Top 5 Considerations When Drafting a new HOA Budget

With a booming housing market, York’s Association Management team has been busy advising developers on drafting strong, realistic HOA budgets.

You might notice that there are actually 6 takeaways below.  No one says “top 6” though….so we went with 5 and you can consider that last one a bonus!

  • Get Multiple Vendor Estimates. Increasing labor and material costs mean higher prices for everything from landscaping to pressure washing, maintenance and more.  Make sure to get several estimates and carefully consider the level of service your development will need.  Working with a management company like York can allow you to save on items such as insurance or waste removal by using their bulk purchasing discounts.
  • Set the Assessment to Cover Operating Expenses: It’s very common for new developments to set the assessment at a low rate with the developer funding expense shortfalls while building is ongoing. While the low rate is attractive to new buyers, it will eventually mean a large increase in the operating budget. As you can imagine, increased assessments mean unhappy homeowners, particularly if the increase is substantially higher than the original amount listed in the initial public offering.
  • Fund the Reserve Account:  Funding the Reserve Account for future expenses in the first and future budgets helps buyers recognize that the association is in good financial standing. We recommend a minimum reserve fund transfer annually equal 10% of the projected assessments, thereby protecting you and the homeowners from underfunded future capital expenses.
  • Don’t defer Maintenance. Don’t try to keep your homeowner fees low by deferring maintenance.  We recommend routine maintenance inspections are scheduled for your roofs, gutters, common area mechanical systems, lighting, fencing, parking and building exteriors.   In fact, most warranties require some type of inspection to keep the warranty validate.
  • Expect the unexpected. Even though your development will be new, unforeseen issues will arise. Try to anticipate what might need attention within the first years.  In our experience, new developments generally have issues arise around landscaping and pond maintenance Weather related issues that do not warrant an insurance claim can also add up.
  • Engage an association attorney to review your documents and budgets. Association Management attorneys are worth every penny to ensure you don’t overlook any items specific to your development.

 

Back to the Roaring 20s?

The Cary Chamber got the jump on the 2020 economic forecasts this morning at a breakfast presentation with NCSU economist Mike Walden, PhD.

The forecast was decidedly rosy, with indications that the current expansion should continue throughout this year.  Unlike the 2019 forecast when there was talk about 2020 being the year of the slowdown, 2021 wasn’t even mentioned.

Some key take-aways included:

  • Unemployment is at a 50-year low.
  • Wages are starting to rise.  Low-wage workers are getting the biggest pay raises.
  • Inverted yield curve is back to normal (does that make it a verted yield curve?). With its return to normal, the outlook for recession has lessened.
  • The soon-to-be-ratified USMCA (US-Mexico-Canada Agreement) should benefit North Carolina dairy and auto parts industries. Dairy will benefit from the Canadian market accepting more imports, and auto parts will benefit partially due to Mexico’s agreement to raise domestic auto-part manufacturing wages making NC wages more competitive.
  • The US/China trade negotiations are making slow progress. However, Dr. Walden cautions against any champagne popping since China has reneged on implementation in the past.
  • US labor force participation is not back to historic levels, partially due to personal choice and partially due to those unable to work. An estimated 2.4 million individuals can’t work due to opioid addiction.
  • We’re in a Goldilocks economy — low inflation combined with low unemployment.
  • Wage inequality continues. In NC, high-wage jobs and low-wage jobs are the fastest growing.  Middle-wage jobs are lagging.

 

So, what might cause a slowdown?

  • Stock market continues to roar. Is everyone getting too optimistic?  Price-earnings ratio has risen – watch carefully for signs of overheating.
  • Business debt is up – if spending slows, businesses holding too much debt could be in a world of hurt.

Overall outlook? Continued steady, if slow, growth.

Breathe a sigh of relief.

The Impacts of High Construction Costs on Tenants

Construction costs in the commercial real estate market continue to rise.  As a tenant, why does this matter to me?

  1. Construction costs, not just to build out your space but also to build or renovate the building, are a large component of rent.
  2. For landlords, higher construction costs are reflected in higher rents for tenants and need to be closely monitored to recoup those costs in rent. Higher costs, which equate to higher rent, can also impact a building’s competitiveness when tenants consider multiple competitive properties.

What is causing the rise in Construction costs?

