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Commercial Weekly: Thriving Office Market in Secondary Cities

The demand for office space continues to remain in negative territory on the aggregate, as high to substantial transmission1 of the coronavirus delta variant continues to sustain a work-from-home approach, increasing the likelihood that a hybrid workstyle will become the dominant option in the future.

Since 2020 Q2 through September 19, 144 million square feet of office space has been released back to the market (negative net absorption), according to CoStar® market data. The office vacancy rate has increased to 12.4% (9.8% in 2020 Q1) and the average asking rent has declined year-over-year, at -0.4%. However, the headline figures mask the resiliency and recovery in secondary markets which are more numerous but which account for a lesser share of the office square footage that primary/gateway markets account for.

Gateway cities still struggling to recover lost office space, but secondary markets are thriving

As of September 10, New York, Washington D.C., Los Angeles, Chicago, San Francisco, Boston, Philadelphia, Denver, Seattle, and Northern New Jersey have suffered the largest declines in occupancy over a 12-month period. Twenty-six of 390 markets have lost over 1 million square feet in office occupancy on a net basis over the past 12 months ending September 19.

However, secondary markets are experiencing rising occupancy, with the largest increases in Palm Beach, Durham, Austin, Boise, Pensacola, Provo, Salt Lake City, New Haven, Miami, Fargo, San Antonio, and Oklahoma, each of which absorbed at least 500,000 square feet of office space.

Florida is emerging as the “it” state when it comes to the office market, with several markets having positive net absorption: Palm Beach, Pensacola, Miami, Fort Myers, Naples, Port St. Lucie, Sarasota, Daytona Beach, Orlando, Lakeland, Tampa, Melbourne, Punta Gorda, and Sebring.

Asking rents still down nationally, but rising in many smaller markets

With falling occupancy and rising office vacancy rates, asking rents remained below the level recorded one year ago, down by 0.4% as of September 19, 2021. The national average rent growth is being pulled down by the rent declines in the large markets of San Francisco (-4.4%), New York (-2.8%), Orange County (-2%), East Bay (-1.6%), Washington, D.C. (-1.2%) and Denver (-1.1%).

However, office rents are up on a year-over-year basis in 365 out of 380 metro areas tracked by CoStar®. Secondary/tertiary metro areas are experiencing high rent growth, led by Tucson, Arizona (6.2%), Providence, Rhode Island (6%), Naples, Florida (5.6%), and Fort Myers, Florida (5.3%), and Las Vegas (4.9%). 

Outlook: Office vacancy rates to remain above 10% in 2022

As of the second quarter of 2021, 144.3 million square feet of office space is under construction, equivalent to about 2% of the existing office space. If the space being constructed is mostly speculative, it will add to the already-elevated vacant inventory and will continue to depress rents in the primary markets until the office space is absorbed.

The largest construction projects are still happening in metro areas that are currently still suffering from declining occupancy: New York, Boston, Seattle, Washington D.C., San Jose, Dallas, Austin, and Los Angeles. In San Jose and Austin, the incoming supply amounts to about 6% of office space.

With the huge losses in office occupancy in these markets and the ongoing construction, office vacancy rates will likely remain above 10% in the next two years.

1 CDC reported as high to substantial transmission rates in 97% of counties as of the week of September 19, but that has gone down to 76% as of September 24. See

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Less Intense Multi-bidding and Fewer First-time Buyers in August 2021

The intense multi-bidding seen during the summer is simmering down, due in part to a seasonal decline, but also because first-time buyers are stepping away due to the lack of affordable homes. The share of first-time buyers declined to 29% in August, and the number of offers on homes that sold (closed) in August decreased to an average of 4 offers per home, according to the August REALTORS® Confidence Index report, a monthly national survey of transactions of REALTORS®.

Roughly four offers on average per home sold in August

In August, there were, on average, 3.8 offers on homes that sold during the month, down from 5.1 offers in May. But even as the number of offers has been declining, competition is still more intense than during the pre-pandemic period when the average number of offers on homes ranged from an average of 2 to 3 offers.

