Just Returned from Madrid, a Tale of Two Housing Markets

Spain was not immune to the worldwide Great Recession. Similar to the United States Spain’s real estate was also affected with banks lending sans oversight and subsequent defaults. When I was in Barcelona two years ago there were signs of a real estate market in recovery coupled with in-migration of younger entrepreneurs attracted to the city with its affordable housing and commercial space.

Visiting Madrid this past weekend I was impressed with the vibrancy of the housing market. Of note Madrid is enjoying its most robust year of home construction since 2008 with an average of 2,151 new residential licenses awarded per month in the first 7 months of the year. City-centric real estate seems to have strong demand from flats to even garage parking where a space cost can rival the cost of condos in the suburbs of Denver. Even in the northern Madrid suburbs development continues with demand fueled by affordability when compared to the center of the city.

Yet just beyond the major cities the carnage resulting from The Great Recession is still visible. According to a local broker and statistician the real estate sector’s recovery in Spain is developing at two clearly different speeds. While one part of the country is consolidating the recovery of the sector and even expanding, another part of the country is stagnating and is showing few signs of returning to pre-crisis levels in the medium- and long-term.

The major cities and tourism centric areas are booming fuelled by interest rates that are still near historic lows, an economic recovery, demand from other European residents and a banking system that has been stabilized. Like in the United States private equity firms including Blackstone Group LP ($25B Euros invested in Spain) is purchasing once-toxic assets and similar to their MO in the United States is converting properties into rentals as home ownership has yet to rebound in Spain which once had a quite high rate of home-ownership.

Yet beyond the city centers and tourism hot spots the market is struggling. Travel to the outskirts of smaller villages and ghost towns still litter the landscape – once ambitious developments, often started on agricultural land that was converted into building lots just before the Great Recession started.

An example and known by some urban planners like myself is the unfinished Bioclimatic designed development known as City La Encina. Situated on the edge of the village of Bernuy de Porreros, about 6 miles from Segovia, it promised to be Spain’s first environmentally-friendly town, providing solar energy and recycled water for 267 homes, two-, three-, and four-bedroom chalets and apartments. At present only about a dozen of the homes are occupied.

Related and what statisticans like myself look at is the mortgage market as an excellent indicator of the status of the overall real estate market. The volume of residential mortgages sold in Spain peaked in late 2005 before hitting a low in 2013. In the 5 years since the bottom the mortgage market has gradually recovered with 28,755 sold in August 2018, a 7% annual increase. The recovery of Spain’s real-estate is truly uneven and reinforces the oldest axiom of real estate it’s about Location, Location, Location.

 

 

 

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Is Ikea Orienting New Development to the Inner City

We all have seen the big box Ikea in suburban locations rising from the landscape like a sculpture in Yves Klein Blue yet an actual color scheme of the flag of Sweden. Possibly following the trend set by Target and Wal-Mart, Ikea may be looking closer to the inner-city which would make sense offering furnishings and products oriented to smaller residences.

A year after the parent company of Ikea said it was rethinking its business model and focusing on city centers rather than out-of-town warehouses, the furniture giant’s property division, Ingka Centres (formerly Ikea Centres), is taking the same tact.

As part of its plan to invest €5.8 billion (or $6.6 billion) to create new Ikea store-anchored developments around the world, Ingka Centres—a subsidiary of Ingka Group, which is the parent company of Ikea—is looking in the next two years to open six mixed-use developments with retail and entertainment areas, health education services and of course, an Ikea. But in the case of these city centers, the Ikea stores will have a smaller footprint (70,000 to 150,000 square feet rather than the more typical 400,000 square feet), Word on the streets is there will be at least 15 such centers opening within the next three years.

Ingka Centres is targeting 30 major cities in North America, Europe, Asia and Russia, with New York City (Ikea has full-format locations within Brooklyn and across the Hudson River in Elizabeth NJ) and San Francisco (a location in Emeryville) at the forefront. The company wants to purchase sites and redevelop them, and has already started visiting some properties in both cities. Other cities on the shortlist include Los Angles and Chicago, no mention of Denver, not surprising as our density is low compared to the other cities yet our average age and educational attainment would be a good match.

