Home Equity Hits Record $8.1T For US Owners

(Source: pymnts.com)  

Posted on June 27, 2021

U.S. homeowners have a staggering $8.1 trillion in untapped equity in their properties, according to data service Black Knight Inc., but despite all that equity and a strong economy, banks are reluctant to write home equity loans, Bloomberg reports.

“Many banks are still wary of the risks of making home-equity lines of credit,” Bloomberg quoted Keith Gumbinger, vice president at mortgage-information company HSH.com, as having said. “For both banks and borrowers, cash-out refinancing can offer a very viable alternative for accessing the growing equity in their homes.”

Bloomberg cited data from Informa Financial Intelligence indicating that demand for home equity lines of credit, or Helocs, has fallen sharply since spiking in early 2020 as the pandemic took hold.

The attraction of Helocs for homeowners is powerful: they often offer rates better rates and higher limits than easily-obtained credit cards. For banks, however, they carry an extra measure of risk because if housing values fall at the same time borrowers — or in a worst-case scenario, foreclosing financial institutions — need to sell homes to pay bills, first mortgages are in front of banks that issued Helocs in lines of creditors.

“A lot of lenders even before the pandemic hit were kind of reluctant to be in that second-lien position,” Tendayi Kapfidze, chief economist at LendingTree, told Bloomberg. “And then certainly when the pandemic hit, that became a very significant risk factor that many lenders didn’t want to be exposed to.”

Among major banks cited by Bloomberg, Bank of America is providing Helocs, but J.P. Morgan Chase & Co. and Wells Fargo aren't.

Many homeowners are turning to an alternative to Helocs through which they replace mortgages altogether and, in the process, withdraw what can be very significant sums of cash. Often called "cash-out" financing, the process offers homeowners the benefit of better interest rates in many cases because lenders are taking on less risk.

How managers should deal with the flood of vacation requests coming this summer

(Sources: theladders.com, fastcompany.com)  

June 24, 2021
Jared Lindzon

Workers desperately need a break and given recent economic trends, employers need to be very careful in how they handle time-off requests in the coming months.

The summer of 2021 is likely to see a huge spike in PTO requests as a result of a number of concurrent trends stemming from the pandemic. In the past year employees requested less time off, worked longer hours, and reported higher rates of stress and burnout. Now they want a breather.

According to a study conducted by the Society for Human Resource Management (SHRM), 41% of employed Americans feel burned out from their work, and 48% feel mentally and physically exhausted at the end of the workday. Another study conducted by Robert Half found that a quarter of workers forfeited paid time off in 2020, and a third intend to take three weeks or more of vacation time in 2021.

At the same time, however, now is a particularly challenging period for employers to find themselves shorthanded. As the economy gradually reopens, organizations are looking to the second half of 2021 to make up for lost time and lost revenue. To make matters even more difficult, according to a study conducted by Microsoft, 40% of workers are considering leaving their employer this year; organizations that ignore their employees’ needs could find themselves even further understaffed as a result.

“If you tell people ‘I can’t afford for any of you to leave,’ you run the risk of all of them leaving, because they burn out,” says Johnny C. Taylor Jr., president and CEO of SHRM.

According to another SHRM study, however, 74% of employers haven’t made any changes to their PTO policies in response to COVID-19. Of those who did, 34% are allowing staff to carry their vacation time over to next year and 16% are paying staff to void some of their vacation days.

“[During the pandemic] we were hearing about layoffs and furloughs, people were fearful of asking for time off, because the unemployment rate topped 15%, so people were like, ‘This is not the time to request PTO,’” Taylor says. “We saw employees not taking it, employers naively believing because you were working from home you wouldn’t need a vacation, and that created a perfect storm.”

Here’s how managers and employers can best handle the wave of PTO requests that is likely heading their way.

Seasonal staffing challenges are here already

Taylor says that this period of staffing shortages and paid time off is not unlike the holiday season, during which many industries struggle to balance an increase in holiday-related PTO requests and an increase in holiday-related demand.

“We know how to labor plan during the holiday surges,” he says. “Retailers know they need more employees at a time when a lot of people don’t want to work, which is the holiday season, so what do we need to put in place to fill those positions and make sure the business keeps running? It’s the same concept. . . . You need to sit down and be methodical, and approach it like you would any other part of your business.”

Use temporary staff to help fill in the gaps

Just as retailers utilize staffing agencies to hire temporary employees around the holiday season, employers should consider exploring similar temporary staffing solutions for managing employee PTO requests in the coming months.

