Examining Commercial Real Estate Use and Values

Transcription:

Rich Saskal (00:08):

Good Morning everybody. We're ready to get the commercial real estate panel underway if you want to find your way to a seat.

Kimberly Olivares (00:17):

I know that is really,

Rich Saskal (00:21):

I'll begin by introducing my panelists briefly. Directly to my left is Eric DeJernett, a Senior Vice President Advisory and Transaction at CBRE. And we have Kim Olivares, The Deputy Chief Financial Officer for this Great City of Austin and Gera McGuire, Associate Managing Director at Moody's Ratings. Let's start by establishing the state of play for commercial real estate in Texas in particular, the pandemic threw the market for a loop, but where does it stand today in 2024 in Texas? Maybe Eric can get us started with the industry perspective. Is the return to office a done deal? Are there some alterations from the before times?

Eric DeJernett (01:12):

I'd be happy to join in. Can you hear me? Yes. Okay. There are a lot of different topics we could talk about. We're going to open with office, which is something you all probably all go to or you lease for your employees or if you're advising your municipal clients is a topic of discussion. I think there's both a feeling that COVID brought on the hybrid work or the idea of hybrid work or the idea of working from home. But really the truth is as we were going into COVID and say 20 16, 17, 18, 19, that companies were already moving in this direction and really so was the government. I know I work for CBRE. We're a large international firm and our firm was already moving to what we call a 360, which is an open office concept internationally. And so we were converting all of our offices to this new, you have no assigned desk today.

(02:12):

I went in the office, I put down my laptop and I set up for the day. Now the truth is, like most people, I sit in pretty much the same place every day, just like you used to, but on the days I'm not there, my desk is open for other people and it's a much more efficient way to go now to think it's only in the private sector. We did a study for the city of Austin in 2018, 20 19, and we've toured with the city best of class projects and in 2019 we went to Washington DC and toured the GSA, which is the big federal government authority that does federal leasing and development. And they had recently renovated a 700,000 foot historic building in Downtown DC. Gensler was the architect. It was very impressive. It was all open desk. We got there one morning with our city team and basically there's a kiosk kind of like you're getting an airport ticket and people would come in and they would punch in, people are gathered by their groups or their neighborhoods is what they call it, and they would get their desk for a day.

(03:25):

And as we're standing there checking in, going through security, there's a line of children that walk by that kind of classic 4-year-old with a little rope and the teacher in the middle of this big new office building. And so what the GASA had done before COVID is they opened up their system to do hybrid work. And so what we, including the daycare, which is an attractive attribute for coming to the office. So what we're seeing is really going through COVID coming on the other end, something you'll hear quite a bit is a flight to quality and in the leasing market we're seeing companies either kick the can because they're not sure what to do yet or they're tending to downsize maybe 75% of what they took before, but they're getting better space, they've got better meeting space, they've got better remote work space for people and they're doing it in areas where there are more amenities, not just daycare but fitness restaurants and so on to make it attractive to come back to work.

(04:41):

So is the office dead? No. Is it under a huge shift? Yes. For those of you who are in effect, I'm looking at is really underwriters, bond bond attorneys, we're going to see winners and losers. There are going to be some assets that are older that were not fixed up, that were not really positioned well to go into this new hybrid environment or new, nicer, attractive environment for employees. And it's going to be challenging for some of those assets in Texas. I think we'll fare a lot better because we don't have kind of the old stock that you might have in the northeast or something like that. So I think we can touch on a lot of things about the real estate market in general, but that's a quick snapshot on the office. Alright,

Rich Saskal (05:33):

Kim, can you talk a little about what you're seeing from the city's perspective?

