Digital Nomad: Iconoclast or Prototype?

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Digital nomads are individuals who capitalize on their skills and the flexibility provided by telecommunications technology to earn a livelihood, primarily as self-employed workers, without being anchored to one specific location. While all of us experience how the pervasiveness of wireless internet and smartphones blurs distinctions between the places we work, live and play, digital nomads proactively seek a lifestyle where they are never actually at home or at work. Digital nomads generally love to travel and are creatively inspired by new environments, but typically struggle with an array of concerns including maintaining long-distance relationships with friends and family and identifying comfortable work spaces with high download speed.

As pioneers of sorts, digital nomads may be clear indicators of where our globalizing society is headed. Within 15 years, over 50% of American workers will be freelance, independent contractors or consultants, with a minority remaing full-time employees. Millennials, in particular, do not typically strive to affiliate with one company for any extended period. Mobility, often without the obligations of ownership (home or car), is clearly prized by this demographic. Increasingly companies seek to engage and retain talented workers with more flexible workplace policies and are moving away from stolid corporate campuses and longer-term office space commitments in favor of more flexible and shorter-term office configurations oriented toward collaborating and diverse teams, often organized across geographies.

The real estate sector is also developing an array of environments oriented to the mobile worker, from Soho House-type clubs in a range of cities which meld hotel, play, work and meeting areas to far flung co-working spaces that are now growing as fast in Third World countries as they are in the West. Perhaps repurposing of vacant retail spaces as work spaces for the growing number of freelance digital workers may be next.

Is Airbnb disrupting the second home investment market?

Much has been written about Airbnb’s impact on demand for hotels and apartment rents in specific neighborhoods. In addition, we are now familiar with the controversial restrictions municipalities have enacted to minimize the perceived deleterious consequences of short-term rental in multifamily buildings. Now we are observing the dramatic impact of Airbnb and its peers on second home investment markets like the Hamptons.

Historically, many owners of Hamptons vacation houses benefited from the income of monthly or summer rentals, which often more than offset annual mortgage, tax and maintenance expenses. However, this year, local brokers report that summer rentals were off nearly 50% as compared to typical years, particularly in the under $75,000 rent per summer category. This appears to be a direct result of large numbers of available Airbnb shorter rentals, despite greater scrutiny and regulation of shorter term rentals by the towns of Southampton, Riverhead and Southhold and throughout the unincorporated portions of the Town of East Hampton. And this phenomenon is not restricted to the Hamptons. Christopher Chauvin, the president of a french concierge app for villa, car and plane rentals, reports a similar drop this summer in seasonal rentals in the south of France.

For many renters the option to pick and choose which specific weeks and weekends they commit and pay for is particularly attractive. And for owners of well-reviewed and attractively photographed properties, the rental income from multiple shorter rentals can in some cases exceed that of traditional longer term commitments (while allowing owners greater flexibility to also use and enjoy their properties). However, managing a large number of shorter term rentals requires greater effort by property owner, particularly in effectively pricing to capture demand and for maintenance, as cleaning and associated responsibilities are shifted from tenant to owner in the Airbnb model. In other resort-oriented markets like Charleston, South Carolina, these issues have contributed to the rise of short-stay management firms like Duvet (stayduvet.com) which in return for 25% of rental income, price properties for short-term rentals, manage advertisements, guarantee 5-star ratings and coordinate check-ins and check-outs.

Why a Millennial-Centric Investment Strategy – Part 2

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Last month I explored why the millennial preference for urban lifestyle and this cohort’s general inability to purchase housing combine with a shortfall of rental housing production to present an ideal opportunity to invest in urban housing appealing to renting millennials. https://workplace-of-the-future.com/2017/12/26/why-a-millennial-centric-investment-strategy-part-1/. Since that post I attended a lecture by Laurie Goodman, Director of the Urban Institute’s Housing Finance Policy Center and her research confirms my recommendations. Most fascinating was that even with the housing construction industry now largely recovered, net new housing units in 2015 represented only 75% of the number of homes demanded by new households in that one year.

