COVID-19 and the Flight to the 'Burbs - Part 2

September 22, 2020

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Darren Griffith, a director in EisnerAmper’s Real Estate Group, and Tim Schuster, a senior manager in the Private Business Services Group, discuss updated trends in the commercial and residential real estate markets. They explore how COVID-19 has escalated the trend of families and individuals moving out of large cities, the tax impacts of moving to a different state from where your employer is located, and the potential ripple effect on the cost of housing.


Transcript

Donna Fleres: Hello, everyone. Welcome to Breaking Ground: Real Estate Insights from EisnerAmper. I'm Donna Fleres, a senior manager in the real estate audit department. With me, I have Darren Griffith, a director in the real estate business development group, and Tim Schuster, a senior manager in the private business services group. Today, we're going to talk about COVID-19 and the flight to the burbs part two. Guys, it's nice to have you here with me today.

Darren Griffith: Great to be with you, Donna. Thanks, again. Excited to talk about this subject a little bit more this time around.
Tim Schuster: Let me tell you, it's always fun being with you guys. Good to see you both.

DF:
Good to see you. So, Darren, last time we really focused on the residential. I think we're going to start with the office this time. Would you like to give us some of your thoughts on the trends and stuff that we're seeing?
DG: Yeah. As I talk to people on a regular basis, I think we forget as we moved to the suburbs, we potentially could be moving some of the office space to the suburbs as well. Prior to this call, I was doing a little bit of research and I was looking to see what people were actually doing. I've heard a lot of people talking about taking space in the suburbs, et cetera, but there hasn't been really concrete information on that. With that being said, I did find some larger corporations that are trying to at least sublease or get rid of some of their space, whether it's completely declining their space or reducing their space, or if it's just a matter of getting rid of that space and then substituting that out for space in the suburbs.

A couple of employers, larger ones that we might think of out in Chicago, Career Builder, for example. They're trying to sublease 85,000 square feet. You have Groupon. They're trying to sublease 150,000 square feet. So, regardless of if they are moving to the suburbs or not, these large employers, and again, there's a list that goes on and on of these employers, are getting rid of a significant amount of city space. Tim can dive into this as well, but I assume that a ton of them will be taking some sort of space in the suburbs. I don't think that it's going to be significant because we have to find out where that happy medium is as far as working from home versus working from suburbs but I think it's an interesting dynamic that's going to come up as we try to start to get back into a regular work schedule.
TS: Yeah. Darren, that actually makes a lot of sense to me, and what's interesting about that too, especially from an employer perspective, it's almost like thinking, "Where are my employees going to wind up?" So, there's this concept there where you almost have to rethink where to live. There's an interesting trend, actually, we just read in the New York Times recently. It was reported that this was the first time since the tech crash of 2000 that housing vacancies in San Francisco are skyrocketing and rents on one-bedroom apartments are down by 11%. Those are crazy statistics when you think about it. A lot of these folks who are leaving the cities and someone who's considering this myself, there's some added costs that people I don't think are actually thinking about.

So, as people are really rethinking this, and they're thinking about the wherewithal in their capacity that, "Hey, maybe I don't have to be in the city. Maybe I can be in the suburbs. Do I even have to even stay in the state where my employer is?" That's a legitimate question. So, just some things to keep in mind if people are actually thinking about leaving the city is, Hey, you may not have ever had a car before. Now you need a car. Now you might actually have some other additional expenses that you're going to be incurring by living in the suburbs as opposed to not. Lawn care. Things that people never thought about. You're in the concrete jungle. Now you're out in the suburbs. You might have to take care of your lawns. That's just something to consider.

But the one thing to keep in mind too, and I'm not going to spend a lot of time on this, is some tax impacts. So, I actually recorded a podcast on this recently about the state and local impacts of people moving to different jurisdictions or different states or actually getting their job done in a different location than they normally do. Just two things I want to just bring to the listeners' attentions. One is nexus presence. If you are in a different state from where your job is employed, there might be some withholding issues to consider. The other aspect is, from a business perspective, if your employees are in different locations, filing thresholds for income tax compliance is relatively low. So, I go more in-depth on this in a different podcast, but just something for the listeners to think about as you're thinking about potentially spreading to a different location. Hey, Darren, I just want to ask you a question actually. So, what are you seeing in some of the updated trends right now for our listeners to think about?
DG:Well, as you talk about increased costs as far as moving to the suburbs and things that people need to account for, I think people need to also account for everybody else thinking the same exact way. There are a lot of people who are having this consideration I think. I've read a couple of articles on this and a few have said that there's between 25% or 21% and 30% of people are considering a move. That's a significant amount of population. Now, obviously not that many people are going to move, but there was a significant amount. There's a lot of people. So, with that being said, in a place like, for example, New Jersey, or maybe even the suburbs of San Francisco or suburbs of most cities, a lot of them just because mortgage rates are relatively low, there wasn't a lot of inventory in the first place.