Kimberly Olivares (05:40):

So Austin, I mean if you walk around you see cranes everywhere. So it looks like everything is just fine and dandy, but we are seeing a slowdown. We're not seeing a lot of new starts. A lot of that is related to just the price of capital, but at the same time we do see a lot of developers working on their site, planning their zoning, all of that kind of preliminary development work so that they are ruined and ready to go the minute they're rate cut ever happens and the cost of capital starts to shrink. We're also seeing occupancy rates in terms of office are definitely higher, but in Austin they're actually it's, it's not nearly what you see in other areas of the country and in Texas in general is like that. Even at the 2021, early 22 timeframe, as we were starting to edge out of the pandemic, Austin had higher return to work numbers than you saw elsewhere. In addition, there's definitely a sublease market going on, but that sublease market is actually shrinking and it's spread out. There's notable ones that you'll hear about certain tenants or certain like the Google the sale building and meta with theirs, but by and large it's more spread out around the city and that square footage is dropping.

(07:22):

We're also from our city side, we actually are, we have a 50% in office requirement for all staff. Unless you're executive then you're so lucky to be in five days a week, not bitter, but it's been interesting to see that just everybody's making that shift. But it's also, I see I walk through Downtown, I mean you guys are potential obviously hopefully walking around, spending your money, giving us sales tax dollars as you're here in town and all your hotel occupancy tax will love you for that. Thank you. But Downtown is bustling. It is incredibly active. So while we are seeing slowdowns, it's not enough to give me pause. It's not enough to make me really worry about the future and what's to come because, and we'll talk, we can talk about this a little bit later, but just the nature of our developments Downtown and across the city are our nature that we're poised to be just fine.

Rich Saskal (08:35):

And Ger, can you talk about how the shifting CRE market has factors into how Moody's looks at ratings for example?

Gera McGuire (08:45):

Sure, sure. So I'm going to throw some numbers at you and test the strength of the coffee that you drank this morning, but I need to use my notes to get the numbers right overall, Moody's recently put out a commercial mortgage backed piece talking about how secure commercial mortgage backed securities are. And in that we looked at the top 25 markets for office space and in that 25 across the nation are three of our major cities. We have Austin, Dallas, and Houston in the top 25 markets for office space. And I think something that we really are observe is that Austin had an incredible, the highest in the country of those 25 between Q4 2019 and Q4 2023, they saw a 23% growth in inventory of office inventory. Dallas saw 6% nationally, the number was four and Houston was a little bit more moderate at 3.8, but basically at the national level of adding inventory to commercial during that time period.

(10:05):

But I think when you look at that, you kind of have to start to look at a few of the other things, what's happening with vacancy, especially now, what's the change in vacancy from Q4 2019 to Q4 2023 and you start to see a little bit of the story and then you see the taking rents and you start to see a little bit more of the story. So just for leading into what Moody's is viewing to this effect for vacancy rates, the national is about 6.2% vacancy for those 25, Houston is the second lowest in the nation with only a 2.4% vacancy rate. Dallas is running at 5.4 and Austin's went up the most to 13, 13 4. But the reason is really around that growth and how much is available. Of course, we continue to add jobs into the market, into all of Texas and into our major cities, but I think you see some stability in the Austin market when you look at taking rents.

(11:13):

So taking rents are what actually people are signing the lease for. In case you're not overly familiar and nationally we're seeing about a one and a half percent decrease in that taking rate number. But in Texas we're seeing a totally different story. For Dallas, the taking rates are actually up 5.9%, which is the fourth highest in the top 25 markets a strength for sure. For our office space as we're going into what I'll talk about property taxes, Houston and Austin are right around the national average at 1.3 and 1.7% losses in taking rent, but we also have a very different price per square footage in Texas than we see in much of the nation. So Dallas and Houston run about two thirds the cost per square foot of the other 25 markets in the nation and they're running in the twenties per square foot. Austin is about a little more than half of what our highest market is, which is Manhattan. So Austin's running 33 some odd dollars per square foot. Manhattan runs about 64 or 66 per square foot. So you're still seeing affordability from a corporate reinvestment and something that will help to mitigate the hybrid work environment in Texas. So we see it as a pretty good landscape from that perspective. San Francisco's a whole another story. Anybody from San Francisco? Nope. Anybody still awake? Okay.

