Author: admin

What Tighter Financial Conditions
Mean for Real Estate in 2023

Key Takeaways

Introduction

Asset prices surged in 2020 and 2021, as unprecedented levels of liquidity sloshed around the capital markets. Trillions of dollars in new fiscal stimulus—much of which was directly transferred to households—combined with unprecedented expansion of the Federal Reserve’s balance sheet and quantitative easing (QE) measures, which kept interest rates low. Pricing and development activity across the real estate markets felt brisk tailwinds during this period, making it a rewarding time to own and/or be a developer of real assets.

In 2022, however, the “easy money” party ended.

Inflation’s upside surprise caused the Federal Reserve to aggressively shift from quantitative easing (QE) to quantitative tightening (QT), and fiscal stimulus ran its course. The tide that lifted all boats suddenly and quickly receded back to sea.

In 2022 alone, the Fed raised its benchmark interest rate from 0.1% to 4.4%. Elsewhere in fixed income, the yield on the 10-year US Treasury bond more than doubled from 1.6% to 3.88%, high-yield spreads moved from 3.5% to 5.2%, and mortgage rates rose from 3.1% to 6.4%. This rapid tightening of financial conditions had a chilling effect on available capital and capital flows across real estate markets.

Looking ahead, we think capital is likely remain slow-moving until lenders and investors have a clearer understanding of where and when the interest rate cycle will peak. Barring a negative inflation surprise, we believe this peak will arrive by mid-year 2023, as we explain in the next section.

Inflation and the Fed – Our 2023 View

Inflation has been trending in the right direction for several months, which has allowed the Federal Reserve to be less aggressive with rate hikes. The 50 and 75 basis point rate increases of 2022 finally gave way to quarter point increase in the first meeting of 2023.

Supply chain disruptions that forced goods prices higher have largely faded. This has given way to falling costs for semiconductors, used cars, gas, appliances, and a range of other goods that contributed significantly to last summer’s inflation surge. Inflation in the manufacturing sector has also improved greatly, as measured by the prices-paid index and supplier delivery times (see left-hand side of chart below).

From a real estate perspective, housing is poised to bring inflation down in the coming months. Existing home sales have fallen -32% over the past 10 months, and home prices have also  come down from peak levels. In the rental markets, the supply of new apartments hit a 40-year high, and more than 500,000 new apartment units are expected to hit the market by the end of 2023 – the highest total since 1986. We’re already seeing rents falling from peaks in many major cities, but this improvement is yet to show up in headline inflation data since it works on a lag (see right-hand side of chart below).

Key Inflation Data Is Trending Lower

Goods inflation is clearly trending in the right direction, but the Fed is now fixated on ‘services’ inflation, which tends to have closer ties to the jobs market and wages. In comments following the Fed’s December  meeting, Chairman Powell said “the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers.” This imbalance puts upward pressure on wages, which in  turn influences companies to raise prices to make up for higher costs—a so-termed “wage-price spiral.”

Early signs of labor market weakness are apparent in high-profile layoffs being announced by technology companies. But small businesses (under 250 employees) continue to hire and raise wages, and there are  approximately 10 million open jobs in the US economy. The Fed likely wants to see the number of available jobs scale down before committing to pausing rates. The good news is that the ratio of open jobs to  available workers only needs to shrink to 2 million (from the current 4 million) to bring wage growth down to a rate compatible with the Fed’s 2% inflation target, according to Goldman Sachs. The jobs market is  currently trending in that direction:

The Gap Between Available Workers and Job Openings is Starting to Fall

By mid-year, we think the Federal Reserve is likely to find that fed funds rate is higher than CPI, and that job openings have fallen enough to cool wage inflation pressure. This scenario would make the peak of the interest rate cycle much easier for investors and market participants to forecast, which we think will allow capital to start flowing again as the defined cost (interest rates) will be a known quantity.

In our focal area of real estate investing – GMP life sciences facilities – supply has been affected by 2022’s capital crunch, but demand has remained firm. We think the coming peak in the interest rate cycle makes a strong case that capital will start to move again, positioning the sector for a solid rebound in 2023.

Our Outlook for GMP and Life Sciences Real Estate

Capital Hall Partners’ focus continues to be in Boston, which remains the undisputed center of industry for life sciences in the US.

Boston saw demand for lab and manufacturing space double from mid-2020 to mid-2021, with available supply notably lagging behind. Most of the top life sciences markets had a similar experience.

But even with demand falling in 2022, it remains above pre-pandemic levels and space remains limited, with vacancy below 6% when looking at the top life sciences markets in aggregate (which of course includes Boston):

Total Vacancy Remains Low as New Supply Has Been Steadily Absorbed by Growing Firms

The fact that demand for GMP and R&D life science space has remained elevated is a byproduct of the engine of innovation that characterizes the life sciences industry. As pointed out by JLL, “science doesn’t stop.”

No industry is recession-proof, but the sheer pace of innovation and discovery that is happening in life sciences today suggests that any slowdown is just a short-term correction creating pent-up demand within a firm long-term uptrend.  There is no hyperbole in stating that we’re living in a historic moment, where decades of research into cell and gene therapy are finally being converted into once unconceivable drug treatments and therapies.

It follows that revenue growth has soared over the last five years as the life sciences sector becomes larger. Of the five biggest years of annual revenue for biotech R&D in the last 20 years, three of them have  occurred in this period.

Boston and the greater Massachusetts market has absorbed much of this growth, as you can see in the charts below:

Massachusetts Remains the Leader in Life Sciences Growth

Pipeline summary from JLL

From a real estate supply standpoint, tight financial conditions hit the sector in 2022, and we saw a notable stall in the GMP manufacturing segment. But it’s worth noting that some of the pullback started to occur before the Fed started to get aggressive with rate hikes. As the cost of capital went up over the course of the year, projects stalled even more. In our view, this only exacerbated an already existing supply-demand imbalance with pent-up demand growing.

Capital flows played a role in the supply slowdown as well, with VC funding falling -38% in 2022 from peak 2021 levels. But some context is important here, given that 2021 was the high-water mark for VC funding.  As seen in the chart below, though venture capital funding showed a marked decrease from 2021 levels, it was still higher than 2020:

Cumulative VC Raised by U.S. Life Sciences Companies

In 2023, capital constraints could ease as the interest rate peak becomes clear, but we could also see major pharmaceutical companies and established biotechnology companies become active in the partnership and acquisitions space for the foreseeable future. Start-up valuations are attractive, and fresh injections of capital are not as easily procured as they have been in years past. Large biopharmas have massive amounts of cash on balance sheets, and investment opportunities are plentiful in the early-stage market.

From JLL: “For the first time, many early-stage tenants in the market have move-in-ready space that requires little capex, a key consideration as many boards and investors are preaching cash preservation in a tight  funding environment. The upshot is these spaces are highly sought-after short-term solutions in the market and have seen a good deal of leasing activity at good rents.”

Conclusion

The demand for drug treatments and therapies that help us live longer, healthier lives is inelastic. Weak economic growth and tight capital may slow it down from time to time, but the desire to innovate and bring therapies to market is far too strong for it to be stopped.

The life sciences sector is poised for tremendous growth for the foreseeable future. Over 50% of all healthcare spending in the US is driven by those aged 55 and older, a cohort that currently makes up 30% of the population is expected to grow from 96 million today to around 110 million in 2030. A rapidly growing pool of consumers means demand for novel therapies, innovative new modalities and increased adoption of advanced technologies will continue to drive investment over the long-term. With growing demand comes the need for more  biomanufacturing GMP and R&D life science space.

