Four Key Takeaways From the 11th Annual Saul Ewing Arnstein & Lehr Real Estate Conference
Innovation, creativity, economic outlooks and some transformative ideas for the future were the key themes discussed at Saul Ewing Arnstein & Lehr’s 11th Annual Real Estate Conference in Baltimore, which was attended by nearly 200 real estate and urban planning professionals. Below are four key takeaways from the conference.
1. Innovation in real estate is being sparked by a sharp focus on place-based solutions, collaboration goals and demographic analyses, with projects being executed by some nontraditional groups such as churches and universities. Among the 16 industry leaders who served as moderators and panelists at the conference, the importance of innovative ideas transforming communities was a common thread. "Real estate development knows how to turn the system upside down," explained keynote speaker J. Phillip Thompson, Deputy Mayor for Strategic Policy Initiatives of New York City. “Urban policies in New York City can take mud and turn it into a mud pie that becomes apple pie." Jennifer Vey of Brookings Institution stressed how "if market and demographic trends are going to work for more people and places, we believe that public, private and civic sector leaders need to invest in transformative, place-based solutions that include an economic ecosystem, civic infrastructure, a built environment and a social environment." She added that in order to deliver these outcomes, leaders need new sets of knowledge, new practices and tools, and new policies and investment strategies that better support place-led development.
Panelist Bishop Donté Hickman of the Southern Baptist Church in Baltimore is one such leader. He outlined how he guided his church through a process of demographic analysis to determine the real and felt needs of the community. "When we looked out at all the dilapidation in the area, the questions we asked were: how did it get this way and how do we prevent it from happening again if we just rebuild the structures," he explained. "The mantra became very clear to us that we have to restore people as we rebuild properties with the right mix of affordability, amenities and accessibility." Bishop Hickman is spearheading a master plan approved by the City of Baltimore of four major projects in his community that includes a senior living facility, multifamily housing, and a health and wellness center. Panelist and architect Adam Glaser of Perkins & Will highlighted his Campus 2.0 program that centers on creating 21st century university communities. He believes, "Academic anchors will play new and unprecedented roles in shaping the future of work and city building through design, planning and real estate."
2. A year after the Treasury issued the initial set of Opportunity Zone (OZ) proposed regulations, OZ projects are moving forward—some in very creative ways. Saul Ewing Arnstein & Lehr attorneys Tom Prevas, Wendie Stabler, Ronnie Fieldstone and David Shapiro discussed how Opportunity Zone investments get capital into distressed areas from a macro perspective while also analyzing the particular rules involved in taking advantage of the program’s tax incentives on a micro level. Wendie Stabler asked how many people in the room of close to 200 were either already involved in an OZ project or were planning to be and about 30 percent of the attendees raised their hands. "It's exciting because it is the biggest tax incentive deal to impact commercial real estate that’s come down the pike," she surmised. "OZ investments won’t make a bad project good, may make a marginal project good and will make a good project great." She highlighted one new and innovative project happening in a Wilmington, Delaware OZ that involves a vertical farming facility that will employ recently released prisoners.
Working with many clients on their OZ investments, Ronnie Fieldstone estimated that most transactions he’s seen are done by organized funds with a developer sponsoring the fund and bringing in other investors or there’s an independent fund that finds the developer, finds the property and brings the money to the developer. "It's a great program that covers 10 percent of the U.S. population with the majority of Puerto Rico in an OZ, so it should be a major economic driver," Ronnie explained. "The dust is still settling on how vibrant it’s going to be for investors." David Shapiro highlighted how the program is also designed to attract investors outside of the real estate industry. "For those investors, there is an education process on how the market and the incentives work, with more of a runway required than for typical real estate investors."
