Parking, September 2016
By: Lance Miller, CPP and Ted Anglyn, CRE, MAI, CCIM
Since 2010, the national real estate market, by most accounts, has experienced favorable economic trends, benefiting from low interest rates as well as improving supply and demand fundamentals. The corresponding result has been relatively stable rent and value increases. How long will the good times prevail, and will the six-year real estate recovery continue?
The first quarter 2016 Situs RERC econometric model forecasts continued growth for the next three years, albeit at much slower rates and decelerating from 1.89 percent growth in 2016 to less than 0.63 percent growth in 2018. Overall, this trend is positive, but the much slower economic growth should give pause to real estate investors who are thinking strong rent and value growth are guaranteed.
Real Estate Market Success Uncertain
The prevailing theme for the national commercial real estate market as of mid-2016 is uncertainty. The recent political upheaval Brexit has caused on major regulatory issues is giving concern to many investors.
While on a relative value basis, real estate as an asset class remains attractive as rates of return can quickly evaporate if the capital debt markets should contract. Debt market contraction may, in fact, be one of the biggest risk factors impacting real estate.
Commercial banks complying with new equity requirement hurdles, high volatility commercial real estate requirements, construction lending and the commercial mortgage bank securities (CMBS) market complying with new risk retention rules that take place in December 2016, all contribute to this. Of note, these two capital sources, commercial banks and the CMBS market, comprise roughly 62 percent of the $3.5 trillion commercial debt real estate market. They also represent the two largest sources of debt capital that finance commercial real estate.
National Property Type Overview
Per the Situs RERC first quarter 2016 investment conditions report, the strongest real estate sectors are:
The industrial warehouse segment benefits from the proliferation of online retail. According to a recently released study by commercial real estate services firm Colliers, there was 61 million feet of big box industrial space delivered in 2015. However, with net absorption taking up almost all of the new space, year-end occupancy was around 93 percent, with certain geographic areas like Orange County, Calif., seeing above 98 percent occupancy rates in industrial warehouse markets.
Neighborhood/ commercial retail
This space benefits from necessity retail. Neighborhood/commercial retail is more insulated from online shopping, with groceries representing the largest component.
Multi-family development including student housing has benefited from strong demographic growth factors tempered with low cost capital availability. However, a recent PwC real estate barometer indicates significant softening market conditions with increasing vacancy and slowing rental growth brought about by new supply entering the multi-family sector. The result is that many real estate investors fear overbuilding in the foreseeable future in many markets across the country.
The central business district office market has benefited from many corporations relocating offices to urban centers where millennials live. Overall, the national office market has advanced from the office sectors relatively slow recovery, which precluded product oversupply. Vacancy rates on a national level have been trending down for the past few years and are forecasted by the National Association of Realtors to be less than 13 percent by 2017. A significant positive trend for parking is office densification, with more employees per square feet, leading to overall more positive demand for parking.
Two of the aforementioned property types that have benefited from parking investments the most is the proliferation of many urban apartments with often less parking provided than resulting demand, (see sidebar for more detail) and new urban office development.
Another positive parking real estate component, but not in the top four sectors, is the resurgence of hotel development in many urban centers. A prevailing trend for many of these three noted property types (urban apartments, CBD office, and hotels) is that many of these structures have been constructed on what had been existing surface parking lots. The result is a double positive for parking: reduction in supply with parking lot elimination, and new overflow generated demand from development constructed with inadequate on-site parking.
LESS MANDATED PARKING MEANS MORE DEMAND FOR EXISTING SPACES
While many in the industry agree that parking real estate is becoming more difficult to acquire, once acquired, reduction in parking space requirements may be making the development of parking real estate easier.
Often, one of the largest barriers impacting development is complying with zoning codes related to parking space requirements. In many cities, however, these rules are changing rapidly. Development zoning rules are loosening across the nation, and they are, in turn, creating even more demand for the limited remaining parking spaces left behind.
Miami Developers Near Transit are Parking Decision Makers
In October 2015, commissioners in the city of Miami passed an amendment to allow developers of any new building under 10,000 square feet near a transit corridor to decide how much parking they want to build. This exemption shift is a game changer for small surface lot owners, who might not have been able to build or sell their land as a viable project under the older zoning rules.
The city of Miami has also completely waived parking requirements in its densest CBD areas within 1,000 feet of a Metromover or Metrorail station. Some major residential condominium projects have taken advantage of this waiver and are building without a single space of on-site parking.
Land Size, Shape Often Determine Parking Feasibility
Most developers admit that figuring out how much parking to build alongside a residential project can be an art form. The decision often depends on the size and shape of the land. One downtown Miami developer is completing a 40-story structure with 352 units on a slender lot, measuring only 22,000 square feet. The developer recently disclosed that the only way the project was feasible was constructing the project without parking.
Close by, the cities of Miami Beach and Coral Gables also have similar exceptions, where small buildings under a certain square footage are exempt from typical parking requirements.
These zoning changes are happening now. In city council meetings across the nation, it’s common to have discussions about overhauling or totally eliminating outdated parking requirements. Time will tell if these trends benefit the parking real estate market as an investment class.
Lance Miller, CPP, is co-founder of JNL Parking. Email him at email@example.com. Ted Anglyn, CRE, MAI, CCIM, is founder of Parking Property Advisors and an NPA Parking Consultants Council member. Email him at firstname.lastname@example.org.
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