Capital Hall Partners continues to move forward with development of GMP assets we currently own, and in 2023 we are looking to expand our pipeline of future investments in both GMP and industrial facilities.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, please contact us today at info@caphall.com.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

Where Medical Breakthroughs are Made

A few years ago, most investors weren’t aware of the scale and speed of innovation in the Life Sciences sector. Many did not even know what “Life Sciences” referred to.

Things have changed.

Once-unfathomable breakthroughs in genome sequencing have fundamentally altered the trajectory of the Life Sciences industry, and have arguably changed the course of human history. There have been enormous leaps in understanding our human genetic makeup alongside massive gains in computing power technology. These leaps—combined with robust investment in Life Science R&D, company start-ups, and construction of laboratory/bio-manufacturing space—have ushered-in incredible advances in therapy development and in the treatment and cure of disease. We are living in this era now.

In particular, the arrival of near-instant, commercially-scaled genome sequencing has revolutionized the field. Advances in genome sequencing have been compared to the invention of the microscope, which of course represents another moment in history that changed medicine, healthcare, and science as we know it. For those wondering how exactly the Covid-19 vaccine was delivered to the market in record time with such high efficacy, the answer absolutely starts with genome sequencing.

The entire healthcare system is being reshaped as a result of these innovations and investments. Within the broad healthcare sector, biotechnology represents the fasting growing vertical, with investment increasing by 56.6% year-over-year. Drug and pharmaceutical venture capital is a close second, with investment growing 50.2% year-over-year.

Capital Hall Partners is active in the space, and we’re grateful to our investors who have joined us in pursuing these opportunities. Our firm is currently engaged in developing R&D labs and biotech/pharmaceutical manufacturing facilities (referred to as Good Manufacturing Process, cGMP) in the Greater Boston area. We currently have over 2 million square feet of Life Science development underway ranging from high-rise R&D labs to cGMP bio-manufacturing facilities. These are exciting times.

We’re seeing over 3 million square feet of excess demand (where the expressed demand for space is greater than available supply) for cGMP facilities and over 4 million square feet of excess demand for Life Science R&D. Life science tenants seeking space in Cambridge are expected to have to wait nearly two years for available space, underscoring the unprecedented demand. Given that 14% of the U.S. pipeline of new drugs are being developed in Massachusetts—and given that Life Science companies want to develop small batch manufacturing plants near existing research facilities—it makes sense that demand is so robust – and expected to grow at exceptional rates.

Surging demand is spurring construction, redevelopment and conversion activity. That’s why Capital Hall Partners is building our Life Sciences team by hiring three senior executives and additional supporting staff.

We do not see this real estate activity as a one-off solely tied to the pandemic. There is increasing talk within the industry of the need to “on-shore” pharmaceutical supply chains and bring back domestic drug manufacturing capabilities. As this sentiment grows—which we’re confident it will—the implications for Life Science and bio-manufacturing real estate are likely to be profound, and long lasting.

As the broad economy embraces the “hybrid work” and remote work models, Life Science and biotech companies are far less able to conduct vital research and development from home. Scientists need to collaborate, and they need labs.

It follows that the concentration of Life Science investment volume as a percentage of total office volume reached a record high of 16.4% in 2020, as nearly $15 billion of fundraising activity and over $10 billion of closed real estate deals was recorded:

Life Science Volume Percentage

According to Newmark Research, “the lack of built and available lab inventory in a handful of top life science submarkets, such is Cambridge and South San Francisco, has accelerated the growth in pricing and rental rates in those markets, and Boston/Cambridge remains the tightest and most institutional life science market in the country, with high-water mark pricing reaching nearly $1,900 PSF. The San Francisco Bay Area and Seattle recorded high-water mark pricing in excess of $1,000 PSF.”

High Water Mark

It is also true that the Life Science ecosystem has never received the current levels of funding. Capital is flowing to key markets and shows little sign of abating. Healthcare venture capital funding in the U.S. reached $29.9 billion in 2020, representing a 36.1% increase year-over-year and a cycle high. Globally, life science, drug and medical device companies have raised over $103 million year to date in 2021 – up from $63 billion in 2019. An estimated $87 billion is being directed for life science real estate globally.

National Life Science Funding

For the Boston/Cambridge market, where Capital Hall Partners is positioned, fund flows have followed a similar pattern to what we’re seeing across the country:

Life Science VC Funding

In a world that has been beset by uncertainties over the past year and a half, there is plenty to be optimistic about, in our view. Record-paced investments, real estate growth, and company creation will undoubtedly lead to new therapies and cures for patients around the world, creating increasingly better health outcomes over time. Another critical but less often discussed upshot is purely economic—based on conservative estimates, 20 million new square feet of lab and biomanufacturing space will create demand for up to 40,000 net-new employees by 2024. What’s good for human health can also be good for the economy.

How Medical Breakthroughs are Made: Genome Sequencing

About 20 years ago, scientists had yet to map the complete human genome sequence, but they were desperate to succeed. The Human Genome Project (HGP) was their key.

The success of the HGP has transformed researchers’ ability to easily and quickly read the complete genetic codes of viruses, as well as genetic blueprints for humans, animals, plants, and microbes. Innovation has moved very quickly—gene sequencing that only 20 years ago cost $100,000 per human genome now cost about $600 per genome. And these costs are still falling.

In the public health realm, the efficiency and reduced cost of gene sequencing gave way to a big breakthrough in 2014, with the Ebola virus. Scientists from M.I.T. and Harvard were able to sequence samples of Ebola and use contrasting genetic codes to identify hidden pathways of transmission. This information would ultimately be deployed to slow the spread of the virus, in what is known as genetic surveillance.

More recently, Crispr—which is a technology driven by sequencing—has been giving scientists the potential to fix disease-causing mutations in our genomes. The possibility of analyzing a small amount of blood for DNA markers can open the door for cancer diagnoses, for instance, before symptoms ever appear. We are perhaps only years away from being able to identify a problematic mutation 20+ years in advance of it becoming a serious health issue. According to Harvard geneticist George Church, “one day sensors may be able to ‘sip the air’ so that a genomic app on our phone can tell us if a pathogen is lurking in the room.”

History-making breakthroughs in Covid-19 vaccine development also would not have been possible without gene sequencing. When the virus’s gene sequence was initially mapped and posted publicly, Moderna used the sequence to launch work on the first ever mRNA vaccine. Pharmaceutical companies normally need virus samples to begin tackling the complex problem of developing a vaccine. With gene sequencing, Moderna simply treated the disease as a software problem.

The ability to treat rare diseases is the current and future frontier of gene sequencing. Rapid advancements in computing power and data analytics have drastically reduced the cost of developing treatments, and by 2025 the FDA estimates that 10 to 20 new cell and gene therapy products will arrive each year. In Massachusetts specifically, the drug development pipeline covers a wide array of therapeutic areas:

Drug Development Areas

It is possible that gene sequencing will prove to be one of the most important innovations of this century. We may be fast-approaching a time when healthcare consists of a whole genome test, from an early age, that can inform personalized lifestyle and medical plans—customized for us based on our genetic strengths and weaknesses. This idea may seem like science-fiction, but it could just be a few years away.

The Greater Boston area is poised to be close to the center—if not the center—of future innovation and growth in this space. According to Newmark Research, “although Greater Boston’s Life Science market has not been immune to the impacts of the pandemic, fundamentals remain among the strongest in the country. Robust tenant demand, limited building availabilities, and high rents continue to characterize Cambridge, while the outer Boston suburbs continue to expand and capture excess demand.” Capital Hall Partners is excited to be a part of this transformational growth, and we plan to continue expanding our presence in the years ahead.

