Why tech loves quirky, old buildings

As giants like Facebook and Google build shiny new cities in Silicon Valley, other technology companies are doing just the opposite to the national office landscape. They are revitalizing and transforming older buildings and breathing new life into a market that had been on life support.

“We’re seeing the most significant demand in the market from the tech sector right now,” said Nikki Kern, senior vice president at JLL Agency Leasing in Chicago. “We definitely are seeing a big push for Class B space from tech users.”

So-called Class B is an office designation that refers to older buildings with fewer amenities and less updated systems. Rent for space in these buildings can be up to 40 percent less than newer “Class A” buildings, which offer more modern amenities and services along with the latest and often most environmentally desirable systems.

Class A rents increased more than 9 percent since the end of 2011, according to JLL, which pushed more companies to Class B, which is now seeing a big drop in vacancies as well as rising rents. Some “Class B” buildings are now upgrading common spaces, like lobbies, in the hopes of attracting tech customers.

The Chicago headquarters of DialogTech

At 300 W. Adams St. in Chicago, a prewar building with an ornate stone entrance, DialogTech, a call-tracking software company, blew out the ninth and 11th floors, taking the space down to the frame and not putting much back—at least not walls and ceilings.

“We can spend dollars on the things that matter, so what matters to the people working for us? They want the best computers they can get. They want high-speed Internet access. They want space, they want a lot of space,” said Irv Shapiro, DialogTech’s CEO.

Shapiro is a baby boomer, but his company is filled with millennial employees, and he is more interested in making them happy—retaining them—than impressing clients with fancy finishings in the space.

“Historically you rent glitzy spaces because you want to impress your customers. In our business, in a high-tech business like ours, our customers never visit us,” chuckled Shapiro.

Instead Shapiro invested in the technology—huge bundles of orange wires in basket-like hangings that are clearly visible and accessible across every ceiling. Garage doors turn large conference spaces into smaller ones at the touch of an opener.

He also put in an enormous game space with ping pong and pinball, right next to the large kitchen where everything from the Cheerios to the Red Bull is free to employees. Space, thanks to lower rent, also allowed him to lease more than he currently needs, so he can expand his company easily.

“We still create a message to the people that work here that what’s important is what’s on your desk, what’s in between your ears, the environment we create, not that we’re putting mahogany on the walls,” said Shapiro.

The same is happening at a slightly newer, but still “Class B” space just a few blocks west at 222 South Riverside Plaza. This classic 1970s-style office building is now a mix of traditional law firm spaces and new tech spaces. At Medix, which places workers in health care and information technology, there are also wide open spaces and unfinished ceilings. And millennials, lots of millennials.

“The average age in our company is 26, so we have that same zest for that young talent, so when people walk in to interview at Medex they have to feel and understand that we are moving in the direction to become a talent technology company as well, so we have to look the part,” said Andrew Limouris, president and CEO of Medix.

The demand is starting to drive Class B rents higher, and Limouris is already worried that he won’t be able to afford the next lease. He moved his company from the Chicago suburbs where rents were about $12-$15 per square foot. Now he pays $35 per square foot. That may be less than Class A, but that is changing, thanks to tech.

“The entire country is going to see a difference where the lines are going to be blurred between the Class B and the Class A product, and rental rates are going to not necessarily be one thing in ‘Class B’ and another in ‘Class A,'” said JLL’s Kern.

In Chicago, Vornado, which owns the iconic behemoth, the Merchandise Mart, is seeing big demand from tech. Motorola was the first to move in in 2012. Then Yelp followed just a few months ago, transforming what had been dark spaces with closed-in offices blocking the windows, to wide-open, bright, colorful spaces with every possible amenity for its more than 300 mostly millennial employees. It boasts both an Apple-style “Genius” bar for tech help as well as a beer bar.

The Chicago headquarters of DialogTech
The building also has a Vornado-backed tech incubator, called 1871 (the year of the Chicago Fire), which houses small tech companies in one communal space. It already has two levels of space for companies that need more size. The Merchandise Mart is now planning to develop another floor for office space, with the expectation that tech companies will move in.