I think that has driven prices up significantly. I was speaking to a friend of mine. He's a real estate broker down in the - I'll call it South Jersey - area. Just the suburbs of Philadelphia. He had mentioned to me, he's like, "Well, one, a lot of the Philadelphia city dwellers, if you will, are moving to the Jersey shore." And he's seen a big trend in that. That's something that we didn't cover the last time we came around on the podcast. He was mentioning one of these, I guess this is one of the more absurd things that I've heard. He had mentioned that he had a sale where the list price of the property was somewhere a little over $700,000 and it sold for $900,000.
TS: Wow.
DG:So, that's $200,000 over list, and he said that most of the listings that he's been seeing are selling somewhere between 30 and 50,000 above list price, and that's the average. So, you have to account for that as well. When you step out of the market, you might think you're spending X amount of dollars for the property, and you might be spending $100,000 more than you thought you were going to, and obviously, there's additional mortgage costs. But with that being said, going back to how I started this conversation, mortgage rates are low right now. It's giving people more and more incentives to not only move to the suburbs but spend a little bit more when they move to the suburbs. So, you have that too. Like I said, in the short term, I think that demand is going to continue to stay high.

TS: I totally agree. And honestly, even if you're not considering moving, I think this is something our listeners really should be considering. When was the last time you even thought about doing a refinance? So, I mean, this is actually a good opportunity. Even if you're not thinking of moving, you should actually seriously consider refinancing your mortgage because of that point. I don't know if the rates are going to go any lower than they are. I mean, it's pretty much rock bottom at this point, but there's something here that even people who aren't considering moving really should be taking advantage of. I think you hit the nail on the head and, before we kind of close out this podcast, Darren, do you have any last parting words for our listeners today?
DG: I would say, do your research and be aggressive. If your intent is to move, do your research and make sure you're getting the best bet. I think on the commercial side, we're not seeing as much activity. We're not seeing the large increases of rental rates in the suburbs, the same way that we're seeing them on the sales side of residential. Take a look and understand the marketplace and understand what's going on there and just make sure that you're making a best decision when you're choosing to make that move. Whether it's on the business side or on the residential side where you're living.
TS:Yeah. That makes complete sense. One thing actually that I want to just bring to the listener's attention before we close out our podcast then, something to consider too that's not usually part of the dialogue is there is always a group that loses out during a housing surge, especially what's going on right now. Low-income families that are in those areas might start to see a spike in their rents or even a potential homelessness increase. I mean, other than the fact that COVID is spurring this whole process just in and of itself. But I think something that's actually going to be part of the conversation and something we can even dive into in a later series is affordable housing units.

That's going to be something that has to be a part of this conversation, especially as we're going through this new changes and the variety of the things that could be transpiring, that really is something that actually needs to be part of the dialogue, and there potentially could be some opportunities there for other developers to maybe even have these options for other people too. But just something I want to bring to the listener's attention. Let me tell you, Darren, it's a pleasure as always recording shows with you, my friend. I'm looking forward to doing the next one with you, hopefully relatively soon.
DG:You as well, Tim. Had an absolute pleasure.
TS:Me too, buddy.
DF:Well, thank you, Darren and Tim. Your insight into this trend is great. I think, Tim, you might've given the next topic with the affordable housing right there for you guys to chat on again. I think you guys brought up some great points. I'm definitely seeing it. Personally, family, friends, colleagues, people are moving, people are buying, people are refinancing, so very interesting to see. We're five months into this working from home and we'll see where it goes in the next few months. Thank you for listening to breaking ground and please visit eisneramper.com for more news, as well as Tim's other podcasts that cover some of the tax implications mentioned.

 

About Darren Griffith

Darren’s experience includes real estate private equity, financing, acquisitions and dispositions, marketing, leasing, underwriting, asset management, property management, real estate risk management and business consulting.

About Tim Schuster

Mr. Schuster is a Senior Manager providing tax compliance services to individual filers, as well as assistance on tax returns for companies in the manufacturing and real estate industries.

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