During this time of Thanksgiving, we wish all our friends, family and investors a peaceful and love-filled holiday. We are grateful for your trust and confidence, and we thank you for investing with us. Together, we are stakeholders in facilitating life-changing research, providing the space and facilities needed to develop medicines and cures for people around the world. We look forward to continued work in the months and years ahead.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or our work in Boston, please contact us today at info@caphall.com.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

Two Key Opportunities in
Commercial Real Estate Today

The investment landscape today looks materially different than it did before the pandemic, across many asset classes and industries. For its part, commercial real estate held up remarkably well. Prices fell far less than in the wake of the 2008 financial crisis, and the market has retraced losses considerably over the past year. Pension funds and private-equity firms are once again spending record sums on buildings.

To be fair, however, the commercial real estate market looks a lot like the broader U.S. economy: some areas of the market are thriving and charting strong growth forecasts, while other areas are struggling to claw back to pre-pandemic levels.

The prices of malls and hotels, for instance, are down significantly, and in cities, office vacancy rates are at elevated levels. Looking ahead, loan defaults and foreclosures in these areas are expected to increase as forbearance periods end, the government withdraws fiscal support over time, and as lenders eventually lose patience. The upshot is that losses should be lower than originally expected, and far from losses experienced in the 2008 financial crisis.

In this somewhat fragmented market, Capital Hall Partners is naturally shifting focus to the real estate opportunities with more robust medium- to long-term outlooks. There are two key areas—detailed below—we think will produce strong growth opportunities now and over the next few years, if not longer.

TREND #1
Life Sciences Office, Lab, and Bio-Manufacturing Space

The life-sciences sector has been a significant bright spot in commercial real estate over the last year. The pandemic brought global attention to the critical importance of innovation in life sciences, pharmaceutical drug discovery, and it accelerated the commercialization of gene-based therapies. During the early 1990’s, the biotech industry made revolutionary scientific break-throughs in understanding our genetic makeup and DNA. Today, those break-throughs are being used to develop gene-based therapies for the treatment of numerous human disease and illness.

Demand is on the rise. 131 life sciences companies went public via IPO in 2020, raising over $22 billion globally. This is roughly triple 2019 figures. Venture capital funding in the space also reached record levels at $22.5 billion, representing a 39% increase over 2019.

We know one of the biggest trends over the last year was in the shifting of work from offices to home. But scientists cannot develop drugs and therapies from home offices. They need physical lab space, with specialized designs, ventilation, and other key secure infrastructure measures.

Life Sciences Office, Lab, and Bio-Manufacturing Space

TREND #2
Logistics and Warehouses

In the first half of 2020—which was also in the throes of the pandemic—demand for big warehouses surged 51% (according to Colliers International). For sites 750,000 square feet or larger, net absorption came to 34.3 million square feet in the first six months of 2020, which is more than double the total amount recorded for all of 2019. The shift towards e-commerce and away from ‘just in time’ inventory management led many companies to scramble for warehouse spaces to use as logistics centers for processing, packaging, and shipping digital orders.

Amazon, of course, was at the center of this accelerated push. The company leased nearly 30 million square feet in the first half of 2020 alone, and was estimated to occupy some 100 million square feet across the U.S. by the end of last year. All told, Amazon has over 600 facilities in the U.S. alone and has been a huge driver of employment in the sector over the last decade:

Change in Employment Over the Past Decade

Investor interest is on the rise. More recently, foreign property investors—who once focused on urban markets, skyscrapers, and urban shopping corridors—are shifting their focus to suburban and urban warehouses and logistic centers for “last-mile” delivery of retail products. According to a report in the Wall Street Journal, a subsidiary of France’s AXA Investment Managers bought a majority stake in 27 U.S. logistics facilities from Cabot Properties for $875 million last December. Germany’s Allianz Real Estate announced it had purchased a 49% stake in a U.S. logistics portfolio in partnership with Crow Holdings, and the National Pension Service of Korea bought 23 warehouses last year in a $2 billion deal with Stockbridge Capital Group.

In our view, the surge of interest in warehouse/logistics space is not a one-time phenomenon. We see it as part of a secular shift in retail and other consumer-oriented businesses, with companies increasingly reaching customers online versus in-store. In other words, demand for warehousing and last-mile logistics space is only likely to increase in the years ahead.

Uncovering Opportunities in High-Demand Markets

Given the recent surge of demand for warehousing/logistics and life sciences real estate, more investors and developers are expected to enter the respective spaces. Blackstone Group, for example, recently agreed to pay $3.45 billion for a portfolio of buildings in Cambridge (where Capital Hall Partners has a presence), which followed a recapitalization of BioMed Realty for $14.6 billion. The firm is betting on lasting demand in life science clusters.

Even with increasing participation by institutional investors (and foreign investors) in the logistics and life sciences space, we believe secular economic trends in consumer retail and life science R&D/bio-manufacturing will continue to drive demand for both last-mile logistics and life science lab space higher in the years to come. Companies are increasingly shifting away from brick-and-mortar stores to the e-commerce/delivery/pick-up model, and the life sciences sector is at an all-time high for funding and is expected to continue to fuel growth in research, development and manufacturing.

Capital Hall Partners is actively pursuing investment opportunities in both warehousing/logistics and life sciences. We’re already developing two Life Sciences campuses in the Greater Boston Area, the Gateway Innovation Center and Brickyard @ Assembly project, and we will continue to pursue new opportunistic deals to meet our ESG investment philosophy standards.

Due to limited supply in both these areas of commercial real estate, more operators, developers and investors will enter the space. But we think it’s the established operators and developers— like Capital Hall Partners—who will have a clear advantage by possessing technical experience within the asset class. Our deep research, institutional experience, commitment to ESG and value-oriented approach will help us navigate new opportunities in a high-demand market.

To learn more about our projects or who have questions about our firm, please reach out to us at info@caphall.com. We’d be happy to talk with you.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or our work in Boston, please contact us today at info@caphall.com.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

Where Women Made History:
The Hotel Figueroa

Hotel Figueroa - Lobby

On August 26, 1920, the 19th amendment to the U.S. Constitution officially took effect. With its passage, women were granted the right to vote.

With all the challenges, difficulties and uncertainties that persisted throughout 2020, it was easy to overlook the incredible milestone the U.S. reached last year: 100 years of women’s suffrage.

The National Trust for Historic Preservation did not bypass this important opportunity to celebrate women’s place in American history. The organization launched a campaign called “Where Women Made History,” determined to find 1,000 places in the U.S. where women helped shape the country we are today.

​

Capital Hall Partners was honored to see the
Hotel Figueroa designated as one of the historic
places where women made history.

​

Hotel Figueroa - Sign

When the Hotel Figueroa opened in 1926, it was reported to be the largest project of its kind to be financed, owned and operated by women in the United States. Given that women had just won the right to vote six years earlier, the hotel became a de facto symbol for female empowerment. 95 years later, the Hotel Figueroa remains committed to celebrating women’s place in U.S. history.

Capital Hall Partners is humbled to be a part of preserving the hotel’s legacy, and we’re determined to push it forward.

The Hotel Figueroa’s Incredible History

In the 1920s, women could not simply stay at any hotel. Not only was it largely unsafe to travel alone, it could also be damaging to a woman’s reputation. In an effort to support working and traveling women, the YWCA began building female-only havens—including the Hotel Figueroa in 1926. According to an article in the Los Angeles Times, the hotel was "financed, built and operated by and for femininity," and served as a safe haven for women travelers.

The hotel itself was an incredible statement and accomplishment, and then there was Maude Bouldin. Ms. Bouldin was the country’s first-ever female hotel managing director, and under her leadership, the Hotel Figueroa quickly became a mecca for progressive, independent women—a safe place for women dedicated to advancing social, intellectual and artistic consciousness. Today, to honor her contributions and legacy, Maude Bouldin greets visitors in the lobby in a crimson painting by critically acclaimed artist Alison Van Pelt.