(12:51):

So what does this mean for Moody's? Okay, so from a property tax value perspective, job growth is going to continue. We're seeing continued population growth and most of our cities are running about a third, a third or third on sales tax, property taxes and other taxes. So when you factor in property tax, you see a balance as that population comes in, you see additional where you might see some loss in the commercial values, you're going to see some gain in sales tax as people are in the area or other taxes that cities are collecting. We'll start to see a convergence is in particular cities where their property tax revenue is about. The numbers we're looking at right now to look for needles in the haystack, if you will, is where property values generate more than 40% of the taxes. And of those property values, 25% are commercial. A loss in commercial would then result in around a three to 7% decline in revenues. And we'll talk a little bit more about declines in revenues and how we can mitigate that with revenue restrictions in a little bit.

Rich Saskal (14:08):

Alright. And Kim, I believe you've been able to take some of the turns in the commercial real estate market to benefit the city's taxpayers. Can you talk a little bit about that?

Kimberly Olivares (14:19):

Sure. So the price of buying a building has dropped and I'm definitely taking advantage of that. I think I look in the audience and I see our in-house attorneys and our outside bond counsel and I think I've given them many heart attacks over the deals that I've been doing over the last year for some of these acquisitions. But we're in a situation where we can make an investment that benefits us as well as the community. So Eric and CBRE serves as our real estate advisor and he was talking about the study around our office use. So they found that if we were to eliminate our use or strongly or extensively decrease our use of lease space, we could be saving $30 million. So we've been actively pursuing owned versus lease space. The current market is allowing us to accelerate that.

(15:27):

So when we make these investments, it's helping us in terms of long-term, addressing our current office space needs, future office space needs, getting ourselves out of lease situations where through the triple net we're tax exempt. I don't want to pay property tax on lease space, so let's get out of that, save ourselves money. But also the folks that own these properties, they have a desire to sell. So we're able, our payment to them is an influx of cash and to their coffers to be able to make further investments and it's a win-win situation. Now there is a challenge to some of these. There was some talk yesterday about restrictions on certificates of obligation. The last time we did a voter approved bond election, the idea of buying multiple office buildings was not at the front of mind. So we didn't have just funds sitting around to do that from voter approved.

(16:32):

So I'm using COS, but I'm definitely having to structure these acquisitions, structure the occupants of these acquisitions in such a way to make sure that I'm continuing to abide by the co restrictions, which can be challenging. I'm having to move the deck chairs around in terms of our different staff and where they're officed and whatnot, but it's been doable so far. In addition, the cost of buying these properties is far less than what it would cost me to build these properties brand new. And we've been very lucky that the properties we're acquiring are in excellent condition. So I'm not walking into a buy it and also need to do complete gut renovation or anything like that. So it's putting ourselves in a much better spot near term and long term.

Rich Saskal (17:26):

Thanks Eric. I think you have your own vantage point on how municipalities fit into the commercial real estate market. Can you talk a little bit about that?

Eric DeJernett (17:35):

Yeah, I'd be happy to. And as Kim mentioned, I've been working with the city of Austin for almost 10 years now and we've steadily been working through a program the past five, six years as Kim mentioned, to move out of lease space and into own space, not only from lease to owned but kind of better quality space. We're looking at what are the functions within in the buildings. We're adding community space, we're doing other things that are helpful to the city. When we look at the entire portfolio, and as Kim mentioned and Jared touched on, Austin has been just really a boom town for office going into COVID and there were a lot of developers on the private side that were doing spec development, which in a lot of the rest of the country you wouldn't do. But because we're tech oriented, there's a lot of, if you build it, they will come.