Once you establish your own cap rate threshold, implementing a millennial-oriented real estate investment plan should incorporate these strategies:

  • Invest through LLC entities in single family and multifamily properties in urban neighborhoods where new housing supply is constrained and where recent rent growth can be quantified. This doesn’t mean avoiding areas attractive to new development – as long as new housing development is a different typology –i.e.,  invest in existing single family and two-five family homes in neighborhoods where land values and construction costs only justify much larger multifamily condominium and rental apartment development.
  • Select properties which combine architectural appeal with walkability to shopping and amenities and good access to public transportation.  The average millennial drove 23% less in 2009 than in 2001 – the sharpest reduction for any age group.  Lack of bike storage could be a deal breaker for a 2-wheeled commuter.  Outdoor space – whether a back yard or roof deck is also an important amenity to attract tenants
  • Don’t be afraid of neighborhoods in the midst of socio-economic transition – these may represent the greatest opportunity for future appreciation of value.  However remember that for many millennials, safety is a top priority.  76% of millennials reported safe streets as the Number 1 priority for urban living.  Install alarm systems and security cameras to enhance a property’s appeal.
  • Be prepared to accept pets and alternative forms of rent payment. More than 76% of millennials own cats or dogs.  And they rarely write a check.  I always offer my millennial tenants the options of Quickpay, Paypal and my personal favorite, Venmo. In fact any of these payment systems give me greater piece of mind than hearing from a tenant that “the check is in the mail.”

Why a Millennial-Centric Investment Strategy – Part 1

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The media is rife with attention to the predilections of millennials (born between 1982 and 2001) who form a demographic cohort of nearly 76 million, that is now the largest living generation in America. In this first of a two-part post, I will explain why an urban real estate investment strategy attuned to Millennial tastes is on target. In the second part of this post, I will describe how to implement a millennial-oriented real estate investment plan.

Millennials seek to live and work in walkable urban areas

Resurgent American Downtowns have long been attributed to aging baby boomers, who as empty nesters were eager to swap suburban homes for urban condos. Millennials are even more inclined than boomers to live in walkable urban areas, particularly if these neighborhoods re-enhanced by the availability of a wide range of transportation options. A Rockefeller Foundation survey in 2014 found that up to 86 percent of millennials said it was important for their city to offer opportunities to live and work without relying on a car. Nearly half of millennials who owned a car said they would give it up if they could count on public transportation options.  A 2014 Harris poll of millennials found that over three-quarters agreed to the importance of affordable and convenient transportation options other than cars in deciding where to live and work. For millennials the fifteen most desirable US metropolitan areas include those with some of the nations’s strongest mixed-use neighborhoods where residents can work, live and play without heavy reliance on owned vehicles: San Diego, New York, Boston, Denver/Boulder, San Francisco, Seattle, Chicago, Los Angeles, Portland, Washington, Austin, Phoenix, Charlotte, Atlanta and Miami.

Millennials need to rent

Most millennials are not financially equipped to purchase urban homes or apartments. Despite a persistently low interest rate environment, millennials are far less likely to purchase rather than rent because of tighter availability of credit and far more rigorous mortgage underwriting standards since The Great Recession. Not only do millennials have more personal debt (particularly student loan debt) than earlier generations, but having witnessed the distress caused by the housing bubble of the late 2000s, most Millennials believe that owning a home may not offer the kinds of financial benefits it once did. As a result, the rate of home ownership among millennials aged 25-29 is only 31.8%, the lowest rate on record for any adult age cohort, according to the US Census. In a rising interest rate environment, none of these conditions are expected to mitigate.

Supply of rental housing has fallen

Since The Great Recession, new housing production (single and multi-family) has fallen far behind the pace of new household formation and demand. Amidst this backdrop, the private equity firm Blackstone has become the largest owner of both private homes and multi-family apartments and its enormous portfolio across 25+ markets has a total vacancy rate under 4% and has seen rents rise more than 5% per year.

These conditions present an ideal opportunity for investors to focus on current returns and future appreciation from owning urban housing positioned to appeal to renting millennials. In the second part of this series, I will detail how to implement this selective investment approach. Stay tuned.

