Joseph Krist
Publisher
WE WORK, REMOTE WORK, DOWNTOWN WORK
A combination of events and releases of data this week has shone a brighter spotlight on the current state of office real estate. The glaring symbol of the change in where people work is WeWork. The bankruptcy, unlike many failures, has several fathers. Nevertheless, the decline of office space utilization and the rise of remote work wreaked too much damage on the company’s business plan. It puts the debate over remote work back on the front burner.
The data part comes from a recent release from the University of Toronto. Researchers there have been using data from cell phones to track the changes in foot traffic in North America’s largest cities. The latest data showed the level of traffic in the March to May time period in 2019 versus that in 2023. It covers 66 cities in the U.S. and Canada. It does not paint a particularly favorable picture even if it does support what the eye sees.
Only Las Vegas has returned to the same level of foot traffic. It is currently at 103% of the 2019 level. Given the increasing number of large scale events (to say nothing of an upcoming Super Bowl, this weekend’s inaugural F1 race) both newly occurring and recurring, this is not a surprise. Following Las Vegas was a group of eight Sun Belt cities of which Miami and Phoenix fared the best with recovery rates in the 90%+ range.
It is the lower rated cities that are concerning. The bottom 10 cities in terms of recovery rates include Minneapolis, Portland OR, Chicago and Houston which all had rates of 64% or less. The next 10 with recovery rates between 60 and 70% include NY, D.C., Baltimore, S.F., Denver and Philadelphia.
ELECTION DAY
Cincinnati voters approved a ballot initiative which allows the Cincinnati Southern Railway board to sell the railroad to Norfolk Southern for $1.6 billion. The railroad was the last municipally-owned railway in the U.S. Sale proceeds will be used to create a trust which is designed to generate interest earnings which will be used to improve city infrastructure. The Cincinnati Southern Railway has long been leased to Norfolk Southern, but in April of 2022 during negotiations to renew the lease, Norfolk Southern offered to buy the railroad. The current lease brings in roughly $25 million a year.
In Maine, voters decisively rejected an initiative to create a public power utility to take over the operations of two investor owned utilities. Despite widespread dissatisfaction with the state’s largest electric provider, the Governor and several labor unions opposed the measure. In Ohio, despite being overshadowed by the presence of an abortion initiative, voters approved the legalization of recreational marijuana. The vote marks the first time that a majority of Americans will live in states with legal cannabis.
Coloradans rejected an initiative which would have weakened the impact of the TABOR amendment which requires funds above certain levels to be returned to taxpayers. Texans voted to increase the homestead exemption for local property taxes from $40,000 to $100,000. They also voted to create a fund for the development of broadband in the state. They rejected the concept of a wealth tax. The most impactful may be the approval of the creation of an energy fund designed to provide low interest financing for new generation. The down side of the vote is that the proposition was explicitly designed to support new natural gas generation.
TRANSPORTATION OPINIONS
The Mineta Institute founded by the former US Transportation Secretary has recently announced the results of its 14th annual survey of attitudes towards transit issues. The findings highlight the disconnect between what people think and what lawmakers seem to believe. Findings related to gas taxes include that only 2% of respondents knew that the federal gas tax rate had not been raised in more than 20 years, and 70% of respondents supported increasing the federal gas tax by 10 cents per gallon if the revenue would be dedicated to maintenance or safety.
With respect to mileage fees, around half of respondents supported some form of mileage fee, whether that was assessed on all travel or just on commercial travel. The majority of respondents supported variable rate structure options that included 62% who supported charging low-income drivers a reduced mileage fee rate and 52% who thought electric vehicles should pay a lower rate than gas and diesel vehicles.
From here, the conclusion to draw is that mileage fees can’t come fast enough. Set them by class of vehicle and set it at an amount that most closely parallels the revenue stream from gas taxes. This way registration fees do not have to be set differently depending on the source of power for the vehicle. Currently, fee differentials provide fuel to complaints from EV owners about the higher fees they pay even though they arguably are a net cost to transportation funding relative to gas powered cars.
NUCLEAR HAS A MIXED WEEK
The hopes of those seeking to develop small scale nuclear generation technology took a big hit this week. NuScale Power announced that it was cancelling its development of a six unit modular generation facility in Idaho. The project was being undertaken with the participation of a public power agency – the Utah Associated Municipal Power Systems, which supplies electricity to public power providers in seven Western states.
UAMPS management was enthusiastic about the project but not all of its member utilities were. That put the project in the position of needing additional capacity purchases in order to justify moving ahead with the project. The cost of building the reactors had increased significantly to $9.3 billion from $5.3 billion because of rising interest rates and inflation. This left the project with insufficient commitments to allow financing to move forward.
In Illinois, Governor Pritzker said he will sign a bill into law to lift a 36-year-old moratorium on nuclear construction. He had vetoed a previous bill enacted earlier in the legislative session. This bill limits the nameplate capacity of such reactors to 300 megawatts. The law requires the state to develop regulatory proposals for regulators at the Illinois Emergency Management Agency to approve by January 2026.
PARKING REQUIREMENTS
A long standing practice for local planning and zoning boards has been to require off-street parking associated with a new development. As climate change grows as an issue, many have pushed for changes in local development regulations to reduce the need for parking at new developments. There is also the idea that remote work will reduce auto use and the need for parking at current scale.
This week, the Austin TX City Council voted to eliminate minimum parking requirements for virtually every kind of property citywide including single-family homes, apartment buildings, offices and shopping malls. Portland, OR, Minneapolis and San Jose are prior adopters of the policy. Austin now becomes the largest population city to take the step. The city will still require properties to comply with federal law and build accessible parking spaces for people living with disabilities.