(18:26):

And that has worked for a while. Now we're at a point where some of these buildings are empty, the landlords are a little bit more anxious and what we're seeing either on the market or just under the surface are some really nice opportunities for the municipal sector. And as Ken mentioned, talking to the bond attorneys here, I'm sort of on the front end talking to the developers and the owners. They're not used to dealing with municipalities, but at the same time they're more interested than they've ever been. They recognize that there is bonding capability on the public side. There is zero or almost zero on the private side and there's probably, I mean it's hard to predict. I mean at least maybe another year of constrained credit for investors. I was talking to one of our office folks yesterday and the Wall Street folks, private equity money and investment money, REIT money and so on, some of the REITs are struggling rebalancing their portfolios and then they're also trying to look opportunistically and they're just not quite ready right now.

(19:42):

So there is a time for the public sector to come out. Right now bond attorneys got to be a little creative. I know this is stressing everybody a little bit, but at the end of the day, the opportunity for the public sector is really enormous. The savings we've been able to accomplish and we're on the front end of working on a number of transactions right now are really meaningful. I would also add that whether you're looking at an existing inventory, specifically office land, I mean land was just crazy during COVID and now there are a few buyers and it's a great time for municipalities or higher education institutions to look at properties. I do some work for the University of Texas and when I get back to the office, I'm working on a contract to buy a strategic property to help them quietly buy terrible time to sell.

(20:40):

It's just an awful time to sell. It's not a good time to lease, but it's a great time to buy. The last comment I'll make here, so with the city, there are some custom really with any municipality you've got some custom use assets. And so there's a property the city bought 12 years ago for fleets, maintenance, trash recycling, significant a hundred acres up northeast. And in this market we were able to go out to developers and compete way more than we thought we would have. We went out with our performance specs, we said, Hey, we want some help developing this. We want the private side and their expertise to come in and see what they can provide for us. We had 10 proposals, I thought we were maybe going to have six. It was interesting, the P three developers who showed up too, all good, all qualified.

(21:38):

But at the end of the day what we selected was, and we just awarded this yesterday, it's not even public yet, is really a private developer who specializes in industrial. They had a great team, they were very competitive on their pricing. And so we were able to pull in the private side to a public engagement and really save a lot of money, not only save money for the taxpayers, but as Kim mentioned, put money back into our local economy. So there's really a win-win right now for cities and the state. I work with the state as well to lean in and use this opportunity because it will pass. And as you all probably know, a year, 2, 3, 6, 7, 8, I mean it's been very hard for the public sector to compete in the market. And right now they have that opportunity.

Kimberly Olivares (22:32):

And just one thing to add that project that he's talking about, we're particularly excited about because it's our first one to do under a public facilities corporation we recently created. So just again giving, I'm looking at Sean over here, one of my attorneys like Stephanie Vy, I think they're going to kill me before I retire, but it's the first issuance that we'll do through our PFC and it's, it's an exciting kind of a project and a new approach for us

Rich Saskal (23:02):

As controller. Heger reminded us earlier this morning, Texas is in part a property tax state as well as a sales tax state. So I want to dig into whether these shifts in the commercial real estate market have a proper tax revenue impact. If why or why not? Maybe you can start Gera.

Gera McGuire (23:23):

Yeah, so I mentioned earlier certain areas with maybe high daytime populations have more commercial I more commercial office space. They're likely to have cities that rely more heavily on property tax. We do have the revenue rate limitation three and a half percent growth, but it's on growth, right? So if we are to see a huge decline, say a 20% decline in commercial values, cities do have the ability to get back to a revenue neutral plus three and a 5%, right? They can adjust their rate. That's going to play a lot into political will to increase the rates. So if you go back to the scenario of the 40% property tax, 25% commercial and you lose 20% of value, you might lose three to 7% of revenue, but you have to increase your rate by about six to 9% in order to make that up. That's a pretty big jump.