Five Reasons WeWork May be Worth $16 Billion (as of 4/4/16)

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WeWork, the co-working office space firm founded in New York in 2010, now has a valuation of over $16 billion dollars based on private equity and venture capital funds raised. This valuation is comparable to the market values of Vornado and Boston Properties, two of the largest and most established REITS (real estate investment trusts). Unlike these landlords, WeWork owns no real estate. WeWork generally leases office space for long lease terms and builds out and subleases office and open desk space for contract terms of one month to a year. What explains WeWork’s ability to raise money based on this presumed sky high valuation?

  • While we can assume WeWork’s initial market valuation if the company were to go public today would be $16 billion (or higher), there is no guaranty this valuation would hold up over time. For example, Groupon had a $17 billion valuation when it went public in 2011 and today has a market value of a fraction of that amount.
  • Like some observers and analysts, I see WeWork as a “disrupter” that has created a new paradigm for the workplace – similar in impact to Airbnb, which owns no hotel rooms but is currently valued more than Marriott, and Uber which owns no cars but is valued at more than the market capitalization of Hertz and Avis combined. Like Airbnb and Uber, WeWork is capitalizing, in part, on the dominant impact of PDA technology and millennial preferences for how we live, work and play.
  • The US (and multinational) workforce continues to shift from full time employment to contingent jobs, such as freelancing, temping, contracting or part time jobs. Currently 40.4% of the U.S. workforce has a contingent job and this is expected to grow to 50% in ten years. WeWorks greatest success is in curating appealing environments for these “unaffiliated” workers (or members) and for the small and growing firms they create.
  • Without advertising or other marketing WeWork has achieved average occupancy rates of 98% for facilities open more than six months and typically achieves 40% profit margins as the density of a WeWorks office is nearly twice that of a typical dedicated office space. WeWork’s combination of flexibility (including the ability of its members to easily grow or shrink occupancy without capital investment), free drinks and snacks and a zeitgeist of collaboration, community and innovation have built a uniquely successful brand identity, largely through word of mouth of its members. WeWork leases space in older and loftier buildings and employs organic finishes and an overall chic industrial aesthetic that contrasts with the typical slickness and monotony of most corporate office space.
  • WeWork currently has 70 spaces already under lease including several over 250,000 square feet, and its funding may allow it to grow by more than 150 centers per year (across the U.S., Europe and Asia) if a recession does not tamper with employment growth in the 24-hour, millennial-heavy markets the firm targets. In 2014 and 2015, WeWork was the largest lessee of office space in the United States. WeWork’s growth dwarfs that of all its competitors except for the office suite firm Regus, which has not been able to shake its outdated generic corporate office aesthetic. Limiting larger corporate occupancies (firms like Apple, Microsoft and Merck) to no more than 20% of its total membership, WeWork often turns away tenancies for lack of space.

Why are Stores Rents So High

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The #1 question I’m asked about New York City retail is, “Why are store rents so high if there’s so much retail vacancy in my neighborhood?” This inquiry arises from an observation that appears to contradict a basic microeconomics principle — if supply exceeds demand, pricing should adjust downward. New York City’s retail reality today, however, is not so straightforward.

Without a doubt, the rise of e-commerce has disrupted consumer demand across a wide range of retail categories from books to music to clothes to shoes to hardware and has fueled store closures across these categories and beyond. The rise of urban “big box” venues has also hit small retailers hard. More recently, neighborhood restaurants — which have always had a high turnover rate — face diminishing demand in light of the growing popularity of internet-based meal and ingredient delivery services (obviously, we’re not talking about the celebrity restaurant category). A harbinger of the exacerbating struggles of neighborhood retail is clear on Bleecker Street (east of Sixth Avenue) and on East Eighth Street in Greenwich Village These retail strips have always catered almost exclusively to the local NYU student population and now see some of the highest store vacancy rates in Manhattan as they struggle to assimilate the buying habits of this most “wired” of consumer demographics.