“The gig economy could boom even more over the next 6 to 12 months, because it’s a way to offset people taking vacation at a lower cost than hiring full-time employees,” says Dan Schawbel, managing partner of Workplace Intelligence. “The big benefit is it allows you to scale quickly without too much cost in order to meet business needs.”

However, Schawbel warns against leaning too heavily on summer interns to replace vacationing staff members. “You can’t just throw an intern into every position in the organization to let people take a vacation,” he says. “I think in some ways you’ll be better off to offset using a gig worker with more experience who can more readily and quickly take over a job temporarily or add support without much training.”

Automate as much as possible

This period of staffing instability could also be a good time for organizations to consider a digital transformation effort. Automating certain internal processes can make it easier for staff to leave without causing as much of a disruption, and to get up to speed upon their return.

“The right answer is not asking people to work more, or take less time off, it’s making it easier for them to do more in a shorter amount of time,” argues Zoe Clelland, vice president of product and experience at Nintex, a workflow automation solution.

Clelland explains that automation tools can be used to cover less difficult tasks and direct requests and information around the absent staff member for more difficult ones. Similar to the way an automated out-of-office email reply typically provides the contact information of another team member who’s covering for their absent colleague, automation tools can forward requests and workflow processes to the right people.

“That tooling allows you to delegate, which means instead of it pinging you and asking you [while you’re on vacation], it knows who to go to, and if it doesn’t get an answer, it knows to ask your manager, so there is no loss of information or communication there,” she says.

Clelland adds that such tools can also help those returning from leave get up to speed more quickly. “When I come back, I want to know what got approved; I want to know what got rejected; I want to know who did it; what happened, without having to talk to 20 different people,” she says. “The best part of coming back into an automated workplace after PTO is that there’s documentation of everything that happened.”

Offer incentives strategically

According to the SHRM study, employers who are making changes to their PTO policies in response to an anticipated increase in demand are offering a number of incentives to keep staff from taking time off all at once. Taylor warns, however, that if they’re not careful, some incentive programs—such as buying back vacation days or letting staff carry them over to the next year—could lead to even higher rates of burnout.

“I need to give some caution there: Company leaders and HR professionals know there’s a cost to a workforce that doesn’t take a real vacation in more than a year,” he says. “Be careful with your plans. If you tell people ‘I’ll pay you,’ and someone needs the money and works through, you’ll see productivity and morale reduced, because the person burns out.”

Instead of creating incentive programs that discourage staff from taking any time off, Taylor says employers should work with their staff to craft policy changes that allow for some vacation time in the immediate future.

“It’s really important to clarify with employees how much time in advance you need to put in a request, what’s the maximum number of consecutive days, how many in a team can be off at once, those sorts of guidelines,” he says. “That way they understand this isn’t done to keep you from taking a holiday—we understand the need for you to have that—but we also need to run a business.”

Taylor explains that such guidelines, in conjunction with policies for buying back or rolling over leftover vacation days, will encourage staff to limit their holiday plans to the maximum amount of time off that’s necessary, rather than the maximum amount of time off that’s available.

​​​​​​​Virginia's First 3D-Printed Home Under Construction Amid "Hyperinflating" Housing Market

(Source: zerohedge.com) 

BY TYLER DURDEN

SATURDAY, JUN 26, 2021 - 11:15 PM

Last month, we noted "Screw Lumber, Just 3D-Print Your Next Home," which is precisely what one builder did in Virginia.

According to local news NBC12, history was made Thursday when the first house in the state, located in South Richmond, was constructed with a 3-D printer.

"It's a home where your wall are made out of concrete instead of wood that's it," said Zachary Manngeimer, CEO of Alquist, a 3D printing construction firm from Iowa City.

Printing walls out of concrete instead of stick building with lumber is a relief for homebuilders and homeowners. This year alone, a new single-family home cost had risen at least $36,000 because of soaring lumber prices. The good news today is lumber prices are declining but remain well above pre-COVID levels.

"It's mixed in a mixing bowl and from there it goes through a tube into a printer head and that printer head is programmed to go around and print the wall system," said Chris Thompson, Director of Virginia Housing.

To print the 1,550-square-foot home with three bedrooms and two baths will take approximately 15 hours and requires less labor and fewer materials. The contractor on the project said the home is no different than any other average home.

"It's the same plumbing, same electrical, same HVAC, and same roof structure. All of that is the same," said Manngeimer.