(24:34):

So you'll see a competitive advantage of those. We will see what people do politically if they just go straight for the rate. But I think you'll see an advantage of those with a lower tax rate going into this particular stress. I mean our governments in general have been very resilient. We saw the tech crash and you saw diversification of tax bases and additional job growth come in that helped the revenue get to a revenue neutral improving environment. You saw the housing crisis sales tax remained incredibly stable during that time period and banks who took over mortgages paid the property tax earlier than the citizens did. So it really wound up being a pretty good scenario and now we're in this post pandemic and wondering what's going to happen. And there's a lot of options and levers to pull from a credit perspective. When you're looking at continued population growth, you're looking at a third of your revenues in most cases sales tax as likely between 25% to 30% of your revenue, you're going to continue to see that growth take place. So given the population growth, the tax rate limitation in and of itself is not a credit concern. It's still considered to be very stable and growing positive environment in Texas from that perspective.

Rich Saskal (26:00):

And Kim, what do you see specifically at the city of Boston level?

Kimberly Olivares (26:05):

So our total tax base is pushing 250 billion here in Austin and are very lucky that it is incredibly diversified. And I mentioned earlier downtown, while they're slowing, it's definitely continues to thrive. So we have a nice mix of commercial retail, residential throughout, which keeps it very active. I looked at our latest act for and our top 10 taxpayers, they only account for 2.5% of our total tax base, so only of 250 billion. And I look at where they're located around town and they're spread out everywhere. So I'm not worried about, we have a concentration of certain taxpayers in a certain area and I also, when I look at them, the investments that are, I know that are public knowledge are huge. So Samsung is our top one. If you read the news yesterday, Samsung is doing just fine. Then we've also got Apple in there and Apple is, they're continuing to expand their presence in Austin.

(27:22):

They have their main campus up on the north side, largest campus outside of Cupertino. They actually just, I can't remember if it was an acquisition or a lease on another huge space on the southwest side of town. So we're continuing to see investment from major players in Austin. And on top of that, our property tax collection rates are 98 plus percent every year. So that helps. And then as we look at the coming fiscal year, we're projecting based on the tax notices that just went out from the appraisal district, we're looking at five and a half billion dollars of new construction value coming online. So we're in a good spot and I feel lucky now there's still some challenges and we'll talk about that, but it could be a lot worse. So I feel lucky that we're in this situation, but I also need to credit that to our economic development efforts. Also just the private sector in general and just kind of how they've set up shop here and created an environment that gives us strength even when there's downturns.

Rich Saskal (28:39):

Alright, we've been talking about office space generally, but another part of commercial real estate is the retail sector, which received a big shock from COVID specifically and the internet in general. How is that doing? Maybe Eric can fill us in. Sure,

Eric DeJernett (28:59):

I'd be happy to. Yeah, as we were going into COVID, people were buying online, people were buying online more and more as they got more comfortable with it. And kind of like with hybrid work, COVID sped some things up. We all got comfortable, myself included with ordering things online and having Amazon show up and especially through the pandemic. And as you all know, I mean it is kind of weird to think that COVID was a few years ago, but it was a very dark time for retail. So retail was going into sort of an unknown time. Retail was hit very hard. And along the way the good news is there was really no development.

(29:45):

The lenders, the underwriters for retail had pulled back on everything but basically grocery store and some really high end products. So supply was coming down as we went into COVID. And what we've seen coming out of COVID is a lot of right sizing, sort of like right sizing in office, right sizing in retail, we're also having, there's the flight to quality. So in Austin you would see South Congress and the domain and key suburban areas because the return for retail has not just been urban. Actually the urban has been slower than the suburban because there was that time early in coming out of the COVID where people were more comfortable in their car, they were more comfortable out in the suburban environment, they were already at home. And what we've seen in general is because of the lack of supply, because of the fact that retailers have figured out that they need some bricks and mortar, like maybe pre COVID, a retailer might've need in a place like Austin or two to five locations or maybe a metroplex like Dallas, five to 10, well they don't need quite so many stores, but they still need some.