The charts below show the average number of offers on homes sold for selected states.1 At the state-level, one can see a more significant spike in the number of offers during the summer. The largest surge in home offers on average were in Michigan (8.7), New Jersey (8.1), and Arizona (8.8), followed by California (6.8), New York (6.3), Florida (6.3), and then by Texas (5.9), North Carolina (5.8), Massachusetts (5.6), Ohio (5.4), Pennsylvania (4.9), and Illinois (4.6).

As of August 2021, large population states with the highest average number of offers included Georgia (5.5), California (4.7), Colorado (4.5), Texas (4.2), and Florida (4.8).

Demand for vacation homes rises to 6% of market

The uptick in offers during the summer could be associated with the demand for people seeking second or vacation homes that offer the opportunity to work from home. Since July 2020, the share of vacation home sales has been trending at around 6%, compared to the average of 5.6% in 2020 and 5.2% in 2019. NAR’s 2021 Vacation Home Counties Report shows stronger demand for housing in vacation home counties compared to non-vacation home counties.

First-time buyer share declines to 29%

The share of first-time buyers to the total existing-home sales market declined to 29% in August 2021 from 33% in the same month in 2020. During the first eight months of 2021, the first-time buyer share averaged just 31% compared to 33% in 2020 and 32% in 2019 (pre-pandemic).

A variety of factors are causing buyers to step away: lack of affordable homes, especially at price points below $250,000 (single-family homes priced at $250,000 and below made up 29% of single-family existing-home sales in 2021 compared to 38% in 2020), lack of financial resources to meet the down payment requirements ($52,000 for a 10% down payment and 5% closing cost on a $350,000 home), and competition with cash buyers (cash sales accounted for 22% of existing-home sales compared to 18% in the same period one year ago). Among buyers, 25% also waived the appraisal contract contingency, which indicates that these buyers are not obtaining mortgage financing. In a tight market, sellers tend to prefer cash because they also need cash to make a down payment and to sell quickly so they can close quickly.

Outlook: Multi-bidding to cool as mortgage rates rise in 2022

The intense multi-bidding seen in the summer will likely continue to cool in the remaining months of 2021 and in 2022, due to rising mortgage rates. This cooling off is good for the long-term health of the market because the multi-bidding frenzy can only further erode home affordability and push buyers out of the market.

NAR forecasts the 30-year fixed mortgage rate to rise from 3% in 2021 to 3.6% in 2022, with the Federal Reserve Board likely to start cutting back on its purchases of mortgage-backed securities in 2022 to control inflation (5.3% in August) while achieving full employment (5.2% unemployment rate in August). Rising mortgage rates will lead to a small decrease in home sales and a modest increase in home prices. Home sales are expected to decrease slightly to 5.99 million in 2022 from 6 million in 2021 while the median existing-home sales price is expected to increase to just 4.4%, a modest increase compared to the current double-digit price growth.

1 These states typically have at least 25 respondents.

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Behind the Trees, a Brooklyn Artists’ Collective

Hidden by overgrown trees and flowering shrubs in need of a haircut, 70 Lefferts Place, in Brooklyn’s Clinton Hill, can be hard to find amid its neighboring rowhouses of brick and brownstone.

But pass through a rusting iron gate and beneath an unruly canopy of greenery, and you find yourself gawking up at a kind of secret artistic treehouse, a sprawling antebellum Italianate villa painted a jaunty yellow. This is the primary home of the AllInOne Collective, a vibrant community of artists and activists in their late 20s that was founded last year in the teeth of the pandemic.

Litchfield Villa, just inside Prospect Park near Fifth Street. While the Litchfield house was designed by the celebrated architect Alexander Jackson Davis, 70 Lefferts was probably adapted from an architectural pattern book.

the artists collective that now rents the entire building, is the brain child of Audrey Banks, a soft-spoken, hard-driving 27-year-old painter and performance artist who has been nurturing creative communities since she herself was still a child.

At 16, while attending Bard High School Early College in Manhattan, Ms. Banks founded the Teen Art Gallery, for which she sifted through thousands of submissions from around the country to curate exhibitions of her peers’ paintings, sculptures and other works in Manhattan gallery spaces.