During and after Ms. Bouldin’s time serving as director, the hotel continued its mission of being a special place for women. In 1933, there was an exhibition in the lobby featuring "Women Painters of the West," and there were musical evenings on Fridays. In 1934, there was a lecture by world traveler and member of the Baha'i faith, Margarita Orlov, on the "New World Order."

The hotel maintained its social conscience and political image into the 1950s. Press conferences were often held in the lobby and in private rooms. Intellectuals gave speeches decrying racism, sexism and other social issues. Ownership changed hands in the years that followed, but the strong architectural elements of grandeur, safety and inclusiveness kept the hotel viable, relevant, and true to its mission.

When Capital Hall Partners entered a partnership in 2015 to purchase the Hotel Figueroa, the group was determined to revitalize not only the hotel’s interior and design, but also its deep connection to women in history. We decided to honor that unique history through art and socially conscious programs supporting women and an inclusive community. Today, the Hotel Figueroa is home to a large and extensive women-only art gallery, specifically celebrating L.A.-based women artists. We’re inspired every time we set foot in the building.

Hotel Figueroa - Guest Room

The Hotel Figueroa is truly a special place, and we are honored to be recognized by the National Trust in its celebration of 100 years of women’s suffrage. Our determination to protect the Hotel Figueroa’s place in women’s history has never been greater.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or our work in Boston, please contact us today at info@caphall.com.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

In the Throes of a Challenging Year,
Real Estate Offers Some Silver Linings

2020 has been a difficult year for nearly everyone in the world, and a devastating year for many. Our smarter and better angels are always looking for silver linings during a crisis. Capital Hall Partners sees a few in real estate.

We know many readers are pretty exhausted by the political cycle and the uncertainties surrounding the pandemic. Hopefully we can offer you a diversion, looking at a few areas of economic strength with constructive longer-term outlooks. In an effort to stay in our lane, we’ll focus on positive trends in real estate that we think readers should know about.

​

Economists have been increasingly referring to the U.S. economic recovery as “K-shaped.” Some areas of the economy—air travel, brick-and-mortar retail, small businesses, restaurants, hospitality, etc.—are stuck in down cycles and struggling to fully recover.

On the other side of the “K” are businesses thriving in the current environment—enterprise cloud, big tech, consumer staples, e-commerce, and a few key areas in real estate. We’ve been investing in one of the key areas: life sciences.

The life sciences industry has moved to the center of the global narrative in 2020, as companies race to develop effective treatments and vaccines. The industry has not been unscathed by the recession, but employment in life sciences has held up remarkably well relative to the broad economy. Biotech research and development employment has been particularly strong, up by 4.9% from a year ago and outpacing tech employment growth.

Life sciences is driving urban-core demand for office and lab space, boding well for commercial real estate investors in the sector.

US Life Sciences Total Nonfarm Employment

Venture capitalists are also taking note. In response to the pandemic, and because of better understanding of the longer-term threat of pandemics, the U.S. life sciences industry saw its largest quarterly total of venture capital investment in Q2 2020.

US Life Sciences Venture Capital Funding

The rolling annual total of life sciences venture capital investment hit a record $17.8 billion in Q2 2020. This surge in funding runs counter to U.S. venture capital investments in all other industries, which have been declining since mid-2019. Another major driver behind the surge in life sciences demand has been the billions of dollars funneled to major universities and research institutions for health-care research from the National Institutes of Health (NIH).

Top 20 Markets for 2019 NIH Funding

There’s a major silver lining here for commercial real estate investors in life sciences: venture capital and other funding growth has historically preceded employment gains by about year, signaling strong job gains for the industry in 2021.

This correlation between funding and employment provides a direct tailwind for Capital Hall Partners, since 54% of all venture capital investment has been to Boston-Cambridge and the San Francisco Bay Area. We’re developing two Life Sciences campuses in the Greater Boston Area, the Gateway Innovation Center and Brickyard @ Assembly project.

The Boston-Cambridge laboratory market remains tight, with a vacancy rate of just 4.9% in Q2 2020. In the Cambridge submarket alone, a 2.6% vacancy rate helped push average asking rents up by 12.4% since early 2019. As of Q2, nearly 110 tenants were seeking a total of 3.7 million square feet of lab space, up slightly from the beginning of 2020. Compared with a year ago, the number of tenants seeking space has grown by 83%, while total space required is down marginally.

More than 50 companies in the Boston-Cambridge market can apply their science and technology to COVID-related products, which has also created a marginal boost to demand. In the Greater Boston area, we expect more rent growth and extremely tight vacancy in the coming quarters and perhaps years.

We’re grateful to be positioned in what we see as a strong, valuable market with a focus on helping everyone live better, healthier lives.

Another outperforming area of real estate has been housing, which has an indirect effect on Capital Hall Partners’ current projects.

In a sense, housing has been the economic story of the third quarter. The sector declined in-line with the broader U.S. economy in the spring, but has since climbed back to pre-pandemic levels in terms of housing starts and construction.

Downstream effects of the housing boom have been evident in consumer spending on furniture, appliances, and home improvement, which has outperformed spending across most other sectors. Construction employment has recovered briskly. One familiar name in the space, Home Depot, underscores the sector’s strength: the company posted its best quarterly sales growth in nearly 20 years.

Interestingly, much of the new growth is being driven by millennials, who previously had been reluctant to enter the housing market as family formation lagged and as they favored renting. For the first time, millennials accounted for over 50% of new home loans.

Migration out of densely-populated cities is driving a significant portion of this housing strength, which we believe indirectly benefits our QOZ project in Tempe, Arizona—the HUB.

While the HUB in Tempe is an office building, it’s one story and outside of a dense urban area. In fact, it’s the type of market people are leaving dense cities like San Francisco and New York to pursue. The HUB is focused on positioning the property as an environmentally sustainable, Covid-19 safe and healthy building. The HUB will have many distinct competitive advantages to midrise or high-rise office buildings, due to the need to transfer employees to their workspace via elevators—the problem point for physical distancing and the lack of safe and healthy improvements such as air filtration, fresh air intake, touchless entry, lighting and plumbing.

We see tenants gravitating to single story and low-rise office buildings, and in response we are accelerating the buildout of certain tenant improvements such as painting the interior, adding restrooms, and placing the HVAC units complete with high air filtration—all typically done once a tenant has executed a lease. We have made a decision to make the space as “Move-in Ready” as possible, thus shortening the timeline that a tenant can locate in the space, begin paying rent and provide its workers a safe and healthy work environment.

Looking Ahead to 2021

Capital Hall Partners is taking a cautious and patient approach to what we see as a bifurcated real estate market: life sciences, logistics-oriented buildings, data centers, and industrial commercial real estate are holding up nicely. Meanwhile, we fully expect pricing adjustments to the downside in hotel, retail, high density (urban) multi-family, and dense urban office space.

For now, our goal is to focus on the core: the LA, Boston, and Phoenix markets with an emphasis on life sciences, “healthy office,” and industrial commercial real estate. And as ever, we will look for distressed situations where Capital Hall Partners can recapitalize and reposition existing buildings.