(30:59):

And so they're willing to basically pay up for those locations. And something we haven't really touched on but is kind of a key element of real estate right now is in what it came through with inflation through COVID, which really hasn't come down. I mean we're all looking at interest rates to stop going up, but we've had a real increase in what it costs to finish out a space. If you've just renovated your house, you know what I'm talking about. And so whether it's office, retail, whatever, the ti costs are really high. So we're seeing retailers focus on just a couple of locations, say as an example in a market, but they haven't gone away. And the strange thing is the things I never thought I would see, and I know this is true in Houston and Dallas too, like Westheimer in post Oak and Houston and Knox Henderson and North Park, and I'm stretching my retail expertise here a little bit.

(31:58):

But on South Congress, to Kim's point, which hopefully you went out to eat or you went and bought some cowboy boots or something while you're here to lease a space on South Congress, I'm sharing this only because it's so mind blowing. It's about $200 per foot per year plus expenses. So that means if you went to Kova and you bought a pair of boots and they've got 2,500 feet, they're spending $500,000 a year on rent. And so just to underline that point that the retailers will pay up for the right location, but that didn't mean they've disappeared from the suburbs either. We've seen really rents go up across the board for retail because of constrained supply. There are some outliers, there will be some projects that really just don't make sense anymore. We'll see those as redevelopment opportunities in the future. Now I'll just tack onto that. I think something we will see in the next five to seven years as we float through this kind of reabsorption post COVID, there will be kind of your, I would say your B and really your C product functionally obsolete properties, which will really become land development opportunities as we come to the other side of this current market.

Rich Saskal (33:23):

And before I go on, I just want to give, we have three microphones set up and one in each aisle. If anyone from the audience wants to have ask a question of the panel, I will a call on you. But going back slightly to the property tax tangent, I mean you talked about how you're adjusting to the three point a half percent caps from the 2019 legislature did, there's some big headline news on property tax from last year's legislature. How big an impact does that have on local governments in Texas? Do you want to start Kim?

Kimberly Olivares (34:02):

You go. Okay,

Gera McGuire (34:04):

No problem. So yeah, we talked a little bit, oh shoot, there we go. We talked a little bit about the revenue cap and mitigates around that, but I think just to kind of tie that into what Eric was just talking about, when we're looking at risk, we're looking about plans to mitigate stress. Cities are always planning and then we're asking them what is the plan and how is this all going to happen? And I think overall, we're seeing in all three of the markets I've discussed today, we're seeing multifamily really show strength and growth in rents. And we're seeing that retail, with the Macy's announcement, you're seeing a lot more off mall investment in these regions around some of this multifamily and you're seeing cities get into that. So as you're seeing, Houston has been really progressive on this front, about 2.5% of their office stock is currently in conversion and many cities are doing this, but they're leveraging federal money and often tiff money to convert into multifamily.

(35:26):

And as you're seeing some of these commercial properties get to a lower price per square foot, the pretty high cost of converting to housing is being offset mostly in luxury townhome kind of conversions because it's expensive to put HVAC and plumbing and all the things you need to do to make commercial residential. But you're also seeing federal and state and locals come in with financing to help with market rate that has some level of affordability, which is something our cities are struggling with as well. So if you tie that all together, you've got this revenue restriction which can be limiting, but then you've got the innovation and the planning of the cities which really ties into utilizing all of these different tools that they have to be able to keep a healthy economy around their region.