Manngeimer added: "The housing prices have been out of control for decades and the pandemic has only made it worse. We think this technology can drop the cost make it more efficient and also help families customize a home to fit their lifestyle in ways they may not have been able to do before."

This comes as veteran housing analyst Ivy Zelman said she saw "hyperinflation" in the US housing "ecosystem" fraught with labor and materials bottlenecks.

Zelman's warning comes as investors are closely watching whether a broad surge in inflation as the economy recovers from pandemic lockdowns will prove to be transitory. At least it validates one part of a recent Bank of America warning which said that the US is facing "hyperinflation" if transitory.

Currently, Florida and Arizona are two other states with companies printing homes. We've noted this phenomenon is occurring in other parts of the world.

While the Federal Reserve and federal government continue to allow home prices to hyperinflate to well beyond bubble levels, making homeownership unaffordable for many, companies are innovating how materials and new technologies can create cheaper homes. The only issue now is finding buildable land.

An inflation storm is coming for the U.S. housing market

(Source: marketwatch.com)  

First Published: June 11, 2021 at 9:57 a.m. ET

Last Updated: July 13, 2021 at 10:04 a.m. ET

By Jacob Passy

Some economists suggest the government may be misunderstanding the size of the problem

Fast-rising housing costs have helped cause the largest increase in inflation since 2008. But the way that government statisticians track the price of consumer goods may be missing just how explosive home-price growth really has been in recent months.

The cost of shelter rose by 0.5% between May and June, according to the latest edition of the monthly consumer price index released Tuesday by the Bureau of Labor Statistics. Compared with last year, however, shelter costs were up 2.6%.

Altogether, the rise in housing prices accounted for roughly a fifth of the overall increase in inflation in June, a reflection of how heavily government economists weight this spending category.

But much of that increase was actually driven by the rising cost of hotels and motel stays, which are factored into the overall shelter figure. Between May and June, the cost of a hotel room increased nearly 8%. Comparatively, housing costs for renters and homeowners rose 0.2% and 0.3% respectively, per the government’s inflation measure.

If those figures seem off based on your own experience of buying a home or signing a new lease as of late, it’s not a surprise. Not everyone agrees on the rate of house-price growth.

The latest edition of the consumer price index indicated housing prices have risen 2.6% over the past year, while other reports suggest home prices are up more than 13%.

Other data suggested a much faster pace of home price appreciation and rental growth, well in excess of that level.

The most recent report from the Case-Shiller Home Price Index for April showed that home prices were up 14.6% nationally, which marked the highest increase in the more than 30 years of S&P CoreLogic Case-Shiller data.

So how does the CPI calculate housing? First, housing units themselves are not included the CPI market basket.

Second, rental data to establish how prices are changing are collected every six months. The calculations for most other CPI items are collected monthly or bimonthly.

“Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items,” the Bureau of Labor Statistics says. “Spending to purchase and improve houses and other housing units is investment and not consumption.”

“The cost of shelter for renter-occupied housing is rent. For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes,” the bureau adds.

The government pollsters ask homeowners: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

And they ask renters: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”

Housing isn’t like other goods

“The rate of house price appreciation is not akin to inflation,” said Mark Fleming, chief economist at title insurance company First American Financial Services FAF.

For a start, housing is a very basic necessity. “Demand for shelter doesn’t go away — it just moves around,” Fleming said. In other words, if the price of airfares surges 2.7%, as it did over the past month, families could decide against going on that summer getaway.

That choice isn’t so simple when it comes to housing. As the cost of shelter increases it can have a “cascading effect on extremely low-income renters,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition.

Some 9.2 million ‘extremely low-income’ renters are spending more than a third of their income on shelter-related expenses 
    — Andrew Aurand, vice president for research at the National Low Income Housing Coalition

Research from Aurand’s organization has shown that more than 9.2 million “extremely low-income” renters are cost burdened by their housing, meaning they spent more than a third of their income on shelter-related expenses. Many of these households spend upwards of 50% on housing, leaving little money behind for other purchases.

The alternative for these households would be losing the roof over their heads. In recent years, that has become the reality for many Americans. A 2019 study released by the Trump administration estimated that more than 500,000 people sleep outdoors each night across the country, while many more couch surf or utilize shelters for unhoused people.

Meanwhile, for people who own their homes, buying a property isn’t the same as buying, say, a banana. Owning that banana won’t benefit you financially in the long-run, whereas with a house you can expect to see its value increase and to profit off that. But a home isn’t a pure investment asset like a stock — it’s a mix of both.

