196 Hope Avenue
Columbus, OH 43212
http://columbus.uli.org