Kimberly Olivares (36:29):

And from Austin perspective, we've been prepping our council for years now that the three and a half percent realities are coming and we are there right now actually our five-year financial forecast is being presented to city council and we're talking about the deficit that we are projecting for next fiscal year and going out. So the three and a half percent challenge is a real thing. But I'm also, this isn't our first rodeo, this isn't the first time we've encountered challenges on the operating front. I know we will make the hard decisions and we will come through on the operating side, but on the debt service side of the equation though, I mean we continue to have the ability to set our debt service rate and exactly what we need to continue to make to meet all of our debt obligations. So I think you might see a little bit, not necessarily from Austin per se, but you might see some cities have a little bit more reliance on debt to weather some of this and make the adjustments. But hopefully not too much. I wouldn't really recommend that. But we have no concerns on the geo front. I know that we will be able to make the adjustments necessary on the operating front. And like I noted before, our property tax collection rate is incredibly high. And while sales tax growth though has dropped considerably, we at one point during the pandemic saw a 20% just over 20% growth year over year. So that was never sustainable. But we are definitely just, I think we're coming back down to earth and we will adjust.

Rich Saskal (38:36):

So my room in this hotel has a nice view over the convention center, which kind of brings me to another facet of commercial real estate that's built to cater to visitors. And Kim, I think your position also gives you a good vantage point for the convention and hotel business in the city. Can you talk about how that is doing?

Kimberly Olivares (38:54):

Right. So the, the convention center Hilton is actually owned by A PFC created by the city and I serve on that board. So we're continually getting updates on average daily rates, the revenue per available room, occupancy rates and the sort for the longest time it was always comparing to pre COVID and we're finally not doing that. We're finally just doing year over year. So we've made substantial recovery in those metrics. It's not been a hundred percent and it also, you're going to see more variances in that recovery depending on the class hotel it is. So if it's a luxury or upper upscale versus a midscale or economy, all the different levels the CBD hotels are having, the 2024 performance is lagging behind 2023 a little bit, but it's still relative to COVID take it.

(40:07):

And we're also seeing considerable new supply coming online or in the works. So there's two hotels that are making major investments on renovations and then there are half a dozen hotels projected to come online. Well actually one just opened in January and then another five projected to come online between 2025 and 2028. So there is clearly confidence in the hotel market here in Austin, which, and that's on top of the fact that we're about to rip down our convention center. So we will be tearing that down starting from scratch, rebuilding and reopening in 2029. So there is a lot of activity on the convention and hotel front in downtown that to come in these next few years that I'm really, really fascinated to see how it ultimately plays out.

Rich Saskal (41:11):

Alright. Does else on the panel have any insight into the hotel side of things? Either from development or occupancy tax or thought I'll just,

Kimberly Olivares (41:23):

Can you say

Rich Saskal (41:23):

Again either from a development perspective or occupancy tax perspective?

Kimberly Olivares (41:29):

So from the hotel occupancy tax, we are taking our convention center closure into account. The taxes have grown substantially over the last few years, but just to be safe, we're assuming kind of a flat level for the most part over during the construction years. But again, like I said, there's a number of hotels coming in line, the hotels outside of the CBD, they actually continue to perform very well. So that gives us a lot of stability in terms of our hot collections. Alright.

Rich Saskal (42:08):

I think a lot of what's unspoken about what's supporting all kinds of real estate markets in the state is just the population growth. I mean, Jared, from the 30,000 foot perspective, what does Moody see in terms of the, is this just going to continue indefinitely and how well are governments prepared?

Gera McGuire (42:30):

Okay, so just generally from a demographic perspective, replacement rate and working age are going to require migration in the nation and that is true in Texas as well. I think in general, Texas has done an incredible job relative to the other states in job creation and bringing in immigration inside the us. I think one of the advantages we have in Texas is really around nearshoring post pandemic. You're really seeing corporations begin to invest and diversify in their supply chain and the location of that supply chain and Texas, Mexico via Mexico is really poised to be a big winner in attracting folks into the state for job creation. And I think all the economic reports around Brownsville and McAllen are really showing that that's happening. Yeah, there'll be a little bit of a crunch to get the right housing for the population to come into those regions, but that's all development for those regions. So to answer your question, yeah, I do think that the population growth will continue, it'll be more muted just as everything we've talked about here today kind of works itself out. But Texas in comparison will continue to be pretty strong on that front. I believe if you look at the economics,

