Multifamily News Roundup – October 2019

California Fires

Of all fifty states, California has the dubious honor of having the highest percentage of homes burdened by housing costs. The state recently passed legislation designed to reduce the cost of living in the state, but rent control cannot impact another problem facing multifamily owners, renters, and everyone living in the state: wildfires.

As development has pushed further away from urban centers, homes have become more exposed to the state’s natural wildfire season. That natural season has expanded by some 78 days since 1970. This longer and longer season increasingly threatens the already limited supply of housing in the state in two ways. First, the obvious one: fires destroy existing housing, forcing displaced homeowners and renters into lower-quality temporary housing, or away from their previous home altogether. However, fires also limit supply by limiting the areas where builders can reasonably contribute more housing without the high costs associated with building in urban centers. As the wildfire season expands and Governor Newsom’s tenure continues, expect the introduction of incentives to build in or near urban cores, and legal limits placed on what developers can produce in areas prone to fire.

WeWork’s Troubles Continue

WeWork’s troubles continued in October. As the fallout from the company’s delayed or cancelled IPO continues, the company has formally parted ways with its founder, Adam Neumann. That separation comes at a high price: a cool $1.7 billion payment. The payment, or fee, will mostly serve to buy out the founder’s shares, but some portion will take the form of a credit line to help him pay down personal loans from JPMorgan, and some will take the form of cash. Specifically, a $185 million consulting fee paid directly by investor and shareholder Softbank to retain Neumann as an advisor, loosely linked to the company, for the next four years.

$1.7 billion is a staggering cost for any company to separate from an executive. The number should alarm investors as much as the $700 million the company bleeds through every quarter. New executives and leaders have committed to lowering costs by moving resources away from non-core businesses, such as the company’s residential division, WeLive, and its school, WeGrow. In addition, layoffs have begun, and despite a history of pricey acquisitions, the company will forgo growth through purchase for the foreseeable future, emphasizing organic growth instead.

Meanwhile, on the front lines, the negative press seems to have given potential tenants a reason to look elsewhere for office space. The ribbon cutting for a new office building largely occupied by WeWork in Brooklyn was met with little fanfare—tenants have indicated the space does not have many occupants.

Opportunity Zones

The Trump administration has touted Opportunity Zones as a potential economic engine for under-performing parts of the country, and as a means to incentivize multifamily development in underserved areas. Steven Mnuchin, Trump’s Treasury Secretary, stated publicly last year that he anticipated some $100 billion would be invested through the program. However, that interest has not materialized. Numbers released in October by a San Francisco-based analytics company suggest that only 15% of the expected investment has occurred. Some companies have successfully raised enough to meet their fundraising goals, but unless the Trump administration continues to tweak the existing tax breaks Opportunity Zones provide, it seems the program will not meet its creators’ expectations. This failure means fewer units of housing in areas that need it, and as of now no clear replacement program exists to provide those units