3. "Cautiously optimistic" economic outlooks combined with alternative financing and tax incentive opportunities, such as Opportunity Zones, are keeping real estate project funding humming along—for now. The project funding panel included one banker, two private equity investors, a city official, a developer, and a portal to foreign investment capital, who each focus on different corners of the real estate industry but share "cautiously optimistic" outlooks for the U.S. economy and the flow of real estate deals and projects. Ryan Donovan of Jefferies helped kick off the discussion by highlighting key attributes that are still required for financing: the quality of the sponsorship, location and submarket, and the fundamental underlining economics. Several panelists addressed areas outside of traditional financing that help fill in gaps in the capital stack. “Debt funds have gotten a lot of press over the last several years and we actually work with them, as I think a lot of banks do, in certain cases to fill in the gaps in higher leverage transactions,” explained Joe Carter of Wells Fargo Bank. "They’re just a piece of the puzzle to the developers that need higher leverage." Providing a specific example of alternative financing assistance in action, Jonnel Doris from the NYC Mayor’s Office highlighted how the city’s minority and woman-owned business program, which is a $20 billion initiative, has been able to get about $13.5 billion out to firms either through their procurement process or through development deals. He talked about two other funds the city has as well "to address the gap in finances that our firms face in order to compete in a large environment."
Tang Tang of KT Capital Group, who focuses on foreign investment in the U.S. real estate market, believes that the market is still wide open for foreign money. "A year ago we were looking at both equity and debt coming from foreign capital sources, but over the course of the year we’ve seen a big shift towards the debt side because they’re looking for capital preservation and yield as opposed to appreciation of the capital necessarily," he explained.
4. Major American cities, such as Baltimore, are well-positioned to become epicenters for leading national and global transformation in areas such as health care, technology and climate adaptation.
A Baltimore native who taught urban planning at the Massachusetts Institute of Technology for more than 20 years and now serves as the Deputy Mayor for Strategic Policy Initiatives of New York City, Phil Thompson delivered an inspirational keynote speech. "Most Americans haven’t seen their standard of living rise in more than 30 years, and many are wondering what kind of economic future is ahead and whether or not they’ll fit in," he said kicking off his remarks. "I think there are at least four trends that will profoundly shape our future: (1) health care, (2) digital transformation, (3) climate adaptation and (4) demographic change. The main argument I want to make today is that Baltimore can transform itself by relentlessly focusing on the future, which means diving into these trends."
Deputy Mayor Thompson first addressed how revolutionizing homecare is paramount. "We can do it by training homecare workers better, by paying workers better, and by creating ladders of opportunity from homecare to other jobs in health care, and also by introducing telemedicine and other teamwork approaches between clients, homecare workers, nurses and doctors," he outlined.
Next Deputy Mayor Thompson discussed how the greatest impact of digital technology will be computer-aided manufacturing and artificial intelligence. "There will be local design and production for cars and shoes rather than manufacturing happening half way around the world. The workers will be technicians and designers rather than assembly-line workers or shoe clerks. With the right strategies and investments, a tech economy could mean that good jobs replace bad jobs and not mass unemployment," he said. "Lots of tech companies are dying to work with cities right now on creating the new urban model for car manufacturing—why not Baltimore?"
Deputy Mayor Thompson’s third trend—climate adaptation—could produce global benefits. He pointed to energy efficiency as one of the key issues to address to mitigate and adapt to climate change. "Buildings use more carbon than any other segment of society. We can reduce our carbon use as well as hold down energy costs by retrofitting buildings for energy efficiency. In most cases, energy savings can pay for the cost of retrofitting and can create a lot of jobs." He also addressed the challenges of food supply and how we’re rapidly depleting our ocean’s food sources. "Figuring out how to restore marine life in this Baltimore estuary has implications for similar estuaries worldwide. Baltimore could become the go-to place for R&D of marine life restoration with major implications for food production worldwide. This is the right place to do it," he explained. 'Young people need to know that if they work hard and study hard, they can have a great future in building America green." Deputy Mayor Thompson outlined how we can give kids the opportunities in the community and let them invent—something we can be doing right now. "We can show young people in Baltimore how water created this region, and fire their imaginations to restore marine life and save the world’s food problems."
The fourth trend Deputy Mayor Thompson discussed is demographic change given that the United States will become, in two or three decades, majority black, Latino and Asian in terms of ethnicity. “Soon, no racial or ethnic group will be a majority, which means that the future of the U.S. economy, the future of cities, the future value of real estate, the solvency of social security, all of these things, depend, more than any other factor, on the future of young people of color, who are concentrated in our cities, because that will be the workforce,” he said. “We need to make radical investments in our young people and especially in the young people we are investing in the least.”
As he concluded, Deputy Mayor Thompson stressed his belief in making our cities physical representations of what a democracy is. “What will it take to turn our cities around,” he asked. “More than anything else, I believe it takes a vision for the city and for the city’s economic pathway.”