Eric DeJernett (44:09):

I'll tack onto that. In addition, doing public sector work, I do some private sector work too, specifically kind of urban development work, which was just going gangbusters going into 22 and then the fall of 22, that kind of a cold wind blew in and the credit markets dried up for the private side. We've got a couple of things out right now in the market. These are ground lease, these are large projects downtown. And what we're seeing, which is interesting is this is sort of like a precursor on the horizon and to your point about Texas and where is Texas going to land or Kim's confidence about where Austin is, we're seeing big capital willing to spend money to take a place at the table for larger future development, including office, including multifamily and hospitality, large mixed use projects. And the feedback we're getting, and these are national, really international developers that are looking at Austin now is this is one of the only places in the country where they can go to their investment committee and get approval to spend money to be in a position that when the market turns around that they'll be ready to develop. So I will say that there is, capital is still circling Austin and I think Texas in general,

Rich Saskal (45:38):

And as I was preparing for this panel last week, I was skipping the headlines and I saw something about something called Tokyo Electron, which sounds really cool, but maybe can kind of fill us in on how that fits into the city's development trajectory.

Kimberly Olivares (45:51):

Sure. So Tokyo Electron has their US headquarters here in Austin and they have a property along Ben White out towards the airport and they decided to sell that entire campus and they're relocating their office operations to a leased based downtown or right on the edge of Downtown property and then also building new R and D facility. So they put it on the market and we put it in the offer and it is ours, this is 107 acres, there's about 85 acres. Well, so there's about 66 acres from their property of raw land. And then we have immediately adjacent to it, another just over 18 acres. So there's about 85 acres of raw land waiting for development, plus a nearly 200,000 square foot building that we will be using for a number of public safety transportation uses. But so this creates a huge opportunity for us to make an investment in the southeast Austin community with mixed use development.

(47:05):

So this will, once it gets rolling, will be our fourth major multi-use, mixed use project. We had Sea Home then Miller and our next one that we're hopefully going to nail this development agreement down here in the next week for Colony Park and then this Tokyo Electron site. So City of Austin is a player in the real estate market and making big investments in our community, in our tax base to address a multitude of issues and challenges and needs in our community. So we're really excited for all the opportunities to come from that property. Alright,

Rich Saskal (47:46):

Kind of nicely ties all the themes we've discussed in this panel together. I'm waiting to see if that gentleman's approaching the microphone. Please ask your question.

Audience Member (48:00):

I'm asking, I guess the first question of the conference, I don't know if the microphone's on, if you can hear me. You're good. Y'all haven't touched on multifamily and I'm particularly curious about the affordable housing market and your commentary on the bill that was recently passed in legislature to reform the Public Facility Corporation Act.

Kimberly Olivares (48:25):

So I can speak to it from the city side of things because we do have a housing PFC, but the changes to that bill are not so much of an impact on us because we were already operating within our city limits anyway. So we will continue to make investments in affordable housing and partner with developers for future projects for outside PFCs. It will be an adjustment. And I dunno, Gera, do you have any thoughts on that front?

Gera McGuire (49:01):

I mean, I think that, what do I think about that? So I do think multifamily is doing fairly well in Texas, but affordable housing is going to have to continue and I think it's a little early to see what the cities are going, kind of observe and see what the cities are going to do to function in the new environment. But overall, it's expected that there'll be partnerships and creative ways to continue to invest and build and house all the people that are moving here. I think it'll be a little bit of a challenge, a shift for a year or two, but we'll see a resolution.

Kimberly Olivares (49:49):

And we're also very lucky our voters have approved multiple affordable housing bonds that continue to give us significant funding to support those partnerships.

Rich Saskal (50:00):

Alright, well I'd like to thank the audience for its time and attention and thank my panelists for this interesting discussion.