There are many factors which are outlined in the bullets below:

  • We are in the midst of the longest economic expansion in the history of our country. A strong economy creates fierce competition for resources and labor. Economics 101 dictates that the higher the demand, the higher the cost.
  • Labor, a major component of construction costs, is in short supply as general contractors struggle to hire subcontractors who can pick and choose their work.
  • The competition for subs goes beyond the commercial real estate industry as commercial general contractors compete with residential contractors for labor.
  • Market disrupters, such as hurricanes, put further strain on the tight labor supply as subs are drawn to more lucrative repair and rebuilding projects (I have heard of several subs who have temporarily moved to the coast for repair work where they can earn higher prices due to a shortage of qualified subs)
  • Tariffs: The trade war with China, and resulting tariffs, have caused a significant increase in materials costs (metal studs, copper wiring, lighting and plumbing fixtures, etc.). In a recent conversation with a construction superintendent, I learned that contractors are facing delayed deliveries and higher costs as a direct result of the tariffs. Additionally, contractors are pricing in contingencies (i.e. higher than current actual costs) because they have been burned by signing a set price contract and then having material costs come in higher than expected.
  • Additionally, the uncertainty caused by the tariffs is creating uncertainty in contractor forecasting.

What Are Typical Construction Costs for Office Space in This Competitive Environment?

  • Costs for renovating second generation space range from $10-$20/SF
  • Costs for building out shell space range from $45-$85/SF
  • Additional “soft costs” related to an office fit-up can range from $40-$60/SF
  • These soft costs along with the corresponding range per square foot are:
    • Move/Decommission Costs: $0.75-$1.50/SF
    • Furniture: $25-$35/SF
    • Technology (audiovisual, structured cabling): $4-$7/SF
    • Design/Consulting: $6-$9/SF
  • All-in costs (construction + office fit-up) for shell space range from $86-$145/SF

As a Tenant, How Can I Best Manage  the Impact of Higher Construction Costs?

  • The best way to manage your costs are:
    • Engage a tenant representative early in the process (12-18 months before a move is optimal) to aggressively negotiate a favorable lease.
    • Engage a professional project manager to pull together a team of consultants that can assist in streamlining the process,  This team would consist of a general contractor (GC), a design firm as well as furniture, data cabling and technology consultants.
    • The design firm will create a “program” (list of specific space needs) which can them be applied to a “test-fit” (a preliminary space plan that applies the program to a specific space)
    • Have your GC price and provide any value engineering to the plan to drive down the cost.

In closing, The Research Triangle market which consistently receives national accolades will continue its growth (~92 people a day moved to Wake, Durham, Orange and Johnston Counties in 2018) which will result in higher land and construction costs.  Thus the trend in rising rents will continue. Knowing this and planning ahead by engaging the best consultants early in the process will give your company the ability to forecast and accommodate the rising costs associated with leasing space.

Robert Hoyt, Tenant Broker

SubMarket Insights: Downtown Raleigh – Sneaky Cool

The New York Times visited Raleigh in 2018 and aptly deemed it “sneaky cool” – deceivingly mild on the outside, yet passionate, friendly and energetic on the inside.

Historically dominated by state and local government and universities, a new wave of tech entrepreneurs is choosing to call Raleigh home – both homegrown and transplant.  With all this growth comes new restaurants, arts, amenities and a burgeoning cool factor.  Downtown used to be dominated by one main street, Fayetteville, but now sports interesting micromarkets with an impressive array of major developments on the books.

  • To the west, the Warehouse District is growing up anchored by Raleigh Union Station, the Dillon mixed-use development, Morgan Street Food Hall and CAM Raleigh showcasing cutting edge contemporary art and performance.
  • Moore Square to the east is home to newly renovated Moore Square park, Marbles Kids Museum (the most-visited children’s museum per SF in the country), new residential development and ANOTHER great food hall, Transfer Co.
  • To the north, Seaboard is slated to undergo a major $250 million transformation and Person Street showcases a small-town main street vibe with restaurants spilling out onto the street, historic homes, and an urban farm.  Smoky Hollow redevelopment is under construction with hundreds of new apartments, an urban Publix grocery store, and class A office pushing downtown’s boundaries northwest.
  • To the southwest our crown jewel is taking shape, Dix Park, a 308-acre oasis adjacent to downtown, is the nation’s most exciting park project according to Curbed magazine.

We’re not ready to rest on our laurels, although we do have them……. Jus’ sayin’

Latest Laurels

  • Top 20 US City for Startups – Commercial Café, June 2019
  • #3 Best City to Work in Tech in America – SmartAsset, June 2019
  • #3 Best City to Work in – Fortune, January 2019
  • #1 Best Beer Festival in the US – Brewgaloo – USA Today, April 2019
  • Top 10 Places ot Live in the US – US News & World Report, April 2019
  • And so on….

Stats

  • City Population (2018 Est): 469,000
  • DT housing units: 5,472 @ 95% occupancy
  • DT Residents: 8,500 (18,585+ within a mile)
  • Downtown Employees: 47,000
  • Office occupancy: 94.6%
  • Median household income: $61,505
  • Bachelor’s Degree attainment or higher for those 25+: 50%
  • 3 James Beard Award nominations in 2018

Resources: City of Raleigh, Downtown Raleigh Alliance, Wake County Economic Development, US Census