The demand in Chicago has some dubbing it “Silicon Prairie,” but tech is changing the office landscape across the nation. In northern Virginia’s Crystal City, Vornado is backing another tech incubator, leasing office space in the hopes that the area will draw even more tenants. In Seattle, Porch.com, a home remodeling website that is busting at the seams in its current space, is in the process of moving to a much larger, older building that, again, offers great wide spaces at a cheaper rent.

The office sector as a whole was hit hard during the recession and has been slow to revive, as mainstream companies look for smaller spaces to house fewer, telecommuting workers. Tech, however, is the outlier, but one that could drive an old sector of the office market into a brave new world.

Mortgage rates: ‘Definitely in panic mode’

Mortgage rates, which loosely follow the yield on the U.S. 10-year Treasury, spiked Wednesday, after a brief reprieve last week. The move higher seems to signal that while rates rock back and forth every day, they are now on a trajectory to go up.

The days of 3.5 percent on the popular 30-year fixed mortgage are over.

“Definitely in panic mode,” said Matt Weaver, senior mortgage loan originator with PMAC Lending Services. “A lot of refinance clients are moving to locks immediately because the Fed talk is starting to be an eye opener for everyone.” (Tweet this.)

A customer enters at a Wells Fargo branch in Hermosa Beach, California.

Patrick T. Fallon | Bloomberg | Getty Images
A customer enters at a Wells Fargo branch in Hermosa Beach, California.
Weaver said refinance clients who were happy to float rates just three weeks ago are now considerably more afraid of where rates will go. They’re willing to take money off the table to lock in now.

The impact is equally deep on potential homebuyers. This is the heart of the busiest season for sales, and now potential buyers, already highly sensitive to rising home prices, have something else to worry about.

“If the Wednesday surge of Treasury yields persists, the impact on mortgage rates is likely to result in a bout of affordability shock to many housing markets across the country,” said Len Kiefer, deputy chief economist at Freddie Mac.

The shock may already be underway. Mortgage applications to refinance, which are the most rate sensitive, plunged last week, even though rates slid slightly. The fact that the 4 percent range is the new normal has borrowers pulling back. Even mortgage applications to purchase a home fell, down 3 percent last week, as potential homebuyers recalculated that ever-important monthly payment.

That calculation is far more rate sensitive than these small weekly moves might indicate. Take the first quarter of this year, for example.The average down payment for single family homes, condos and town homes purchased in the first quarter was 14.8 percent of the purchase price, down from 15.2 percent in the previous quarter and down from 15.5 percent a year ago to the lowest level since the first quarter of 2012, according to a new report from RealtyTrac.

“When rates plunge, end-user house demand increases quickly—ergo the Q1 2015 outperformance year over year—and then when they surge, the opposite happens—ergo a year earlier when demand was dead,” said Mark Hanson, a California-based mortgage analyst.

The average rate on the popular 30-year fixed mortgage is now up three-eighths of a percentage point since mid-May to about 4.125 percent. While three-eighths may not sound like a lot, it’s not the actual number, or the $40 or $50 more on the monthly payment, but the new trend higher.

“It’s more of what it’s going to look like, where we’re going. Is it a train that’s not stopping? When we see an eighth, a quarter, now it’s starting to become typical language,” said Weaver. “We would normally see a little bit of a pullback, and then it goes up again, and now that’s not happening. We’re slowly steadily increasing.”

Efforts to help homeowners fail their troubled mortgages

The number of delinquent mortgages continues to fall, but the foreclosure crisis is still taking its toll on hundreds of thousands of borrowers.

Of the approximately 952,000 borrowers who are 90 or more days past due on their monthly payments, but not yet in foreclosure, 62 percent have already been through some form of home retention program, according to Black Knight Financial Services (BKFS). They are, it seems, beyond help. Home retention programs were established by lenders and the government to work with borrowers to enable them to keep their homes.

Foreclosure house
“The percentages do look significant,” said Ben Graboske, senior vice president of Black Knight’s data and analytics unit. He pointed to trends in the government’s modification program, which has given borrowers less relief of late.