Home prices can rise both because the actual structure itself may be worth more — thanks to the rising cost of labor and lumber — but also because people see value in it as a capital investment.

As a result, there can be a mismatch in the way economists or government statistician view rising home prices, and what that means to a consumer.

“In a market environment where prices are rising so quickly to buy a home the economist would say that’s the increase in the price of the capital good,” said Robert Dietz, chief economist at the National Association of Home Builders. “But to the buyer, it represents a higher cost of living.”

Why housing inflation is different

People experience inflation vis-à-vis housing differently to most other products, and that makes it a challenging to measure.

For the typical homeowner, their housing costs likely haven’t changed too much over the past year.

“If you have a fixed mortgage, on your home, year over year, how much does your cost of living in that home change? Not very much,” Fleming said. “The only things that change year over year are your escrows for taxes and insurance.”

Even with renters, the price of housing doesn’t shift higher or lower from month to month. That’s why the Bureau of Labor Statistics collects housing data more infrequently than most other items in the CPI basket of goods.

For renters and buyers, you encounter the changing cost when something about your living arrangement changed: When you move to a new home, sign a new lease or refinance your mortgage.

But Americans do need to know how much housing costs are rising or falling — not the least of which because residential real-estate makes up such a huge portion of the nation’s economy.

The government’s Consumer Price Index calculates the “imputed rent” — essentially the amount a homeowner is paying for their housing rather than paying a landlord.

If it did not do so, GDP would actually fall, Dietz said, “because money that would be a rental payment in the marketplace paid by a renter suddenly disappears.”

To bridge this challenge, the government relies on survey data to produce its estimates of housing costs for renters and homeowners. In renters’ cases, they are simply asked how much they pay for housing.

But owners aren’t asked what their mortgage payment is — after all, not everyone has a mortgage. Instead, that’s why they are asked to estimate how much they would be able to charge for rent to lease out their current home.

Government statisticians survey the same cohort of Americans periodically to produce their findings and track changes over time to estimate housing costs.

“Inflation and [changes in] housing prices have generally been matched up,” said Jonathan Needell, President and Chief Investment Officer of KIMC, a private real-estate investment company. He added that rising housing prices has “exceeded inflation in some circumstances.”

Some researchers have argued, however, that this approach can also understate and/or be slow to identify true inflation occurring in the housing market.

A new analysis from Fannie Mae FNMA, -0.74% showed that there is typically a lag between when home prices are actually rising, and when that price growth is reflected in inflation reports like the consumer price index.

The role played by COVID-19

The shifts in housing preferences and needs caused by the COVID-19 pandemic has also complicated our ability to gauge the effect of inflation in the housing market.

Wealthier Americans, many of whom suddenly found themselves able to work remotely, chose to move away from major cities into larger and cheaper homes in the suburbs, often saving money in the process. As a result, rental rates declined in pricier neighborhoods.

But in more affordable areas, rents actually increased. Americans who lost their jobs because of the pandemic rushed to find cheaper housing, pushing rents higher for the least expensive apartments and homes in the suburbs.

Those effects are beginning to dissipate, but will continue to weigh on official measures like the consumer price index given the time lags that occur.

So is housing quickly becoming more expensive? The answer, economists agree, is yes. First American Financial Services has its own measure, the Real House Price Index, which compares nominal-price gains with Americans’ ability to afford to purchase a property based on the prevailing interest rates and household income.

For a period of time between 2018 and the beginning of 2020, the Real House Price Index was falling, because Americans’ buying power was rising faster than home prices, Fleming said. That’s not the case anymore.

‘Deflation has turned into inflation, not because interest rates have gone up — they’ve only gone up a little bit — but because house prices are just crazy.’

    — Mark Fleming, chief economist at First American Financial Services

The reason home prices are rising so fast is fairly simple. After the Great Recession, home-building activity all but drew to a standstill as the construction industry worked to recover.

As a result, the construction of new homes did not keep pace with population growth and the formation of new households.

That left the housing market with a serious shortage of homes, just as millennials have begun getting married and having kids — traditional hallmarks of home-buying interest.

With the pandemic, the shift to remote working and low interest rates have only exacerbated things.

The primary solution to address runaway inflation in housing will be to build more homes — something that’s easier said than done. “Some of the challenges that we face on the supply side of the residential construction industry are going to persist well into 2022,” Dietz said.