For readers and investors who want to learn more about our projects in Qualified Opportunity Zones, the terms of investment, or who have questions about how Qualified Opportunity Zones work, please reach out to us at info@caphall.com. We’d be happy to talk with you.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or our work in Boston, please contact us today at info@caphall.com.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

Rethink, Adapt, Evolve:
Real Estate Development in a Post-Covid Economy

The Covid-19 pandemic wreaked havoc on the U.S. and global economy, resulting in the steepest—and perhaps quickest—recession in history. As we write, the United States is by no means out-of-the-woods and many challenges still lie ahead. For the business and real estate community, however, many of these challenges are already here. The way we work, build, and do business are all poised for major changes. Now is the time for business leaders and developers to rethink, adapt, and evolve.

With respect to Capital Hall Partners’ current Qualified Opportunity Zone (QOZ) projects, we find ourselves in the very fortunate position of being able to adapt quickly to the new normal. Some of the critical ‘future-of-business’ trends currently underway play into our favor, serving as tailwinds—not headwinds—to the direction we are headed.

Two prime examples are in the Greater Boston Area, where we are developing the Gateway Innovation Center and Brickyard @ Assembly projects. There is serendipity in the fact that we are developing two Life Science campuses right now, given the profound spotlight currently shining on the Biotechnology and Life Science sectors. But the reality for us is that we saw major potential in the sector well before the first cases of Covid-19 appeared in the world, and we view the Greater Boston Area as the mecca for work in this critical field. As demand for scientific research and development rises in the wake of the pandemic, we believe this market will experience more job growth, more wage growth, and higher demand for housing, office, laboratory, and data center space.

Job Growth

We are very enthusiastic about having a foothold in this market. The Greater Boston area hosts the largest concentration of life sciences and biotech companies in the world, with blue-chip companies like Biogen, Pfizer, Sanofi-Aventis, and world-class medical campuses like Harvard Medical School and Brigham & Women’s Hospital all calling the Life Sciences Corridor home. Our Boston Gateway QOZ and Brickyard QOZ projects put us squarely in this thriving area—the Capital Hall Partners’ sites sit within a commercial planning area zoned for life science/lab, residential, and office (amenity retail), with density permitting development of 1.6 million square feet and 650,000 square feet, respectively.

Our Phoenix QOZ project, called the HUB, may appear at first glance to have greater challenges ahead. The HUB is a functionally obsolete warehouse being redeveloped into an office, which has a much different post-pandemic outlook than biotech office buildings or data centers. Many major companies (particularly in the tech sector) are rolling-out reconfigured work-from-home policies, giving employees greater flexibility and arguably reducing reliance on traditional office spaces.

Because the HUB is not a traditional office space, and because the pandemic arrived during an early phase of development, we essentially have a “blank canvas” to rethink, adapt, and evolve our design, addressing the needs of the moment. This blank canvas provides us with an exciting opportunity. We can build a de facto lab to pioneer new designs and layouts, to experiment and learn, and ultimately set a course for leading future projects.

Capital Hall Partners’ mission is to develop projects that are environmentally sustainable, socially responsible, and physically responsive. By staying true to this mission, the HUB is in a position to adapt quickly and effectively to the “new normal.”

Rethinking and Adapting The HUB

The HUB is a single-story building.  This is a key advantage because it reduces the complexities of sharing corporate healthcare policies with multiple companies, including screening, cleaning, and other common safe practices. There are no stairs or elevators that need to be adapted for physical distancing. The blank canvas also enables higher employee density without renovating or blocking off large areas of the floor plate. The expansive structural grid will create fewer obstacles in the workstation layout, providing the opportunity for more flexible work areas and corridors wide enough for two-way travel.

Social Distancing

We are currently working with designers and furniture manufacturers to configure the work areas to provide maximum densities without sacrificing separation. The openness of the building space allows us to develop a plan that prioritizes physical distancing. The HUB can be planned to address Desk Settings, Bench Settings, Collaborative Settings, Individual Work-Point Settings, and Neighborhoods without sacrificing employee density. Future flex spaces are designed to be converted, enhancing collaboration in a safe way. There is no need to install plexiglass dividers to address separation as the HUB will design and configure movable whiteboard spaces that are functional and amendable.

Social Distance

Disinfecting

With sanitizing and cleanliness two of the top priorities for individuals returning to work, we will encourage our tenants to plan, communicate, and enforce cleaning regimens to support services and employees. The HUB will incorporate touchless technology into future tenant improvements. This technology will include ingress/egress doors, doors into restrooms and other common areas, plumbing fixtures (sink faucets, toilets, urinals, and towel dispensers), and lighting and mechanical system controls. We are currently exploring the viability of nano-coatings that are anti-microbial, anti-viral, and anti-fungal. These coatings claim to reduce surface contamination and are self-cleaning.

Outdoor Workspaces

The ability to work and meet outdoors is a hallmark of the HUB, which features a covered 14,000-square foot outdoor workspace. Early research indicates the risk of community transmission outdoors is relatively low, particularly if physical distancing is being maintained.

The HUB’s outdoor workspace will be landscaped to create additional shade and a comfortable environment, providing tenants the ability to use this area for outdoor conferencing, teamwork, and collaboration.  The area is overlaid by photovoltaic panels that will generate electricity for the building and sell the balance back to the grid.

Outdoor Workspaces

Isolation

An unfortunate reality of the current moment is that most, if not all, office buildings will need to provide ‘isolation’ rooms for employees exhibiting symptoms or feeling ill. The HUB can accommodate these feature rooms equipped with materials conducive to disinfectant cleaning, as well as having special ventilation and/or negative air pressure to further reduce exposure to others in the area. Since the HUB is designed to accommodate individual packaged HVAC units, the ventilation can be planned for this specific use rather than an expensive adaptation.

HVAC Systems

According to the Centers for Disease Control, many viruses—including the novel coronavirus—tend to spread rapidly indoors through close personal contact, but also via circulation from building ventilation systems.

The design and engineering of HUB’s mechanical system will become important in establishing and maintaining a healthy building. One way to dilute airborne contaminants is to increase air exchanges and increase filtration. The HUB’s plan provides for several locations and sizes of individual package HVAC units, allowing for an increase in the fresh air intake. This feature, combined with the large roll-up doors, will help achieve this goal. The HVAC system is designed and engineered to incorporate a high level of filtration such as high MERV or HEPA filters.

The HUB is also designed with limited entry points. This layout was originally planned for safety and security, but can now be used to set up a thermal scanner before an employee enters the workspace. While the thermal scanner won’t be able to detect Covid-19, the non-contact scanner can detect fever-level body temperatures.

Finally, pandemic-related matters aside, the HUB has a distinct location advantage. Tempe is the strongest submarket in a Greater Phoenix market, which boasted record absorption of over 3 million square feet in Q3 2019, record construction numbers, and healthy pre-leasing activity. Since 2010, Greater Phoenix vacancy has dropped 40 percent, and the outlook for 2020 and beyond remains strong based on a large influx of companies moving into the market. Tempe maintains a vacancy rate of 4.9 percent, significantly ahead of the second lowest submarket (the Southeast Valley at 11.7 percent). Tempe also posted the largest asking rate increase quarter over quarter, according to a CBRE Q1 2020 report.

The HUB is in the center of five major freeways, one mile south of Arizona State University (named #1 in Innovation for five consecutive years), Tempe Town Lake, and the Mill Avenue Entertainment District. Four miles to the southeast is Sky Harbor International Airport, which ranked as America’s Second Friendliest Airport in 2019, the 44th busiest airport in the world, and 13th busiest in the United States. The confluence of these market and location strengths should benefit the HUB as the economy recovers.

Conclusion

The pandemic is reshaping business and society in many ways, but we would also argue that many of these changes were already well underway. Demand for data centers, multi-family housing, biotechnology breakthroughs, and environmentally sustainable, socially responsible, and physically responsive workspaces has been on the rise for some time. The pandemic is merely accelerating these trends.