After graduation from Carnegie Mellon University and stints in Boston and London (where she lived in a closet under the staircase of a warehouse that had been converted into a shared artists’ space), she returned to New York City to discover that the sense of creative community she had known as a teenager was far harder to come by, due primarily to cripplingly high real estate prices.

“We’re spread out in Astoria, Bushwick, Williamsburg — and now we’re priced out of Williamsburg,” Ms. Banks said. “So the city has lost the kinds of artistic communities it had in the 1900s” in neighborhoods like Greenwich Village, SoHo, TriBeCa and the East Village, where Ms. Banks grew up.

George Maciunas, considered by many the father of Manhattan’s SoHo arts district. In 1967, confronting artists’ eternal struggle to find affordable live-work space, Mr. Maciunas founded Fluxhouse Cooperative II in a dilapidated loft building at 80 Wooster Street, the first successful artists cooperative in SoHo. He went on to establish several other flourishing co-ops in the neighborhood, with artists scraping together funds to purchase cheap old commercial buildings in a scruffy area then known as Hell’s Hundred Acres.

“Breathe,” a song by Chobutta, a.k.a. Calvin Ramsay, an R&B musician and model who lives on the attic level and who outfitted the first-floor production studio from scratch with other AllInOne members.

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Residents of 432 Park Sue Developers For $125 Million, Citing Defects

The condo board at the supertall tower 432 Park Avenue, one of the most expensive addresses in the world, is suing the developers for $125 million in damages, citing multiple floods, faulty elevators, “intolerable” noise caused by building sway, and an electrical explosion in June — the second in three years — that knocked out power to residents, according to a lawsuit filed Thursday.

The nearly 1,400-foot-tall tower, designed by the firm of star architect Rafael Viñoly, first came under scrutiny in February, when The Times revealed many of the claims made in the new suit.

“This case presents one of the worst examples of sponsor malfeasance in the development of a luxury condominium in the history of New York City,” referring to the developers, CIM Group and Macklowe Properties, according to the complaint filed with New York State Supreme Court. The damages include the estimated cost to repair some 1,500 construction and design defects in common elements of the building that were identified by an engineering firm hired by the condo board; it does not include potential punitive damages, or separate lawsuits that individual residents might file.

The damages could rise, said Jonathan Adelsberg, a partner at Herrick Feinstein, which is representing the condo board, which residents took over from the sponsor in 2020.

$169 million for the penthouse. Since January, only one sale has closed.

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Monthly State Retail Sales, January 2019 to May 2021

Utilizing a composite model, the U.S. Census Bureau has released a new experimental Monthly State Retail Sales (MSRS) data product that combines monthly retail trade survey data, administrative data, and third-party data that features modeled state-level retail sales.

The MSRS represents year-over-year percent changes for each state and the District of Columbia for total retail sales with the exclusion of nonstore retailers as well as 11 North American Industry Classification System (NAICS) retail subsectors back to January 2019 and provides data by state and NAICS code. State-level data is not adjusted for seasonal variation, trading-day differences, moving holidays or price changes.

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What Are the Best Houseplants to Get You Through Winter?

It seemed like a simple question: What are a couple of standout houseplants to consider adopting before winter calls a halt to our outdoor plant engagement?

But when you ask the staff at the Steve’s Leaves Inc. greenhouses in Lewisville, Texas — where the collection includes somewhere “between 1,500 and 2,000” species and varieties — you can expect a good-humored answer.

“You’re asking us to choose among our favorite children?”

Yes, I am.

Even quantifying the exact number of choices was apparently not easy.

“We’re too busy to stop and count,” said Steve Rosenbaum, who started the business as a wholesale operation 45 years ago, then built a website and added retail mail-order about 10 years back. “We have so many hybrids we’re trialing that are as-yet unnamed, which probably adds many hundreds to the total.”

North America’s largest begonia collection.

And at home? He confesses to having about two dozen plants. “I try not to count them,” he said.

Plant One on Me. The hack is based on simple ceramic cones from Blumat, inserted into the soil surface and connected to tubing that draws from a nearby water vessel.

“One downside of self-watering is that I have always been an advocate of letting the soil surface dry before watering,” he said. “This system keeps it evenly moist instead — which fungus gnats like.” More tinkering is required.