In 2010, homeowners on average could have received a $530 monthly payment reduction. That has dropped to the $450 range today. Graboske said that it is a major reason you are not seeing better performance for these homeowners today.

Banks are also getting more aggressive in pushing delinquent loans through the foreclosure process, rather than offering more modifications. As home prices rise and demand surges, banks can sell the homes more easily in today’s market than they could during the height of the crisis. Retention actions are down 42 percent over past two years, but of the new modifications or payment plans, 70 percent have already been through one or even more modifications that failed, according to BKFS.

Banks are also favoring short sales more, rather than taking the home to final foreclosure and selling it. A short sale is when the bank allows the home to be sold for less than the value of the mortgage.

“The ongoing shift away from (final foreclosure) sales is a driver of improving home prices since bank-owned properties typically sell at a larger discount than short sales,” noted a new report from CoreLogic. Distressed homes accounted for 12 percent of March home sales, according to the report, down from 39 percent at the peak of the foreclosure crisis.

The numbers still vary dramatically place to place. Ironically, Washington, D.C., where the federal loan modification program was born, led the nation with 67 percent of its seriously delinquent inventory having gone through some sort of home retention activity. Maryland, Georgia, Texas and Connecticut followed with each seeing 66 percent of their 90-plus-day delinquent inventory involved in a home retention action.

The government’s Home Affordable Modification Program, introduced in 2009 and recently extended, has offered just more than 1.8 million loan modifications to date. Banks and mortgage servicers have also done independent loan modifications, including millions of dollars in principal reduction and principal forgiveness.

Although the number of both delinquent loans and those in active foreclosure is down dramatically, they are still two and three times their precrisis norms, respectively, with 28 percent of the remaining foreclosure inventory located in just three states: Florida, New York and New Jersey, according to BKFS.

Weekly mortgage applications jump as rates surge

The interest rate sharp jump to the highest level this year caused a sudden surge in mortgage applications. While that may seem counter-intuitive, there’s a reason: fear that rates will move even higher.

Total mortgage application volume jumped 8.4 percent on a seasonally adjusted basis last week from the previous week, according to the Mortgage Bankers Association. The previous week included an adjustment for the Memorial Day holiday.

“Mortgage application volume rebounded strongly … indicating that the holiday had a larger impact on business activity than originally assumed,” said Mike Fratantoni, the association’s chief economist.

Refinance volume increased 7 percent on the week, and applications to purchase a home jumped 10 percent, both seasonally adjusted. Purchase volume is now 15 percent higher than the same week one year ago, but refinance volume is off nearly 5 percent. The weekly move higher in refinances was likely due to the holiday skewing the trend. Refinances are still lower than they were two weeks ago. This all comes as rates continue to climb.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.17 percent, its highest level since November, from 4.02 percent, with points increasing to 0.38 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio loans, according to the association.

While higher rates make home buying more expensive, sharp moves higher often have the immediate effect of getting potential buyers off the fence, before chilling the overall market in the longer term. That is especially true now, in light of rising bond yields and the Federal Reserve’s expected interest-rate hike.

“These increases really help the home-buying market. It really gets buyers to really understand that ‘wait a minute, rates are at an all-time low, let’s react now, let’s react before they go higher,'” said Matt Weaver of Florida-based PMAC Lending.

Weaver said last week that he had a rush of clients calling in to lock-in rates. That was probably smart, as rates continued their move higher in yet another bond market sell-off. Both the spike in foreign bond yields as well as strong U.S. economic data point to an upward trajectory for interest rates, at least in the short term.

While the surge in purchase applications would seem to be welcome news, especially as the usually busy spring market draws to a close, some analysts warn the picture is not as rosy as it looks.

“We think the excitement is misplaced,” analysts at Goldman Sachs said in a note to investors Tuesday. “This index [mortgage bankers’ purchase application index] has been largely range-bound since 2010. Even after the recent increases, it is still at levels comparable to 1996 when the size of the population and housing stock were 15 percent smaller.”