The Capital Hall Partners’ approach fits neatly into this new normal. The pandemic has not forced us to alter our mission, and in fact has done just the opposite—it has confirmed we are on the right path, applying the right processes, and building in the right markets. The current environment is chock-full of opportunities and challenges, which in our view gives urgency of the need to rethink, adapt, and evolve.

For readers and investors who want to learn more about our projects in Qualified Opportunity Zones, the terms of investment, and/or who have questions about how Qualified Opportunity Zones work, please reach out to us at info@caphall.com. We’d be happy to talk with you.

 

Capital Hall Partners is a privately held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or how to invest, please contact us today at info@caphall.com or by calling 310-264-1504.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

A Land of Opportunity – The Greater Phoenix Area

2019 was a landmark year for Capital Hall Partners, marking our first full year of engagement in Qualified Opportunity Zones (QOZs) following the 2017 Tax Cuts and Jobs Act. We now have 5 active investments in the QOZ space: 3 in the Greater Boston Area and 2 in Phoenix. Our enthusiasm behind these projects could not be higher—we see Boston and Phoenix as two of the most exciting job creation hubs in the country.

Our latest QOZ investment is in Phoenix, where we are under contract to acquire a 100,000- square foot building aptly named PHXTECH. We are targeting an $8 million fundraise for the project with approximately $4 million raised to-date and a closing date of April 22, 2020. Please contact us directly at info@caphall.com for investment inquiries and for more detailed information.

The Greater Phoenix area is brimming with economic opportunity. Over the last 70+ years, the city has developed a diversified tech ecosystem, home to high-tech manufacturing, R&D, software companies and next-generation technologies. Tech hubs elsewhere in the country are generally known for exorbitant cost of living and restrictively high wages, but Phoenix stands out for having neither—being known instead for a deep talent pool, low labor costs, and some of the best housing affordability in the country.

A Land of Opportunity

Demographics also play a key role in the Greater Phoenix area’s relative attractiveness. Metropolitan Phoenix is home to more than 4.8 million people (2018 data), a number expected to nearly double to 9.3 million by 2040.

These figures make Phoenix the third largest labor pool in the west, producing talent in high-demand industries including emerging technology, aerospace, semiconductors, healthcare and biomedical. Arizona State University outputs the most educated and technically-skilled workforce in Arizona, and over 86% of this skilled workforce has resided in greater Phoenix since 2010. The confluence of these factors attributes to the region having a median age of 36, one of the lowest in the nation.

Some of the biggest corporations in the world have taken note, with major players like Microsoft, Morgan Stanley, Silicon Valley Bank, KPMG, MetLife, State Farm, and JPMorgan opening large offices in the area.

Within the tech sector in particular, private capital investment in Greater Phoenix is on the rise. Over the last 10 years, the industry has seen 280 deals accounting for approximately $2.03 billion in total funding. In 2019 alone, tech start-ups raised $430 million, marking a 25% jump over the previous high of $344 million set in 2016. According to a report released by the Greater Phoenix Economic Council and CBRE, “the steady growth trend is attributable to a thriving ecosystem of quality startups in Greater Phoenix bolstered by a collaborative entrepreneurial culture. Emerging tech companies choose Greater Phoenix to establish their footprints, test their technologies and scale.”

Greater Phoenix Tech Capital Funding

It follows that the Greater Phoenix area is an emerging market for office space that caters to a younger, technology-oriented crowd. In our view, this assigns higher value to redesigning and rebuilding traditional office spaces into multi-tenant creative office suites, with sustainable and environmentally conscious features like solar paneling and thoughtful landscaping. Tech workers and younger workers want flexibility, sustainability, a sense of community, and productivity that comes with creative, shares office spaces (co-working spaces).

How Our PHXTECH Project Fits into the Phoenix Growth Story

Capital Hall Partners envisions the redevelopment PHXTECH (our QOZ project) to be the first domino to fall in an underutilized submarket rife with opportunity. The submarket is known as the Sky Harbor Office Market, situated on 9.4 acres in close proximity to the Phoenix Sky Harbor International Airport. PHXTECH’s zip code is home to 858 employers and nearly 50,000 jobs. .

Sky Harbor Office Market

The Sky Harbor submarket is quickly filling with new and expanding tenants, pushing vacancy rates down 9.3% year-over-year and inching rental rates up. Overall vacancy in the Sky Harbor submarket in 2018 fell from 32.7% to 23.4%, and is now hovering around 20%. In 2018, rents climbed from $19.63 to $21.95 per-square-foot, luring many businesses that are priced-out of the highly desirable Tempe market.

The micro-market where PHXTECH is located, Southbank, is a master planned business park. The vast majority of tenants in Southbank have focused on economics—not desirability—when leasing space. This is due in part to lack of available improved options. With the large bulk of buildings stuck in old, 2nd generation improvements and little ownership desire to offer modern buildouts and amenities, Southbank is often viewed (based upon current availability) as a basic call center office with little value proposition.

This backdrop creates an excellent opportunity within Southbank to redevelop commercial real estate that leads the market and offers tenants the opportunity to lease a fresh, progressive building. That’s our goal with PHXTECH.

The Capital Hall Partners team will revamp the existing data center building into multi-tenant creative office suites, with a renewed façade, solar-covered parking, updated and refreshed landscape and hardscape, outdoor workspace, new exterior windows and doors, and 150 new parking spaces. The improvements are projected to take approximately 4 to 6 months to complete.

We will hold the building for a 10-year period and lease it to multi-tenants at market rate over a thirty-six-month period. Half the battle is already won: Fidelity Information Services, the publicly-held credit tenant, will continue occupying approximately 50% of the building with a short-term (18-24 months with a 6-month extension) at a competitive market rate. We are now actively working to identify tenants with expiring leases, new tenants in the market, and tenants looking to expand their operations.

Learn More About the PHXTECH QOZ Opportunity

Capital Hall Partners has over $1 billion in real estate investments and developments underway across the country, with over 50 years combined real estate experience in investment, development, and asset management. Investing in Qualified Opportunity Zones offers us a way to support job creation and growth in local communities, while also upgrading the real estate profile of the city/community with modern and sustainable buildings.

We’re excited to be active in the Greater Phoenix market. We view Phoenix as one of the best urban growth stories in the country, and we believe the PHXTECH project plays nicely into the budding strengths of the city’s dynamic economy.

For readers and investors who want to learn more about the project, the terms of investment, or who have questions about how Qualified Opportunity Zones work, please reach out to us at info@caphall.com. We’d be happy to talk with you.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or how to invest, please contact us today at info@caphall.com or by calling 310-264-1504.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

“Smart” Real Estate Investing in the Greater Boston Area

The Greater Boston Area is home to top-tier universities, exceptional scientific talent, and extensive supporting infrastructure.  It also hosts the largest concentration of life sciences and biotech companies in the world. You might say it’s a "smart" place for real estate development.

Of the top five "talent clusters" in the United States, Boston produces the highest number of PhD graduates in the Life Sciences discipline, with the number consistently increasing every year. The number of PhD graduates in Boston has increased by 32% since 2010, whereas San Francisco, for example, has seen its number decrease by 6%. The universities producing these PhD’s in Boston are among the finest in the world.

Total Life Science PhD Graduates

The PhD’s tend to stick around and build careers in the Greater Boston Area. Boston, Somerville, Cambridge, Quincy, Braintree, and surrounding areas contain over 730 companies in the Life Sciences industry. Blue-chip companies like Biogen, Pfizer, and Sanofi-Aventis, and world-class medical campuses like Harvard Medical School and Brigham & Women’s Hospital all call the Life Sciences Corridor home.