Now, does Austin take the next step and address overall zoning regulation reform? Like many other places, housing is an issue in the city and there is a push to use zoning to address the issue. There is a push to allow up to three housing units in most places where single-family homes are allowed and reducing the required amount of land those homes have to sit upon.
OLD SCHOOL AIRPORT FINANCE
Normally it would not be an especially big deal to see voters in a municipality approve debt for revenue based assets. So, it was not a particularly noticeable headline to see that cited the approval of bonds for airport projects by voters in Des Moines, IA. What was noticeable was that the bond authorization will not be backed by a direct pledge of airport revenues to secure the bonds.
The voters approved a $350 million general obligation bond issue for the project. Tax backed full faith and credit bonds. The project will modernize and expand the city’s airport. Here’s where it gets interesting. Construction of the terminal is planned to begin in April 2024. A study is projected to start in January, to assure the airport is prepared to pay back the debt. Estimates are that it will take two to three months to complete.
Ultimately, the city will execute a loan agreement with the Des Moines Airport Authority that expects to capture airport revenues. The rationale for doing such an old school financing is based on cost and ownership. The use of general obligation debt is to secure a lower borrowing cost than would be achieved on a stand alone revenue bond. The city also explored but ruled out a P3 attributing that decision to a desire to maintain ownership of other airport assets.
NYC ECONOMY AND THE PANDEMIC
The NYC Independent Budget Office released some interesting data on incomes for the year 2021. The study used tax return data. About 3.9 million full-year New York City residents filed tax returns in 2021, a return to normal from the unusually high 4.1 million number of filers in 2020. Total AGI in 2021 was $457 billion, up from $391 billion in 2020 (or $410 billion, adjusted for inflation), despite the lower total number of filers in 2021.
One data point leaps out as a source of concern. The top 1 percent of filers represented 44 percent of New York City’s AGI in 2021, up from 39 percent in 2020 and 35 percent in 2019. At the other end of the spectrum, total unemployment compensation diminished to $15.4 billion in 2021, from $22.9 billion in 2020, it remained far above 2018 and 2019 levels of $514 million and $545 million, respectively. The concern is that these changes just further cement the issues of inequality which continue to grow in the city.
NYC WARNING
The NYS Comptroller raised concerns about New York City’s finances as it deals with the recovery from the pandemic at the same time it is overwhelmed by asylum seekers. He warned this week that the fiscal year 2024-2025 budget gap for the city could reach as high as $13.8 billion unless Mayor Eric Adams quickly implements cuts to city programs and curbs new spending. The most alarming number was that some 42% of the estimated gap is attributable to the costs associated with the asylum migrants. The city estimates these costs may grow next year to equal what it spends to run the sanitation and parks departments combined.
He also highlighted an issue we have been worried about for some time. They are not all attributable to the Adams administration. The DeBlasio administration started the city down the road of funding recurring expenses with non-recurring revenues. “City-funded spending has increased more than 50% over the past decade while recurring revenues have not kept pace,” according to the Comptroller.
The other major worry concerns school funding. The Department of Education accounts for 36% of citywide expenditures and faces several issues — including low enrollment and the state-enforced class size mandate. Much state aid is tied to attendance. Public school enrollment fell nearly 9.2% between 2019 and this school year, with some projections expecting it to decline further.
The Mayor will be releasing the November update to the City’s long term fiscal plan.
PUERTO RICO SOLAR
We have long advocated for the development of solar power infrastructure in Puerto Rico in the wake of the 2017 hurricanes. Now, the U.S. Department of Energy (DOE) has announced which solar companies and nonprofits had been selected to install rooftop solar and battery storage systems for vulnerable households in Puerto Rico.
Eligible beneficiaries of the systems to be installed will include very low-income, single-family households that are either: located in areas that have a high percentage of very low-income households and experience frequent and prolonged power outages; or include a resident with an energy-dependent disability, such as an electric wheelchair user or individual who uses at-home dialysis machines.
This marks the first round of selections from the 2023 PR-ERF Funding Opportunity Announcement, which was announced in Puerto Rico in July 2023. The Fiscal Year 2023 Consolidated Appropriations Act included $1 billion to establish the Fund. Three qualified solar companies with an existing workforce in Puerto Rico as well as five qualified nonprofits and cooperatives across the region were selected to negotiate the implementation of the program.
CARBON CAPTURE
The evidentiary hearing for Summit Carbon Solutions’ pipeline permit in Iowa concluded this week. Now the process will involve development of a transcript, a period of time for written comments about the transcript, and a period of time for rebuttal comments. The company had sought an IUB decision by the end of the year. Summit had initially planned to have its pipeline system in operation sometime in 2024.
While it waits for the Iowa process to unfold, North Dakota is in the process of reconsidering the company’s new modified application, but there is no deadline for that process to complete. Summit has indicated it will reapply for a permit to build its pipeline through South Dakota, but it has declined to say when that will happen. Operation has already been pushed back into 2026.
In the meantime, the first commercial plant in the United States to use direct air capture began operations in Tracy, CA. The process takes the carbon dioxide it pulls from the air and have the gas sealed permanently in concrete, where it can’t heat the planet. To earn revenue, the company is selling carbon removal credits to companies paying a premium to offset their own emissions. The project is much smaller than two other projects planned for Texas and Louisiana. Previous attempts at scale have not been successful.
Disclaimer: The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column. The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice. Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.