As for me, I keep browsing. Sure, I love my big old Clivias, Sansevieria and fancy-leaf begonias. But like many people — especially with the pandemic’s imprint never far from mind — more company this winter sounds good. Whom shall I invite in?

A Way to Garden, and a book of the same name.

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August 2021 Existing-Home Sales Decline and Home Price Appreciation Slows

NAR released a summary of existing-home sales data showing that housing market activity this August declined 2.0% from July 2021. August’s existing-home sales reached a 5.88 million seasonally adjusted annual rate. August’s sales of existing homes weakened 1.5% from August 2020.

Line graph: U.S. Existing-Home Sales, August 2020 to August 2021

The national median existing-home price for all housing types rose to $356,700 in August, up 14.9% from a year ago. Home prices have continued to rise, and this marks the 114th consecutive month of year-over-year gains.

Bar chart: U.S. and Regional Median Sales Price of Existing-Home Sales, August 2021 and August 2020

Regionally, all four regions showed double-digit price growth from a year ago. The Northeast had the largest gain of 16.8%, followed by the South with an increase of 12.8%. The West showed an increase of 11.4%, and the Midwest had the smallest price gain of 10.5% from August 2020.

August’s inventory declined 1.5% from last month, standing at 1.29 million homes for sale, falling from the previous two months of gains. Compared with August of 2020, inventory levels are 13.4% lower. This would mark 27 straight months of year-over-year declines. It will take 2.6 months to move the current level of inventory at the current sales pace, well below the desired pace of 6 months.

Demand remains strong as home buyers are snatching listings quickly off the MLS and it takes approximately 17 days for a home to go from listing to a contract in the current housing market. A year ago, it took 22 days.

Bar chart: Inventory, August 2020 to August 2021

From July 2021, all four regions had declines in sales. The South had the biggest dip of 3.0%. The Northeast and the Midwest both had a fall of 1.4%, followed by the West with the smallest decline in sales of 0.8%.

From a year ago, all of the four regions weakened in sales. The Northeast region had the largest decline of 2.7%, followed by the Midwest with a dip of 2.1%. The West fell 1.6%, followed by the South with the smallest decline of 0.8%.

The South led all regions in percentage of national sales, accounting for 43.4% of the total, while the Northeast had the smallest share at 12.4%.

Bar chart: Regional Existing-Home Sales and Year-Over-Year Percent Change, August 2021 and August 2020

In August, single-family sales decreased 1.9% and condominiums sales were down 2.8% compared to last month. Single-family home sales were down 2.8%, while condominium sales were up 9.5% compared to a year ago. The median sales price of single-family homes rose to 15.6% at $363,800 from August 2020, while the median sales price of condominiums rose 10.8% at $302,800.

Line graph: Single-family vs Condo Sales Month-Over-Month Percent Change, February 2019 to August 2021
Line graph: Single-family vs Condo Price Year-Over-Year Percent Change, January 2019 to August 2021

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Instant Reaction: Mortgage Rates, September 23, 2021

“Mortgage rates showed little change this week after the Fed’s tapering announcement. According to the finance mortgage provider Freddie Mac, the 30-year fixed mortgage rate rose slightly to 2.88% from 2.86% the previous week. Nevertheless, rates are expected to rise further as the Fed will likely start reducing its bond purchases before the end of the year and raise interest rates by the middle of next year. NAR forecasts the 30-year fixed mortgage rate to reach 3.5% by mid-2022.

Even with this increase, consumers should bear in mind that these rates will still be historically low. The historical average of the 30-year fixed mortgage rates is 8%. For example, even though rates will be nearly 60 basis points higher, the monthly mortgage payment will only rise by roughly $100 from these higher rates.

Meanwhile, we are seeing that millennial renters are twice as likely to be squeezed than their homeowner counterparts. Forty-three percent of millennial renters spend more than 30% of their income on their rent. However, only 20% of millennial homeowners spend more than 30% of their income on owing a home. Furthermore, these millennial homeowners have already accumulated more than $100,000 in equity due to price appreciation as they have owned their home for the last 5 years, on average. With mortgage rates near historical lows, more millennials may be able to become homeowners and start building wealth.”

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