Vacancy rates currently sit at less than 10%, as a proliferation of companies ensures ample demand for working space. That commodity remains at a premium, but supply shortages can be remedied through redevelopment via Qualified Opportunity Zones (QOZs).

QOZs provide a unique opportunity to meet growing demand for additional space. The life science market is currently growing at a rate of 4.5% year-over-year in the Boston metro area. The demand is there—meaning the supply of office space, housing, and retail is ripe to catch up.

The Capital Hall Partners’ team has extensive experience not only in real estate development in the Greater Boston markets, but also in managing QOZ opportunities. Our sights are now set to Boston.

The Opportunity

Capital Hall Partners is developing Gateway – a 3.7-acre mixed-use life science campus located within a QOZ in Somerville. The site sits within a commercial planning area zoned for life science/office, residential, and office (amenity retail), with density permitting development of 600,000 to 1,300,000 square feet.

Innovation Gateway

The Gateway site is in an ideal location along McGrath Highway, one quarter of a mile from a +30-acre mixed-use Cambridge Crossing development. This development is a mixed-use life science oriented campus which recently leased 900,000 square feet at a $99 NNN rate, and sits approximately half a mile from Cambridge’s Kendall Square Life Science Center.  Total capitalization for buildout of Gateway is estimated at $500,000,000 to $1 billion.

Burgeoning Interest in the Greater Boston Area

Greater Boston’s QOZ sector is experiencing unprecedented investor interest.  Case-in-point: the 4.7-acre Garvey site in Everett, one of the fastest-growing communities in Massachusetts with a residential rental vacancy rate of 1%.

Located in a newly created redevelopment district with tremendous potential, the Garvey site is situated near mass transit, within 3 miles of both Logan Airport and Boston Financial Center, and roughly 1.5 miles from the newly opened Wynn Encore Casino—which employs 5,000 workers.

Capital Hall Partners plans to develop a 650-unit workforce and multifamily residential (MF) complex at Garvey in two phases, utilizing wood-frame construction.


Conclusion

The Greater Boston Area holds tremendous value for real estate development, as new facilities can serve to support a rapidly growing and impactful sector of the U.S. economy: biotechnology and life sciences. Real estate development in the area can not only support growing companies and bring more jobs to the community, it can also support broader economic development and housing for the existing community, 'lifting all boats' in the process.

The end goal for Capital Hall Partners, and for the broader Qualified Opportunity Zone program, is to use new (and in the case of Capital Hall Partners, sustainable) developments to uplift the local economy with greater opportunities. We’re seeking profit with social purpose.

Join us as we pursue these goals in Boston.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

If you would like to learn more about Capital Hall Partners, Qualified Opportunity Zones, or our work in Boston, please contact us today at info@caphall.com .

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

What a QOZ Real Estate Deal Looks Like

In May 2019, Capital Hall Partners (headquartered in Los Angeles, CA) closed its first Qualified Opportunity Zone (QOZ) transaction: the purchase of a 50,000-square foot zoned General Industrial District (GID) building, situated on 4.32 acres in southwest Tempe, AZ with a $10MM total capitalization.

As the first QOZ project in the Tempe area and specifically within this census tract, the opportunity offers an exciting path for addressing a series of needs in a rapidly growing region. The project, being rebranded as “The Hub,” is well-suited for redevelopment based on its prominent location, tall ceilings, building infrastructure, and a large site that can accommodate parking requirements requested by market users.

The project’s mission is to stimulate new economic development and redevelopment of Tempe and surrounding areas, while incorporating sustainable design and construction into an attractive facility.

Capital Hall Partners will redevelop the property by transforming the existing industrial building into a creative office environment. This will include a complete renovation of the exterior, featuring new doors and windows arranged to allow natural light into the interior, while offsetting the heat gain from direct sun. A shade screen structure will wrap the building to shadow the windows and create exterior patios around the perimeter.

The area beneath the shade screen structure, known as the ‘The Commons,’ is located on the north side of the building and serves as the primary entry. It will be covered with photovoltaic panels arranged in a pattern to provide a balance of light and shadow. Engineers estimate the solar array will generate enough power to off-set utility use by up to 75%.

The Commons will feature three primary zones: ‘The Plaza,’ ‘The Lounge,’ and ‘The Lawn.’ The Plaza will serve as the main point of entry to the building and features modular pavers and a variety of low-water-use lush plants. The Lounge serves as the exterior dining and conference room, and The Lawn will feature synthetic turf to soften the space and cool the building and plaza environment.

The building interiors will be reconstructed using high efficiency HVAC, electrical, and plumbing systems. The interior architecture will be tenant dependent, but will feature open ceilings highlighting the existing building structure.

Finally, the efficiently redesigned parking area will accommodate nearly 300 vehicles and will feature shade trees, modular pavers, asphalt drives, and a pervious surface parking area intended to reduce the heat island and allow for more adequate storm-water management.

Design plans have been submitted to the City of Tempe with construction scheduled in the third quarter of 2019, with exterior construction estimated to be completed by the second quarter of 2020. The business plan is to lease the building to a single user or multiple tenants.

An Architectural Rendering of the New Office Space

The Phoenix Metropolitan Area Represents a Burgeoning Economic Opportunity

The Phoenix Metropolitan Area which is the 11th largest metropolis in the nation by population and home to over 4.7 million people as of 2018.  Phoenix-proper is the sixth-most populous city in the United States (and the most populous state capital in the nation), with an estimated 1,626,000 residents as of 2018.  As of April 2019, Maricopa County has been named the fastest growing county in the United States for three consecutive years, according to the U.S. Census Bureau.

As its population has grown, Metro Phoenix has developed into Arizona’s primary business center and a key nationwide economic hub.  Lower costs of living, robust infrastructure, strong quality of life, and a growing, qualified talent supply have attracted an influx of new residents and businesses to the city.  Phoenix is now home to the third-largest labor pool in the West.

The Metro Phoenix job market is healthy and continuing to improve, adding over 82,400 jobs year-over-year through December 2018, welcoming 42 businesses and three corporate headquarters, while maintaining a 3.9% unemployment rate over the same period. According to the Bureau of Labor Statistics, the Phoenix metropolitan area added 25,000 office sector jobs through the fourth quarter 2018 (encompassing business & professional services, information/ technology and financial activities). Employment is projected to grow by 10% (compared to 6% nationally) over the next decade.

This skilled, diverse workforce is fueled by a network of globally recognized universities and community colleges, including Arizona State University, University of Arizona, Grand Canyon University, Northern Arizona University, and the Maricopa Community Colleges.  These institutions, along with others throughout the region, provide a pipeline of exceedingly qualified talent to supply high-demand industries like technology, aerospace, healthcare, and biomedical.  The end result is a young (median age 36) and extremely competitive workforce, available for some of the lowest labor costs nationwide.

How Tempe Fits into This Unique Economic Opportunity

Tempe has benefited from its central location in the Greater Phoenix Metropolitan area.  With a strong workforce and talent pipeline, Tempe has become a top-tier destination for major corporations like State Farm, Union Bank, Northern Trust Bank, Silicon Valley Bank, ADP, Wells Fargo, and JP Morgan. It has also emerged as one of Arizona’s preeminent technology centers, further cementing its status through citywide initiatives focusing on sustainability, quality of life, open data, performance metrics, and inclusivity.

Top Tempe Employers

Tempe is home to Arizona State University, whose nearly 110,000 students and community of residents, researchers, and business leaders make up the most educated and technically skilled workforce in Arizona.

Other Economic Hightlights

Tempe’s Economic Potential from a Real Estate Perspective

Robust employment growth, a readily available supply of qualified talent, cost advantages, and a high quality of life has significantly increased demand for office space throughout Metropolitan Phoenix, and Tempe in particular.