Those challenges run the gamut from the high cost of lumber to the lack of skilled workers to complete construction projects. Another factor: Zoning regulations across the country prevent the construction of more dense housing in many cities, effectively driving up home prices and rents in the process.

Finally, new-home construction alone won’t make matters easier for all Americans. Because of the high costs, it’s easier for builders to construct more expensive homes, even though the demand and competition is strongest for entry-level properties.

Over time, that increased concentration in the bottom-tier of the housing market is driving up prices for those who can least afford it.

“There’s this argument that if you just build more supply to meet the demand, it will eventually help extremely low and very low-income renters,” Aurand said. “But the market is not going to adequately serve mostly extremely low-income renters.”

As bars, restaurants and shops reopen, we are seeing renewed demand for urban living.

(Source: savills.co.uk)  

Frances Clacy

Associate Director
Residential Research
14 MAY 2021

As bars, restaurants and shops reopen, we are seeing renewed demand for urban living. Buyers are planning for the new normal, a trend that is driving interest in prime regional towns and cities

The third national lockdown caused many people to become more aware of what they’ve been missing. Now, many buyers are looking for a home in a more vibrant location. As life begins to return to normal, and bars, shops and restaurants continue to reopen, the accessibility and convenience of being close to these amenities will once again be at the forefront of people’s minds when searching for their next home.

This phenomenon is also part of a longer-term trend where prime urban areas have tended to perform more strongly. Since the credit crunch, prime property in cities and towns have seen values surpass their previous 2007 peak by 22% and 15% respectively. Meanwhile, those in villages only reached this level again at the end of 2020. Across rural areas, prime prices still remain 8% below this previous high point.

Price movements by location to March 2021

	City	Town	Village	Rural
Quarterly growth	2.2%	2.4%	2.0%	2.2%
Annual growth	5.3%	4.8%	4.8%	5.7%
Five-year growth	13.6%	5.1%	6.6%	5.7%
Since 2007 peak	21.8%	14.8%	2.1%	-8.1%

Source: Savills prime regional index, Q1 2021

Attractive towns and cities that are well connected, have an array of good family housing stock and a choice of high-performing schools, appeal to a broader profile of affluent buyers. Young, wealthy families understandably see the appeal of urban living, while an increasing number of empty nesters are also looking for access to good restaurants, shops and leisure facilities. Indeed, more than half of those looking to downsize would prefer to move into a town, city or suburban area, a trend supported by the results of our buyer and seller survey conducted in November 2020.

Of the 1,040 towns and cities across the UK, there are only 37 where the average value of second-hand properties exceeded £500,000 in 2020, and that figure was above the average for the county in which they are located. Of those, only eight were higher than £750,000 and just three were above the £1 million mark: Virginia Water, Beaconsfield and Northwood.

The majority of such towns are located in the Home Counties, while well-established Cambridge, Oxford, St Albans and Winchester are the only cities to meet this criteria. Average prices of second-hand property comes in at between £500,000 and £600,000 for each, but the cost of a central terraced or semi-detached house will often exceed £1 million.

The Surrey towns of Ewell, Haslemere, Reigate and Leatherhead command premiums of less than 10% above the county average. Esher and Weybridge prices are around 30% above that mark.

Across Essex and Kent, the commuter hotspots of Brentwood and Tunbridge Wells have prices that are around 1.5 times more than the average across their respective counties. However, values in Sevenoaks are more than double.

Perhaps unsurprisingly, there’s only one location in the north – Wilmslow. But, reducing the price point to £400,000 brings in hotspots such as Altrincham, Knutsford and Ponteland.

Looking north of the border, the highest value town is St Andrews, with prices averaging at just below £400,000. Meanwhile, the town of Bearsden located immediately to the north west of Glasgow commands the highest premium in Scotland. Prices are more than double their county average.

Looking forward, the value on offer in village and rural areas will continue to support prices across these markets. Just as importantly, the value gap between London and prime regional towns and cities will also continue to drive additional demand here, particularly from those looking for more space.

 

39% of restaurants can't afford June rent, report finds

(Source: restaurantdive.com)  

Published June 23, 2021

By Alicia Kelso | Contributing Reporter

Dive Brief:

• Thirty-nine percent of restaurants were unable to cover their rent payment for the month of June, according to a report from Alignable. 
• This data marks an improvement from May's report, which showed that 49% of restaurant owners could not cover rent and a big jump from December, in which 61% couldn't pay rent. However, the number of businesses unable to pay rent in June increased in New York, Virginia, Arizona, North Carolina and Florida.
• Ongoing rent problems are exasperated by lack of revenue and traffic, as well as labor shortages and inflation, the research revealed. Fifty-five percent of small business owners say they can't fill necessary positions, marking a 5% increase from May.

Dive Insight:

Staffing shortages have caused restaurants to pull back on operating hours and reallocate funds to pay employees more than pre-pandemic levels, which is squeezing general and administrative expenses. Fifty-one percent of business owners said they're paying employees more than they did during COVID-19, according to Alignable's May rent report. Even with pay increases, restaurants continue to struggle filling positions.

Although foodservice and drinking establishments gained 186,000 jobs in May, according to the U.S. Bureau of Labor Statistics, restaurants are still 1.5 million — or 12% — below pre-pandemic employment levels. This is a particular challenge as the industry is showing strong signs of sales recovery. Yelp, for example, recorded its largest number of seated diners ever in May, surpassing pre-pandemic highs, while industry sales are just 2% below February 2020 levels.

The Alignable report shows that 71% of restaurant owners believe withholding the extra $300 unemployment benefit, as 25 states have already done, will correct labor shortages and likely expedite recovery.

Further, supply and inventory shortages are inflating operational costs. The cost of pepperoni, for example, has increased by 60% since April, while Starbucks has been short on offerings like oat milk, breakfast sandwiches and lemonade. Higher costs could also be deterring some customers. According to the Alignable report, 48% of small businesses said over half of their customers haven't returned.

Although restrictions are lifting and sales are returning, the labor and inflation pressures are hindering much of that progress. It also illustrates that relief funds dedicated to kick-starting the restaurant industry, including the Paycheck Protection Program and the Restaurant Revitalization Fund, have only gone so far, which is why the National Restaurant Association has encouraged states to establish their own restaurant grant funds. Landlords aren't likely to let restaurants keep kicking rent payments down the road after more than a year of doing so, and the industry could see more closures than it already has, even as the economy opens up.

Top Three Considerations for Leasing to Cannabis Businesses in Tri-State NY Area

(Source: wealthmanagement.com)  

Opportunities—and pitfalls—abound when it comes to leasing to cannabis businesses in the newly opening market of adult use marijuana in the New York metropolitan area and beyond.

Duncan Delano | Jun 17, 2021

In what is sure to be a watershed moment for the young cannabis industry, the market for legalized adult use marijuana will likely be opening in the tri-state area sometime this year. With the passage of legalization in New Jersey on Feb. 22 and New York on March 31, and with Connecticut (and Pennsylvania, Maryland, Delaware, and Rhode Island) not far behind, cannabis businesses will soon be sprouting up throughout the region, bringing with them billions of dollars in retail sales.

The U.S. legal cannabis market grew 46 percent from 2019 to 2020, reaching a record of $17.5 billion in sales last year. And that rapidly growing market is about to meet a population hub of over 50 million people. In New York and New Jersey each, sales are expected to be almost $1.5 billion by 2023, with estimates soaring year after year thereafter.

Moreover, retail sales represent only a small nugget of the market activity that this budding industry will bring to the region. The direct market will be made up of marijuana cultivators, manufacturers, processors, wholesalers, distributors, retailers and deliverers, and the full economic reach will extend to many other businesses, from packaging suppliers to security operations and countless service providers in between.  All of these players need space in which to operate.

It is no wonder, then, that the real estate industry is taking note, with some property owners intrigued by the potential in this new cannabis market. Indeed, due to the risks, regulatory requirements and inherent uncertainty discussed below, commercial landlords willing to lease to cannabis businesses may wield significant leverage, giving rise to rental premiums and other favorable lease terms.  Landlords should tread carefully, however, and keep in mind three primary considerations: (1) municipalities may not grant authorization to a cannabis business (and may ban them altogether); (2) the timing and requirements of cannabis license applications and approvals present unique challenges which must be addressed; and (3) marijuana’s illegality at the federal level creates various banking, insurance and legal issues. 

1. Check for municipal restrictions and proof of municipal approval

Depending on where a property is located, leasing to a cannabis business may not even be an option.  Under both the New York and New Jersey legalization legislation, municipalities can opt out of the cannabis craze by enacting ordinances prohibiting certain cannabis businesses from operating in their jurisdictions; New York municipalities may only prohibit retail and on-site consumption areas, whereas New Jersey municipalities may prohibit all cannabis businesses (though not in-town delivery).