  • Average density of Los Angeles City not County is: 12,500 persons per sq. mile
  • Average density of San Francisco is: 15,000 persons per sq. mile
  • Average density of Chicago is: 11,900 persons per sq. mile
  • Average density of Denver is: 4,300 persons per sq. mile

In Shanghai, China construction is underway on the €1 billion ($1.1 billion) mixed-use Livat shopping center, which will include a smaller 200,000-square-foot Ikea store, 300 other stores, public space, a roof garden, a Scandinavian-styled street and five office towers. The project is slated for completion in 2022.

Last November, Ingka Group (formerly Ikea Group) launched a new strategy to focus on city-center stores as it sought to rethink its business model amid urbanization and the shift to e-commerce, per the Financial Times. That shift included trying different store formats, including smaller stores. For example, there is a small-format 70,000-square-foot Ikea store opening this spring in Paris although Ingka Centres is not involved.

Even Entertainers Can Lose Money in Real Estate

In the upper-echelons of real-estate we brokers may mention a property’s provenance. Such properties may secure an inflated value due to past or present ownership. The Bob Hope Residence in Palm Springs had his ownership as provenance and being designed by John Lautner an addition premium due to the design and demand for Lautner designed residences with one of his most famous being The Chemosphere and used in multiple moves including Charlie’s Angels and Body Double.

Thus it was a surprise when bold-faced names Keith Richards and his wife Patti Hansen took a loss on their well-pedigreed co-op at One Fifth Avenue in New York City’s Greenwich Village.

First the building; in addition to the address having tone in a city where such matters it is truly a beautiful and striking pre-WWII building. Located on the southern end of 5th Avenue and adjacent to Washington Square Park, One Fifth Avenue is a building that is always in demand and desirable.

The apartment, a duplex i.e. 2-floors features a large open dining/entertainment space, a leather and bronze open staircase and three private terraces — including two that overlook Fifth Avenue and Washington Square Park. The unit was purchased in 2014 for $10.5M and listed at $12.32M. The apartment recently sold for $9M; a substantial discount from the asking and a $1.5M loss from the purchase price 4 years earlier.

Concerning the provenance; not only owned by Keith Richards, a previous owner was art curator/collector Sam Wagstaff, photographer Robert Mapplethorpe’s former lover. Thus while one can place a value on location, ownership, provenance, history and so forth the reality is the market will provide true guidance.

I hope Keith Richards did not say at the closing “I can’t get no satisfaction“.

Zestimate In the Pipeline for Office and other Commercial Space

Zillow has been quite successful with their Zestimate algorithm concerning residential values.  Experienced brokers like myself have been doing this for years i.e. a Comparative Market Analysis (CMA) and Broker Price Opinions (BPO) however leave it to technology to update a practice around since real estate first transacted.

Thus it was only a matter of time before we would see similar algorithms designed for commercial spaces including office, retail, industrial and so forth. Commercial is much more complex; unlike residential there are other factors including free-rent, credits for build-out and so forth, however in theory such a system could be viable.

Office provider Knotel and leasing data specialist CompStak are collaborating to create an Automated Valuation Model for commercial real estate. Such a model according to the two firms would be a rough equivalent of Zillow’s Zestimate.

Unlike residential real estate; as commercial is usually investment oriented the model would be able to estimate the net operating income of a commercial property, especially office space, and thus come up with a valuation.

The company spearheading the development of the algorithm is Knotel (as mentioned above) a company which is considered a strong WeWork competitor. In addition to their partnership with CompStak, Knotel recently purchased 42Floors, a commercial real estate search engine and one assumes a collaboration to create their Automated Valuation Model.

CompStak recently rolled out its CompStak Analytics platform, which the company says comprises millions of lease comparable covering more than 10B SF of commercial real estate. Among other things, CompStak says its new platform allows subscribers to:

  • Compare the effective rent performance of a portfolio of properties against those of competitors in real time.
  • Identify investment opportunities by spotting properties that are performing above or below their peers.
  • Track starting rents for tenants in different industries across submarkets.

As a broker who works in both the residential and commercial markets I am intrigued and will be sure to include their proprietary information in my quiver of information sources as an adjunct to personal qualitative and empirical research; an algorithm may be able to assess, analyze and forecast but human intuition and experience is still quite valuable.