Despite these trends, the recent stickiness of neighborhood retail rents is a softer echo of how store rents have fared since the great recession in the tourist-oriented retail corridors of Fifth Avenue, Madison Avenue, Times Square and Soho, and gentrifying shopping districts like Bedford Avenue in Williamsburg. Since 2009, New York’s skyrocketing appeal to international tourists, a weak dollar and competition among major consumer brands for exposure to influential shoppers have driven retail rents to new heights and retail values into the stratosphere. At the end of 2015, Bulgari broke all records in renewing and expanding its ground floor store lease at 730 Fifth Avenue (one block from Apple, the top selling store in the world) at over $5,500 per square foot per annum. The escalation of prime Manhattan retail rents, growing much faster over the past seven years than rents for New York offices and apartments, has compressed down retail cap rates (the ratio of net operating income over price) to 3% or even lower for prime locations. Observing this much income and valuation growth, landlords in less dynamic retail corridors have been reticent to reduce store rents despite vacancy rates in many cases above equilibrium.

But the winds of change are apparent, even in New York’s hottest shopping corridors. Brazilian, Chinese and Russian tourists are no longer as flush in disposable spending. The dollar is now strong. And Broadway in Soho, where rents range from $800 – $1,600 per square foot, now has a vacancy rate nearing 20%, as retailers cannot justify rents there in light of sales per square foot for brands found in most mid-to-high end American shopping centers. A time of reckoning may be near.

Death of the Private Office?

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Technology has changed why we need to go to an office. Most of the work we used to do by ourselves at a desk, whether in a private office or a large bullpen, can now be done almost anywhere because of the pervasiveness and capabilities of mobile devices. However, advances in technology do not mean we no longer need any private space at work or that it’s just as productive to sit daily in a different spot (à la hoteling) rather than in a dedicated work space.

A New York based money center bank recently eliminated all private offices in its headquarters and most employees will not get their own assigned desks in a new homogeneous “open plan” configuration. While the rationale for this dramatic change is to encourage employee interaction and reduce occupancy costs, the likelihood of success of either goal is questionable at best. A friend of mine is a relationship manager for high net worth individuals at this money center bank. He relies on support from staff in a range of departments to best serve his clients. He can’t depend on calls or e-mail to ensure he receives the proper internal support and prefers to meet with colleagues in person from whom he needs a work task completed. Under the new bank’s space regime, my friend has no idea from day to day where the “hoteling” staff can be found.

Shifting staff out from private offices to open bullpen settings does force a certain amount of “bumping into each other” interaction. But unless there are sufficient meeting spaces of different sizes and configurations — both for formal conferences and for more informal brainstorming — real collaboration can be challenged in an open plan environment. Bloomberg L.P. is often looked to as a model for how its vast open plan configuration has eliminated barriers to interaction typical in a hierarchical office-intensive environment. But at Bloomberg’s Upper East Side headquarters, the shortage of conference rooms is so severe, staff is only allowed access to a conference room if they can prove they are engaging with an outside client or resource. So outside of a large central café area with few chairs, Bloomberg’s headquarters lack available places designed or allocated for staff communication and teamwork. From scientific studies of learning, we also know an open plan environment is just too distracting for individuals with conditions such as ADHD who need privacy and enclosure to focus on tasks and perform effectively.

We still need to go to the office in order to share ideas with colleagues and often to work as a team on initiatives and strategies. Eliminating private offices and other “densification” strategies generally reduce occupancy expenses per employee. But the employee productivity and retention implications can be profound if occupancy cost reduction becomes the main driver for a company to adopt one monolithic space figuration and little attention is given to the kinds of spaces employees and teams desire. Giving employees a greater say in the type of workspaces available may be part of the solution. We know that losing and replacing talented employees, particularly in a tighter labor market, can be extremely costly and that millennials demonstrate much less corporate loyalty than their generational predecessors, particularly if a firm is not aligned with their values and work style.

Co-working spaces, like Grind NY have been quite successful in providing their tenants a broad choice of work settings. At Grind NY, one can choose to work in a bright open bullpen, in a private, dedicated room, in a shared and demarcated quiet area of open cubicles, or in an enclosed team room for five to ten staff.  In addition, a range of collaborative spaces — from open cafés to AV-intensive team rooms — are available for a project or meeting-specific purpose. Perhaps this range of choices provides a more appropriate model for corporate America that a single monolithic office space program where “one size fits all.”