In New Jersey, over 70 municipalities enacted a ban before Governor Phil Murphy signed the adult use bill into law on February 22, 2021, and while the law renders those bans ineffective, the municipalities have 180 days from the date the bill was signed to re-enact a ban (or forfeit the right to do so for another five years). In New York, municipalities have until the end of the year to enact any such ban.

Additionally, municipalities in both states may regulate the number and location of cannabis establishments, as well as impose additional licensing requirements. So, before landlords get too far down the road negotiating with an eager cannabis entrepreneur, they should check the locality’s tolerance for new pot businesses and require the prospective tenant to demonstrate municipal approval early in the process (or at least a likelihood of obtaining it).

2. Incorporate cannabis license requirements and timing into the lease

Obtaining a marijuana license requires an intensive and long application process, which can drag on for months or longer, especially if there are any application issues that must be corrected. In fact, nearly 150 medical marijuana license applications were held up for over a year due to litigation in New Jersey arising out of technical glitches, though this was under the prior, less robust regulatory scheme in place before passage of the new law.

Complicating matters, cannabis applicants in both New York and New Jersey must demonstrate the ability to control the designated site as a prerequisite to submitting the license application. This often means producing a signed lease (unless the applicant owns the property outright), long before the tenant is authorized to open for business—assuming the application is granted at all.

One noteworthy exception under the New York law is for “social and economic equity” applicants—women- and minority-owned businesses, low-income individuals, disabled veterans, distressed farmers and individuals with cannabis-related convictions—who need only demonstrate “a plan” for acquiring control of the premises. Stay tuned for how that exception gets fleshed out by the rules and regulations implementing the legislation.

Because the application process is long and uncertain, cannabis leases should be flexible and allow the landlord to terminate if the tenant’s cannabis license is denied or significantly delayed (or if it later gets revoked).  If the tenant wants the same option, the lease should make clear that the tenant’s early termination right only applies if the license is delayed or denied for reasons outside the tenant’s control, and include a termination fee (e.g., payment of unamortized brokerage commissions, tenant improvement allowances and rent abatements, perhaps plus a few months’ rent). Finally, with high land prices in the area, landlords should expect tenants to seek a partial or full rent abatement in the beginning of the term—to allow the tenant to seek the license rent-free (or at a low rental rate)—or a short initial term, as well as landlord’s cooperation during the application process.

Furthermore, the operational and regulatory complexities of a cannabis business will mean more complicated lease negotiations than what some landlords might be accustomed to, especially for industrial properties where leases often do not document operational matters in detail. In both New York and New Jersey, the license applicant must describe its business and operating plan, from water management to odor mitigation, and from hazardous material management to security procedures. These plans must be feasible in the designated premises, so commercial landlords and would-be cannabis tenants should work together to ensure that any water, electricity and security measures (among other operational elements) are acceptable and built into the lease, accounting for the increased tenant improvement funds and passing through to the tenant the increased operating expenses and additional insurance required to cover marijuana operations.

Landlords should also resist the temptation to accept percentage rent, because regulators are likely to view any profit-sharing arrangement as part ownership, subjecting the landlord to certain disclosures and vetting in the application process, as well as potential liability as an interest-holder in the business. Finally, landlords should be mindful of various boilerplate provisions in their form lease, such as “Landlord Access” clauses, which typically grant a landlord entry to the leased premises during working hours—such access to restricted areas by an unauthorized party may violate the terms of the license and jeopardize the tenant’s business.

3. Remember, cannabis is still illegal at the federal level (for now)

Of course, complex operations and regulations are not the only factors driving uncertainty in the cannabis industry; there is also the elephant in the room issue of federal law. Even though U.S. Senate Majority Leader Chuck Schumer recently tweeted that it is “long past time to end the federal prohibition on marijuana” and marijuana reform legislation is in the works in Congress—including laws to enable banking and insurance to fully enter the industry—at best we currently face an uncertain and rapidly changing regulatory environment for cannabis.

With marijuana still listed as a Schedule I drug under federal law, many legal issues remain present when leasing to cannabis businesses. First, if a landlord has a mortgage on the property, the mortgage loan documents likely have a clause prohibiting illegal activity on the property. Thus, leasing to a cannabis business could be a loan default—raising the risk that a lender may call the loan.

Second, there are also banking issues on the tenant side, because most banks will not service cannabis businesses due to federal banking regulations. The number of banks and credit unions willing to serve marijuana businesses has slowly increased, now totaling just over 630 nationwide, but that number is still woefully insufficient. Landlords should make this a tenant issue and require them to utilize a banking institution rather than accept cash for rent, given the security risk and administrative and other associated costs.

Similar to banking, federal insurance regulations scare away many carriers from insuring cannabis businesses or the properties on which they operate. Landlords and their insurance consultants should make sure that both the tenant’s and landlord’s policies provide proper and adequate coverage.

Finally, while the risk of a federal crackdown on marijuana businesses is small and getting smaller, a lease to a cannabis business may not be enforceable under federal law. While some federal courts have enforced contracts related to cannabis, others have not, leaving this area of law murky at best. The lease must therefore be carefully drafted to exclude or limit defenses claiming that the lease is illegal and therefore unenforceable. Furthermore, landlords should consider making state court—and not federal court—the exclusive venue for disputes in the forum selection clause.

In addition to the protections recommended above, landlords should make sure that their lease has strong indemnification protection from the tenant, specifically covering the risks particular to the industry.  Landlords should also require a full payment guaranty from a credit-worthy person, which guaranties are more common than in other commercial leasing areas. Rental premiums are also standard to justify the risks inherent in leasing to cannabis businesses. Perhaps most importantly, there is no replacement for a landlord thoroughly getting to know its prospective tenant and its business as part of the diligence process.

Despite the risks and uncertainties discussed above, there is no doubt that the adult use marijuana market offers immense opportunities for commercial landlords across the Northeast. It is certainly true that municipal requirements and approval, licensing requirements and timing, and illegality at the federal level present challenges, but they can be mitigated with the right due diligence and careful lease drafting. So, get a good lawyer.

Duncan Delano, Esq. is an associate in the real estate practice of Haynes and Boone LLP.

Existing home sales in May drop for fourth straight month as affordability squeezes buyers

(Source: cnbc.com) 

PUBLISHED TUE, JUN 22 2021

Diana Olick @IN/DIANAOLICK

KEY POINTS

• Sales of existing homes fell 0.9% in May to a seasonally adjusted annualized rate of 5.8 million units, according to the National Association of Realtors.
• The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020.
• Just 1.23 million homes were for sale at the end of May, a 20.6% drop from a year earlier.

Sales of existing homes in May dropped for the fourth straight month due to a very low supply of homes on the market.

Existing home sales fell 0.9% last month from April to a seasonally adjusted annualized rate of 5.8 million units, according to the National Association of Realtors. The 5.8 million rate is modestly above pre-pandemic levels.

Sales were 44.6% higher than a year earlier, but that comparison is skewed massively given that the housing market basically shut down for about two months at the start of the pandemic. The market then rebounded dramatically last summer and remained strong for all of last year.

"Sales are essentially returning towards pre-pandemic activity," Realtors chief economist Lawrence Yun said. "Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market."

Just 1.23 million homes were for sale at the end of May, a 20.6% drop from a year earlier. At the current sales pace, that represents a 2½-month supply.

Very low inventory amid high demand continues to fuel extraordinary price increases. The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020. That is not only the highest median price ever recorded but also the strongest annual appreciation ever.

Prices, however, are skewed by the mix of sales. The market is now tilted toward the upper end, where there is far more supply of homes for sale. For example, sales of homes priced at $100,000 to $250,00 dropped 2% from a year ago, while sales of homes priced $750,000 to $1 million jumped 178%.

Sales declined in every geographical area except in the Midwest, where home prices are lowest.

Mortgage rates fell pretty sharply in April, when the bulk of these contracts were signed. The average rate on the 30-year fixed ended March at 3.45%, and by the start of May the rate was heading below 3%, according to Mortgage News Daily. That would have given buyers some additional purchasing power, but the drop in rates was clearly not enough to offset fast-rising home prices.

Sales numbers for newly built homes — which are based on signed contracts, not closings — dropped 6% in April compared with March, according to the U.S. Census. Prices for those homes were up about 20% year over year.

"With four consecutive monthly declines in existing home sales, May's sales activity points to a potential moderation in growth for the remainder of 2021," said George Ratiu, senior economist at realtor.com. "As inflation is weighing on consumers' budgets and the Federal Reserve indicating it may pull back on its monetary easing sooner than anticipated, interest rates and high prices will keep affordability front-and-center for buyers."