Metro-wide, there is currently 1.6 million square feet of office space under construction, placing Phoenix in the top 10 of American cities with new office construction.  The slow and steady timing of expected new office inventory, relatively tight vacancy in Tempe (measured at 8.3% at the end of the second quarter of 2019), and a high barrier to entry suggests constrained supply with rising demand—leading to higher rents and continued velocity of leasing activity.

We believe the Qualified Opportunity Zone (QOZ) property closed by Capital Hall Partners offers tremendous advantages for employers and employees alike.  Its proximity to Arizona State University, easy access to all the major freeways and Sky Harbor International Airport give “The Hub” direct channels to the Greater Pheonix area and easy access to other tech hubs (including short flights to California).California).

“The Hub's” Advantageous Location

The Bottom Line:

Capital Hall Partners’ commitment to the Phoenix and Tempe markets demonstrates our firm’s mission to create and develop sustainable communities—driving both social and economic impact.  We anticipate this project will fuel local job creation in one of the most up-and-coming job markets in the economy.

Capital Hall Partners’ Qualified Opportunity Zones transactions remain in the top 10% of all 8,700 designated Opportunity Zones in the United States.

 

Capital Hall Partners is a privately-held real estate investment and development firm. We have over 50 years of experience over multiple real estate cycles, with a current focus on value-oriented investments in Qualified Opportunity Zones in the Los Angeles, Phoenix, & Boston areas. Our commitment to investors is to preserve capital, deliver attractive risk-adjusted returns, be trustworthy and transparent.

This is presented only for informational and educational purposes and is not intended to interpret laws or regulations.  This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments.  Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.

Understanding Opportunity Zones: A Primer

The 2017 Tax Cuts and Jobs Act was the most wide-reaching tax overhaul in years. Most headlines centered around the slashing of the corporate tax rate from 35% to 21%, and S&P 500 companies felt the profit boost immediately – posting double-digit growth in 2018.

But for investors who researched deeper into the provisions of the Tax Cuts and Jobs Act, it became clear that Real Estate was also an asset class with new, favorable tax treatments.

One particular provision in the law—a bipartisan collaboration called the Investing in Opportunity Act—generated few initial headlines but drew the attention of experienced real estate investors. The provision, called the Opportunity Zone (OZ) Program, incentivizes long-term investment in communities of economic need through Qualified Opportunity Zone Funds (QOF). Opportunity zones have the potential not only to help revitalize communities in need, but also to offer preferential tax treatments to investors with a desire to pursue (tax advantaged) returns while also making a positive social impact.

 

Let’s Start with the Basics: What is an Opportunity Zone?

The IRS defines an opportunity zone as a census tract designated to be “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.”

Once selected by state governors, opportunity zones can receive private capital investments through Qualified Opportunity Funds. These investment vehicles – whether created as corporations or partnerships – invest capital gains from prior investments in the state-designated Qualified Opportunity Zones of their choosing. In exchange, investors have the unique ability to defer and reduce capital gains tax payments until April 2027 for any investment held through December 31, 2026.

The concept evolved out of a 2015 paper from the Economic Innovation Group (EIG), a “bipartisan public policy organization that combines innovative research and data-driven advocacy to address America’s most pressing economic challenges.” The paper, called “Unlocking Private Capital to Facilitate Growth,” argues that private sector investment is a critical tool for revitalizing distressed economic areas in the United States, which continue to struggle in the aftermath of the Great Recession. Doing so, says its authors, will ultimately spur job creation and economic opportunity in areas of need.

 

How Can Investors Participate Directly in Opportunity Zones?

The 2017 Tax Cuts and Jobs Act created substantial incentive for investors to commit capital to opportunity zones. Under the new law, investors can harvest capital gains from existing investments, whether stocks, real estate, or another source, with those gains becoming eligible for preferential tax treatment if invested in a Qualified Opportunity Fund within 180 days from the time of gain recognition.

Once invested, tax on prior gains is deferrable until the earlier of two dates: when an investor sells, or exchanges, the QOF investment; or December 31, 2026. The deferment structure is tiered into 5-year, 7-year, and 10-year periods, with benefits becoming increasingly more attractive the longer the length of the investment:

Investors can also receive non-taxable cash distributions from any refinancing during the hold period.

Fundrise TimelineSource: Fundrise

In the hypothetical example below, which uses a 20% capital gain tax rate for the purpose of simplification, a capital gain of $10 million is invested in a traditional real estate investment (left column) vs. an opportunity zone investment (right column). The tax deferrals preserve profit in the OZ program, which generates $6,300,000 over 10 years versus the $4,400,000 profit from the non-OZ real estate deal. QOFs give investors the possibility of achieving attractive, risk-adjusted economic returns enhanced by up to 40% relative to traditional real estate investments.

Traditional Real Estate Investment

Traditional Real Estate Investment

Real Estate Opportunities Zones Investment

Real Estate Opportunities Zones Investment

* 20% capital gain tax rate applied for the purpose of mathematical simplification.

Finally, QOFs promote socially responsible investing and give investors the chance to make a real impact on communities in need of an economic boost. Capital scarcity is a significant issue in certain areas, both urban and rural. The Economic Innovation Group’s research, which inspired the creation of opportunity zones, found “that 50 million Americans live in economically distressed communities,” which contain “1.4 million fewer jobs in 2016 than they did in 2007” – a clear indication of the gap separating areas of need and communities that were able to recover in the aftermath of the Great Recession.

Distress Score

The result is a nation increasingly reliant on certain geographic areas to create new businesses and jobs while other areas continue to languish. QOFs not only have the potential to create this vital infrastructure in opportunity zones—they can also add auxiliary benefits like improved education, developing additional affordable workforce housing, advancing health care access, expanding nutritional options, and improving the prospects for people in more than 8,700 communities across the United States.

 

Next Step: How to Approach Opportunity Zones

While opportunity zones offer tremendous promise, they present additional layers of complexity relative to traditional real estate investments. The OZ program demands close attention to detail, as well as thorough familiarity with tax law. Capital Hall Partners believes these complexities necessitate a conservative, thoughtful approach to reduce risk and enhance returns – an approach born from years of experience managing complex development projects.

QOF investments are limited to certain types of property: they must be made in either new construction or major renovations or reuse—and renovations must show substantial improvement within 30 months of construction. Substantial improvement requires a QOF invest an amount equal to the building’s basis of the property plus $1 USD, not including land value. We strictly adhere to a disciplined underwriting process to preserve capital, deliver returns, and maintain compliance with these provisions.

Capital Hall Partners focuses QOF investment dollars on properties with great potential regardless of their potential tax benefit. This means prioritizing capital preservation and investing in properties that achieve attractive risk-adjusted returns prior to tax-benefit enhancements: multi-family units, industrial “last-mile” e-commerce distribution, and creative and adaptive reuse projects including industrial conversion.

Our QOF investments greatly reduce or eliminate the use of leverage prior to stabilization of the property, allowing for maximum tax benefit capital as quickly as possible. By placing low levels of leverage during development and higher levels once properties stabilize, we can maximize the QOF tax benefits to investors.

 

The Bottom Line:

Opportunity zones represent a major opportunity for positive social impact through sustainable, long-term investment – a chance for the private sector to contribute capital to low-income neighborhoods and/or communities already demonstrating growth. Combined with attractive tax benefits, QOFs offer tremendous benefits for investors when managed with an experienced, thoughtful, and prudent approach—which is precisely what we strive to provide at Capital Hall Partners.


This is presented only for informational and educational purposes and is not intended to interpret laws or regulations. This is based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other instruments. Additionally, this is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions.