Congress wants to kill the 'backdoor Roth IRA.' Here's what it means for you

 

 

Tax-free savings in retirement are great to have at your disposal. But provisions in the Build Back Better bill would limit some of the ways to accrue them in the future -- at least for high-income savers. The provisions are included in the version of the bill that recently passed the House, and is set to go to the Senate for consideration in December.

No more 'backdoor' conversions to Roth IRAs

A key way to build tax-free savings is to contribute to a Roth IRA.

While you won't get a tax break for your contributions to a Roth IRA, the after-tax money you put in will then grow tax-free and can be withdrawn tax-free once you reach retirement age. In 2022 you can contribute up to $6,000 a year ($7,000 if you're 50 or older).

High earners, however, are prohibited from contributing directly to a Roth IRA if their modified adjusted gross income in 2022 is at least $144,000 ($214,000 if married).

But they can still create a Roth IRA through a so-called "backdoor" strategy that involves converting their other IRA savings.

Although high-income taxpayers are precluded from making deductible contributions to a traditional IRA, they are allowed to make non-deductible ones.

In transferring a non-deductible IRA to a Roth, you would owe tax on the gains that had accrued on your contributions. That's avoidable, however, if you make the conversion immediately after making your non-deductible IRA contribution, since there would be no time for the money to grow.

But this strategy may get the ax. Starting next year, the House-passed bill would prohibit all taxpayers from converting their after-tax contributions using this "backdoor" conversion method to a Roth IRA.

No more 'mega backdoor' conversions to a Roth 401(k) either

The bill would also prohibit a similar strategy that is currently permitted when it comes to Roth 401(k)s.

Roth 401(k)s are another great way to build tax-free retirement savings and they are now offered by a majority of employers that offer tax-deferred 401(k) plans. Unlike Roth IRAs, Roth 401(k)s do not have any income eligibility rules and they allow for much higher contributions -- up to the 401(k) limit of $20,500 starting next year ($27,000 if you're at least 50).

On top of that, your employer also may let you make after-tax contributions to your regular 401(k), the gains on which would be taxable when you withdraw them. Under current law, you may convert those pre-tax and after-tax savings from your 401(k) account into a Roth and thereby skip having to pay taxes on future withdrawals.

In total, savers effectively can sock away up to $61,000 next year ($67,500 if you're at least 50) -- once your contributions, your employer match and your after-tax contributions are counted.

So for high-income earners, it is possible to convert large sums of money into a Roth 401(k) through what's known as a 'mega backdoor' strategy. Under the bill, however, starting next year, taxpayers would be prohibited from converting the after-tax portion of their 401(k) savings into a Roth.

Then, a decade from now -- in 2032 -- anyone with modified AGI over $400,000 (or $450,000 if married and filing jointly) would also be prohibited from converting their pretax savings into a Roth. That would apply whether their pre-tax savings come from their 401(k) or a traditional, deductible IRA.

What won't change

There is no predicting whether lawmakers will preserve the Roth restrictions in the House-passed Build Back Better bill -- or even if the bill itself will become law. But if the prohibitions on backdoor Roth conversions do survive, Roth IRAs, Roth 401(k)s and Roth conversions will still be useful vehicles for the many savers who meet the income and other eligibility rules governing Roths.

And nothing likely will change for anyone when it comes to their 2021 savings strategies. "We're executing 2021 contributions [and] conversions by December 31 as our best thinking is the bill will have no effect on 2021. For 2022 and beyond, we're taking a wait-and-see approach," said New Jersey-based CPA and certified financial planner Joseph Doerrer.

But for his high-income clients, Doerrer said he is strategizing when and what portion of their savings it makes sense to convert to a Roth before the window potentially closes for them in 2032.

"We're modeling out smaller piecemeal conversions, if we have any favorable play in their tax brackets, to chip away at their pre-tax balances in the event there is the 10-year or so proposed window after which Roth conversions would be unavailable to higher income individuals."

For Florida-based certified financial planner Mari Adam, her advice to clients remains the same regardless of the fate of the Roth provisions in the bill.

"Save consistently, spend moderately and invest for the long-term," she said. "The only advice I would add? Stay nimble. Tax rules change, so stay flexible and avoid committing to any financial strategy that can't easily be undone when the tax regime changes."

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Source: Congress wants to kill the ‘backdoor Roth IRA.’ Here’s what it means for you

https://www.creconsult.net/market-trends/congress-wants-to-kill-the-backdoor-roth-ira-heres-what-it-means-for-you/

US Property Price Growth Breaks Records as Demand Swells

 

The headline rate of U.S. property price growth climbed to the fastest annual rate in the history of the RCA CPPI in October amid intense investor demand for commercial real estate. The RCA CPPI National All-Property Index rose 15.9% from a year ago and 1.7% from September, the latest RCA CPPI: US report shows.

For the year through October, investors acquired $523.8 billion of commercial property assets, a 70% increase on the same period in 2021, as shown in the US Capital Trends report, also released this week.  Investors spent more than $200 billion on apartment properties in the first 10 months of 2021, almost double the activity seen at this point in 2020, and more than $100 billion on industrial properties.

Industrial prices rose 18.9% in October from a year ago and 1.9% from September, the fastest annual and monthly rates among the major property sectors. The apartment index climbed 16.8% from a year ago, the fastest rate in the history of the RCA CPPI for this sector. Apartment prices rose 1.4% from September.

The office index increased 13.7% year-over-year in October, a fourth consecutive month of double-digit growth. Suburban office prices continued to drive gains, increasing 15.6% from a year prior. The CBD office index rose 0.9% year-over-year, an improvement from the declines seen for most of 2021.

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Source: US Property Price Growth Breaks Records as Demand Swells

https://www.creconsult.net/market-trends/us-property-price-growth-breaks-records-as-demand-swells/

Here Are the Apartment Markets Attracting New Renters

 

Remote work continues to dominate renter migration patterns, according to data released this week by Apartment List—particularly in tech-hub markets such as San Jose, Raleigh, and Austin.

Dramatic rent increases have hit virtually all corners of the nation in 2021. Nationally, the median rent price is up over 16% since January, and in some cities rent growth is more than double that, Apartment List reported.

“Today, renters who are looking to move are not only dealing with this affordability crunch, but also navigating a tight market with historically low vacancy rates,” according to the report. “At the same time, migration patterns are also being impacted by one of the most significant societal shifts brought about by the COVID pandemic—remote work.”

Top Three ‘Revolving Door’ Markets

San Jose, Raleigh, and Austin are experiencing high turnover with many renters considering moving both in and out.

These three “revolving-door” metros are the only places that appear in the top 10 for both metrics. In San Jose and Raleigh specifically, the cross-metro rate exceeds 50% for both outbound and inbound searches.

These regions stand out as technology hubs heavily disrupted by the remote work revolution. In fact, they rank first (San Jose), fourth (Austin), and eighth (Raleigh) in terms of the share of their workforce that have remote-friendly occupations.

This quarter’s report incorporates the search preferences of users who registered with Apartment List between July 1 and Sept. 30, 2021.

“Newfound flexibility has likely given many residents of these three metros the opportunity to move somewhere new, which in turn creates vacancies that attract new renters from afar,” Apartment List reported. “We have seen this dynamic play out in local rent prices, where over the last 18 months these cities experienced dramatic rent declines followed by similarly-dramatic rent rebounds as residents cycle in and out of the rental market.”

Beyond these three, other technology-friendly markets that are experiencing high outbound migration this quarter (e.g., San Francisco, Boston, Denver, Baltimore) also rank high in terms of remote-friendly workforces and dramatic price swings.

Long-Distance Moves on the Increase

This collision of market trends and changing preferences may result in a greater number of longer-distance moves—in Q3 2021, 40% of Apartment List users were searching to move to a new metropolitan area, and 26% were searching in a different state altogether.

Despite being separated by more than 1,000 miles, Miami is the number one destination for New York City renters, narrowly edging out nearby Philadelphia. 6.1% of searches leaving the New York City metro are destined for Miami, and another 7.8% are destined for other parts of Florida, namely Tampa, Orlando, and Jacksonville metros.

California: A Major Exporter of Renters

As a large, expensive, and politically liberal state, California has long held a reputation for exporting residents across the country and altering economic and political landscapes along the way. This notion hit a major milestone in 2020, when for the first time in its 170-year history California experienced net population loss, losing over 182,000 residents in the wake of the COVID-19 pandemic.

Apartment List search data indicate that this trend may be continuing, as California supplies more search interest across the country than any other state. In the most recent quarter, eight states—Alaska, Hawaii, Washington, Oregon, Nevada, Arizona, Utah, and Texas—received more searches from California than any other state. In Nevada specifically, over half of all apartment searches came from California residents.

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Source: Here Are the Apartment Markets Attracting New Renters

https://www.creconsult.net/market-trends/here-are-the-apartment-markets-attracting-new-renters/

What is Class A Class B or Class C property?

 

A common question we receive from our investors is what do properties marketed as Class A, Class B, and Class C mean, and why does it matter? To begin, investors, lenders, and brokers have developed property classifications to make it easier to communicate amongst themselves about the quality and rating of a property quickly. For investors, property class is an important factor to consider because each class represents a different level of risk and return. Investors can use these differences about property class types to consider how each property fits within their strategy of investing, such as return objectives and the amount of risk they are willing to accept in order to achieve those returns.

Each property classification reflects a different risk and return because the properties are graded according to a combination of geographical and physical characteristics. These letter grades are assigned to properties after considering a combination of factors such as the age of the property, location of the property, tenant income levels, growth prospects, appreciation, amenities, and rental income. There is no precise formula by which properties are placed into classes, but here is a breakdown of the most common classes, A, B, and C:

Class A

These properties represent the highest quality buildings in their market and area. They are generally newer properties built within the last 15 years with top amenities, high-income earning tenants, and low vacancy rates. Class A buildings are well-located in the market and are typically professionally managed. Additionally, they typically demand the highest rent with little or no deferred maintenance issues.

Class B

These properties are one step down from Class A and are generally older, tend to have lower-income tenants, and may or may not be professionally managed. Rental income is typically lower than Class A, and there may be some deferred maintenance issues. Mostly, these buildings are well-maintained and many investors see these as “value-add” investment opportunities because the properties can be upgraded to Class B+ or Class A through renovations and improvements to common areas. Buyers are generally able to acquire these properties at a higher CAP Rate than a comparable Class A property because these properties are viewed as riskier than Class A.

Class C

Class C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of renovation, such as updating the building infrastructure to bring it up-to-date. As a result, Class C buildings tend to have the lowest rental rates in a market with other Class A or Class B properties. Some Class C properties need significant reposting to get to steady cash flows for investors.

What does this mean for investors?

It is important for investors to understand that each class of property represents a different level of risk and reward. Class A provides investors with more security by knowing that they are investing in top-tier properties, with little or no outstanding issues requiring further capital expenditures. However, despite better property conditions, Class A can be sensitive in times of a recession if high-income earners suffer from increased unemployment.

Class B and C properties tend to be bought and sold at higher CAP rates than Class A, as investors are paid for taking on the additional risk of an investment in an older property with lower-income tenants, or a property in a lower-income neighborhood.

The property class investors choose can have a great deal of influence on the stability of an investment over time, as well as its growth appreciation. For investors looking for capital preservation, Class A may be the right investment. For investors looking for capital appreciation, Class B and C may be better investments for that specific risk profile.

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Source: What is Class A, Class B, or Class C property?

https://www.creconsult.net/market-trends/what-is-class-a-class-b-or-class-c-property/

Small Property Sales 'Easily Outpaced' Larger Assets This Year

Sales of properties valued between $5 million and $25 million have “easily” outpaced those from the same period in 2019 and 2020, according to a new report from Green Street, with $28.11 billion in smaller assets changing hands.

That’s an increase of 60%, according to Real Estate Alert data, and “roughly mirrors the hefty 62.3% rise in the institutional segment of deals over $25 million, reflecting a pandemic-induced slump in investment sales in the first half of 2020,” Green Street notes in its report. But “compared with the first half of 2019, however, smaller trades jumped 22.5% in the first half of this year, while aggregate sales over $25 million were up just 2.5%.”

On a year-over-year basis, sales of properties in that range rose among every property type, with industrial leading the way with a 98.9% increase in the first half. Multifamily sales were up 68.5% at $8.61 billion, and larger industrial deals increased by 120.9%. Retail sales increased by about 50% to $5.28 billion and “easily outperformed the over-$25 million marketplace,” which posted a 25.5% improvement.  And office sales increased 29.5% in the first half, while hotel trades rose 17.3%.

“The momentum is strong,” said John Chang, a senior vice president and national director of research services at Marcus & Millichap. “Even with this spike of rising pandemic levels, barring a major lockdown, the private investors that I’ve spoken to are aggressively trying to place capital. I think that carries us through the remainder of this year and into next year.”

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Source: Small Property Sales ‘Easily Outpaced’ Larger Assets This Year

https://www.creconsult.net/market-trends/small-property-sales-easily-outpaced-larger-assets-this-year/

CRE Investment Volume Is Rising At Strong Pace

Deal volume for US commercial real estate assets rose 74% year-over-year in July and remained well above the average pace set across each July since 2005, according to a new analysis from Real Capital Analytics.

The apartment sector accounted for 35% of CRE investment last month, while office began to make up some ground loss during the pandemic with 26% of sales volume. That increase was mostly comprised of suburban office deal activity, as investment in urban cores and CBDs remain tepid. The suburban price index went up 11.7% last month, while the CBD office index fell 4.6%, RCA analysts say.

Multifamily also led price gains, according to RCA’s CPPI US report released this week. Apartment asset pricing rose 13.5% year-over-year, an increase that’s on track with levels posted during the housing boom prior to the Great Financial Crisis. Also in July, the US National All-Property Index increased 11.8% year-over-year.

Multifamily investment volume increased by 34% quarter-over-quarter in Q2 to hit $52.7 billion, according to CBRE research released earlier this summer. That demand has driven cap rates lower, particularly in cities like Dallas-Fort Worth and Phoenix.  And John Chang, senior vice president and director of research services at Marcus & Millichap, also recently said that bidders, fueled by fears of a continued rise in inflation, were aggressively pushing up apartment pricing.

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Source: CRE Investment Volume Is Rising At Strong Pace

https://www.creconsult.net/market-trends/cre-investment-volume-is-rising-at-strong-pace/

Chicago property owners are fighting Cook County Assessor ahead of reassessments

Cook County assessor Fritz Kaegi (Kaegi, Chicago)

Fritz Kaegi knew he was walking into the line of fire when he set out three years ago to revamp Cook County’s property tax assessments. Still, he says, he is pushing to reform the system, which he described as flawed, unfair, and in some cases corrupt for many generations.

He’s already made sweeping changes that have agitated commercial property owners in two of the county’s three triads. Now he’s facing his biggest challenge yet, with downtown Chicago landlords who question his motives and his methods as he shifts more of the tax burden to commercial property owners.

“When you go into a job like this and try fixing a system so broken and so notorious for clout and stuff behind the scenes, conflict is baked in the cake,” he told The Real Deal in an interview.

His efforts to rebalance a system he says has been abused are complicated by the pandemic, which property owners argue should result in their assessments being reduced rather than increased or left the same.

“If it’s a bad year but people are still buying at 50 percent to 60 percent occupancy, that’s a signal the market is looking at something else,” Kaegi said. “We want to have several data points to use.”

Commercial property owners have been critical of the changes to assessments and of Kaegi himself.

Kaegi “is continuing to put his thumb on the scale and assessing offices, retail stores, and hotels – the type that are bearing the brunt of the pandemic’s economic impacts — as being worth almost twice as much as they were before the pandemic,” said Farzin Parang, executive director of the Building Owners and Managers Association of Chicago.

Kaegi’s predecessor Joseph Berrios is under investigation by a federal grand jury probing property value estimations his office made on a number of central business districts and high-end neighborhoods. Included is a Gold Coast mansion Gov. J.B. Pritzker owned that he said was “uninhabitable” after he had all the toilets removed. That resulted in a $331,000 tax break for the billionaire. Pritzker has said, “all the rules were followed.”

Berrios already has paid $100,000 in ethics fines tied to accepting campaign contributions that exceeded limits from lawyers who worked on appeals cases with his office. The amount was only 60 percent of the original $168,000 fine from the Board of Ethics after a settlement.

Now, even as office and retail vacancies are at record levels, commercial properties owners are worried assessments — and their tax bills — will soar as properties whose rates were lowballed under Berrios adjust to market values, even with pandemic concessions factored in. Only apartment building occupancy and rent levels have bounced back after a short-lived exodus during last year’s lockdowns.

“Assessments are out of date and there are huge inequities,” Kaegi said. “I don’t know the alternative that is being proposed instead of market value.” He added he would be “very wary of putting a political filter on” based on some group’s recommendation. “That always comes at the expense of another.” Under Berrios, metrics used to value properties were out of whack on some parcels without explanation and they stayed that way while other like properties escalated in value. Property values on 9,000 Chicago sites, for example, didn’t budge after the financial crisis in 2009 to 2015, through three Berrios reassessments, according to a year-long Chicago Tribune/ProPublica study released in late 2017.

When 2018 reassessment notices on Chicago properties went out before Kaegi was sworn in, many of them saw little to no changes in market value, according to the assessor’s office. A 2020 study by the International Association of Assessing Officers found estimated market values of the city’s commercial properties, on average, equaled only 52 percent of their sales value.

“Study after study has shown they were way off the market values then,” Kaegi said of Berrios’ models. “We need to take favoritism out of the valuation process. We were off track and we’re getting it back to where it should have been all along.”

Some of Kaegi’s critics at the BOMA and the Chicagoland Chamber of Commerce worry that huge jumps in property taxes will deter growth and investment in a city that is struggling to recover from the pandemic. Some also accuse Kaegi of tilting the tax burden toward businesses and away from individuals — voters — as mainly a tactic to win reelection.

“It should not come as a surprise to you that the biggest ones that were most under-assessed might try to argue that,” he said. “I don’t think they even accept the idea that assessment should be based on market value, a basic underpinning of the law.”

It’s too soon to say if property values will be doubled though it’s likely a few might.

Higher assessments don’t always lead to higher tax bills, but in this case, some of the largest office and apartment landlords will see tax bill hikes in double digits. Already, some property owners know what to expect, thanks to an early analysis by Cook County Treasurer Maria Papas.

Some of these are very high-profile skyscrapers owned by powerful companies. Blackstone Group’s Willis Tower, Sterling Bay’s Prudential Plaza, 601W Companies’ Aon Center, and Vornado Realty Trust’s Merchandise Mart will pay close to 11 percent more in property taxes, according to Pappas’ office.

“It’s not about burden-shifting, it’s about clarifying where the market is at,” Kaegi said. “Our property tax system is going to be fair when we’re using market values. If not, businesses are poorly served and then it becomes a big game of clout.”

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Source: Chicago property owners are fighting Cook County Assessor ahead of reassessments

https://www.creconsult.net/market-trends/chicago-property-owners-are-fighting-cook-county-assessor-ahead-of-reassessments/

Chicago Apartment Rents Rise to Seven-Month High

(Getty)

Renters looking for apartments in major cities need to bring more to the table, and Chicago is no exception.

Median rent for a two-bedroom apartment in Chicago jumped 1.2 percent to $1,423 in August from July and is up 4.4 percent from a year ago, according to a report by Apartment List. It has now risen for seven consecutive months.

“Vacancy rates are at an all-time low. [There is] really high occupancy in the rental market,” said Rob Warnock, senior research associate at Apartment List, a rental listing site. “Landlords have the opportunity for the first time in about a year and a half to raise prices and recoup some of the lost revenue from last year.”

With housing supply getting scarcer in Chicago and the rest of the country, prices are going to go up, Warnock said. The median price in Chicago in July came up to its level from March 2020, which Apartment List considers the last pre-pandemic month, he said. The site publishes monthly rent reports for more than 30 U.S. cities using its own listings as well as census data. The new report shows Chicago’s median two-bedroom rent is 14 percent higher than the national average of $1,246 but is affordable compared to prices in other major cities. San Francisco topped the list with an of $2,780 median asking rent for a two-bedroom, followed by New York ($2,070), Washington ($1,800), and Denver ($1,780).

Asking rents for single-family homes in the U.S. jumped nearly 13 percent year-to-date through the end of July. Downtown Class A apartments in Chicago had an 8.6 percent vacancy rate in the first quarter, higher than a year ago.

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Source: Chicago Apartment Rents Rise to Seven-Month High

https://www.creconsult.net/market-trends/chicago-apartment-rents-rise-to-seven-month-high/

More Tenants Plan To Increase Space Next Year Than Shrink It

 

Also, close to two out of five tenants said they will be preferring longer occupancy terms to get ahead of possible rent increases.

More than double the share of commercial real estate tenants are planning to increase rather than decrease their space next year, according to a survey by the Visual Lease Data Institute, a lease optimization software provider.

Seven out of 10 tenants predict they will be looking for more space while three out of 10 are preparing to downsize.

Close to half of the tenants (48 percent) said at least some of the expansion will come in existing spaces, higher than the 41 percent landlords are anticipating.

Sixty-one percent of tenants are forecasting 2022 commercial rents to be about the same or higher than rent prices were prior to the pandemic, an expectation held by 75 percent of landlords.

In signing new leases during the coming year, close to two out of five tenants said they will be preferring longer occupancy terms to get ahead of possible rent increases and save a significant amount of money.

Fifty-eight percent of tenants are prioritizing leases of at least five years in length, with nearly 20 percent interested in 10 or more years of occupancy.

All that said, a large number of tenants are still suffering financial fallout from the pandemic. More than a third said they are still behind in their rent after 61 percent said they lapsed during the worst of the crisis.

Post-pandemic, landlords are predicting a revival for major metropolitan areas like New York and Los Angeles in a general resurgence for cities.

“Increased interest in urban areas suggests many companies are considering how they will set up physical office spaces amid hybrid working conditions and whether they will be available to employees full-time or part-time,” said the report.

Visual Lease found the majority of landlords expect retail space, multi-tenant offices, single-tenant offices and industrial space to garner the most interest from tenants.

“While no universal blueprint for a return to the workplace exists, many companies that had a remote work option during the height of the pandemic continue to offer hybrid workplaces and still plan for some form of real estate presence,” the company concluded.

The findings were based on a survey of 400 senior accounting and finance professionals and commercial real estate executives, 200 of whom representing the perspective of tenants, and 200 of whom representing the perspective of landlords.

The findings dovetail with other reports of growing confidence in the resiliency of commercial real estate going forward. For instance, ULI is predicting the real estate market will return to pre-pandemic levels by 2023.

“The US economy remains relatively attractive for real estate, especially in contrast with the period immediately following the global economic downturn in 2008/9,” said Ed Walter, ULI’s Global CEO. “While prolonged high inflation could damage the viability of pipeline projects, the short-term spike predicted should have less impact. This is why we see transaction volumes recovering so quickly and investment returns for core property types looking so healthy. The real estate sector is in a strong position to build its way out of the pandemic and take the economy with it.”

ULI predicts GDP growth for 2021 will hit 5.7 percent, a decline from spring 2021 numbers but “still more than double the bounce back seen in 2010,” ULI analysts say. Longer-term forecasts are more stable and remain above the 20-year average of 2.5 percent.

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Source: More Tenants Plan To Increase Space Next Year Than Shrink It

https://www.creconsult.net/market-trends/more-tenants-plan-to-increase-space-next-year-than-shrink-it/

How Millennials Are Reshaping the SFR Market

 

“They desire more space for raising a family in a room for a home office, and they want better access to good schools, jobs, and amenities.”

The population surge of millennials, coupled with the housing supply shortage endemic across the US, will drive demand for single-family rentals in infill neighborhoods in high-growth markets, a SFR exec told investors recently.

“We believe that the operating fundamentals for our business remain fantastic and that the environment for growth remains favorable with our opportunities to creatively deploy new capital among the best we’ve seen in recent years,” Dallas Tanner, president and CEO of Invitation Homes, said on a recent earnings call.

Tanner said Invitation’s average occupancy is at “historically high levels,” with turnover trending lower and rental rate growth surging well past the traditional summer leasing window. One reason? Demographics.

“I’ve spoken previously about the population surge of millennials and how we expect many within this cohort to transition into single family homes over time. They desire more space for raising a family in a room for a home office, and they want better access to good schools, jobs, and amenities,” he said. “They also value the convenience of a worry-free subscription-based lifestyle.”

Chief Operating Officer Charles Young described Invitation’s resident base as “strong and stable,” noting that the company’s average new resident today is a family with at least one child and pet. The adults are 39 years old on average, both work and together earn more than $120,000 per year, equaling an income to rent ratio of more than five times.

That’s particularly true in the Sunbelt and across the West, where Invitation is deploying the bulk of its capital.

“In specific markets like Las Vegas and Phoenix, the Southwest Sunbelt type markets have seen an outperformance over really the last eight to 10 years, in terms of what we’re seeing with net migration, household formation,” Tanner said. “And ultimately, that’s showing itself in home price appreciation and the rate growth that we’re seeing with the corresponding growth in the home pricing. We will continue to invest capital in the parts of the country, where we believe we’re going to continue to see that outperformance.”

Institutional investors have allocated more than $10 billion to the SFR sector over the last few years. And according to a midsummer report from YardiMatrix, the Southwest (4,896) and Southeast (3,978) have the most SFR units under construction. They are followed by the Midwest (1,716) and West (1,522). Only 134 units are being built in the Northeast. Phoenix leads the way with 6,000 existing SFR communities and more than 2,500 under construction. Jacksonville (766), Charlotte (719), Houston (644) and Atlanta (544) have the most SFR communities under construction.

In July, Invitation Homes and PulteGroup announced they had formed a partnership in which PulteGroup will supply the REIT with new houses.  At the time, Invitation Homes said it expected to purchase approximately 7,500 new homes over the next five years from PulteGroup, the nation’s third-largest homebuilder.

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Source: How Millennials Are Reshaping the SFR Market

https://www.creconsult.net/market-trends/how-millennials-are-reshaping-the-sfr-market/

Multifamily Giants Outperforming 2021 Expectations Sitting Pretty Heading Into 2022

 

THIS YEAR HAS GONE BETTER FOR MULTIFAMILY REAL ESTATE THAN VIRTUALLY ANYONE PREDICTED WHEN THE CORONAVIRUS PANDEMIC BEGAN, INCLUDING THE HEADS OF THE SECTOR’S BIGGEST COMPANIES.

Six of the largest multifamily REITs to have released their earnings reports for the third quarter all reported outperforming their year-to-date performance guidance, including Mid-America Apartment Communities, AvalonBay Communities, Equity Residential, Essex Property Trust, UDR and Camden Property Trust. With rents increasing at a dramatic pace and capital availability at historic levels, the biggest landlords in the country are riding high.

Across all of the earnings reports and the calls between the companies’ executives and financial analysts accompanying the reports, common themes emerged within the overall sunny outlook: average occupancy over 96%, cap rates below 4% and an impetus to build new apartment buildings at a greater rate than was expected at the start of the year.

“We continue to aggressively sell our older and less desirable properties at these low cap rates and at prices that exceed our pre-pandemic value estimates, [as well as] acquiring much newer assets in our expansion markets,” Equity Residential President and CEO Mark Parrell said on his company’s earnings call. “We have funded these buys with an approximately equal amount of dispositions of older and less desirable assets.”

The resounding success of the largest landlords stands in stark contrast to the ongoing troubles owners of small numbers of rental units are facing, including being saddled with a disproportionate number of tenants who owe back rent.

The major players still have considerable numbers of tenants who had struggled with rent payments through the pandemic, but they have used their resources to either apply for the federal government’s Emergency Rental Assistance program on their behalf or helped them to apply directly. AvalonBay, Camden, Essex, Equity Residential and UDR all reported receiving more than $10M in ERA payments for their tenants so far this year and all expect to receive further payments before the year is out.

In a similar vein, the widening gap between the demand for single-family homes and the pipeline of new construction counts as good news for the multifamily industry as cost increases and delays in construction serve to drive the price of housing up.

“Price appreciation in the for-sale single-family market and relatively stable multifamily supply both support a healthy near-term outlook for rental rate growth,” AvalonBay Chief Operating Officer Sean Breslin said on his company’s call.

As the lion’s share of units owned by major multifamily REITs are Class-A, executives reported their tenant base as emerging from the pandemic in strong financial positions and with historically high levels of savings, encouraging landlords they can absorb steep rent increases. Loss to lease, the difference between rents paid by in-place tenants and tenants signing new leases today, averaged more than 13% between the largest REITs to have released earnings reports for the third quarter.

Clockwise from top left: Walker & Dunlop CEO Willy Walker, Equity Residential CEO Mark Parrell and Boston Properties CEO Owen Thomas on the Walker Webcast.

“This is definitely the highest loss to lease we have ever seen, with such a large majority of leases below market,” Equity Residential Executive Vice President and Chief Operating Officer Michael Manelis said on his company’s earnings call. “And [our] teams are hyperfocused to recapture as much of the loss to lease as possible.”

Camden Property Trust reported its loss to lease as high as 16% in the third quarter, but Executive Vice Chair Keith Oden told analysts that his company will focus on maximizing retention by avoiding raising rents all the way to market rates for renewing tenants. Even without such consideration, all of the six multifamily REITs mentioned reported higher renewal rates this year, with the relative lack of turnover giving landlords more pricing power.

Pricing power is an incredible tool for landlords with enough scale, as MAA, the largest landlord in the country by unit count, is demonstrating. Despite the supply chain and labor market causing shortages and delays across commercial real estate, MAA’s pipeline of developments under construction is currently on time and on budget, CEO Eric Bolton said to analysts.

Even with the various tailwinds the multifamily market is currently enjoying, with values and deal volume hitting record highs, at least some major landlords have used innovations born out of pandemic necessity to cut costs permanently. Executives from Equity Residential and UDR told analysts prospective tenants seem to prefer self-guided tours and digital platforms for services when possible, boasting higher customer satisfaction numbers even as they have cut staff at their properties.

“Since the second quarter of 2018, we have permanently reduced headcount at our communities by 40% on average, thereby providing a strong hedge against elevated inflationary pressures,” UDR Senior Vice President of Property Operations Michael Lacy said. “[We] delivered products and services in the formats our residents prefer, as exhibited by a 24% increase in our resident satisfaction score and an overall 97% usage rate for self-guided prospective resident tours.”

Though thinner on-site teams may be a permanent consequence of the pandemic, major investors are well aware the current environment for raising capital is not likely to remain this friendly for long thanks to continued inflation and predicted changes to monetary policy from the Federal Reserve.

MAA issued $600M in public bonds in Q3, extended the average maturity on its debt to nine years away and raised $210M of forward equity capital, which MAA Chief Financial Officer Albert Campbell told analysts would cover the company’s equity requirements for the next couple of years. UDR agreed to $350M worth of forward agreements for stock purchases in the quarter, added $200M each to its credit facility and commercial paper capacities and extended maturity dates on other loans.

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Source: Multifamily Giants Outperforming 2021 Expectations Sitting Pretty Heading Into 2022

https://www.creconsult.net/market-trends/multifamily-giants-outperforming-2021-expectations-sitting-pretty-heading-into-2022/

ULI Says US CRE Should Return To Pre-COVID Levels by 2023

 

“The real estate sector is in a strong position to build its way out of the pandemic and take the economy with it.”

The US real estate market is predicted to return to pre-pandemic levels by 2023, with equity REIT investors poised to win big.

Total annual returns for equity REITs are predicted to reach 27.8% in 2021, according to ULI, topping 2019’s previous high of 26%.

“The forecast comes close to the 2014 peak of 30.1% and almost doubles the spring 2021 forecast of 15.0%. At 10% annually, the forecasts for 2022 and 2023 fall back to closer to the 20-year average of 11.3%,” ULI economists note in a recent release outlining their economic predictions for the next few years.

Meanwhile, the Fall 2021 ULI Real Estate Economic Forecast for 2021 to 2023 says the hotel sector will face ‘significant disappointments.’ RevPAR fell 47.4% in 2020 and should peak at 12.2% in 2022. The forecast for 2021 has ‘collapsed’ from 29.6% made in the Spring to 5% now.

“The US economy remains relatively attractive for real estate, especially in contrast with the period immediately following the global economic downturn in 2008/9,” said Ed Walter, ULI’s Global CEO. “While prolonged high inflation could damage the viability of pipeline projects, the short-term spike predicted should have less impact. This is why we see transaction volumes recovering so quickly and investment returns for core property types looking so healthy. The real estate sector is in a strong position to build its way out of the pandemic and take the economy with it.”

ULI predicts GDP growth for 2021 will hit 5.7%, a decline from spring 2021 numbers but “still more than double the bounce back seen in 2010,” ULI analysts say. Longer-term forecasts are more stable and remain above the 20-year average of 2.5%.

Inflation may hit 4.3% in the fall but ULI says its analysts are “optimistic about this spike receding rapidly to near 2019 levels in 2023.” Interest rates are expected to rise gradually to 1.6% in 2021 and 2.25% in 2023, lower than the 20-year average of 3.07%.

Cap rates are expected to fall to 4.3% for 2021 and 2022 before moving upward again in 2023. And “for capital markets, the forecast shows growing optimism about commercial real estate transaction volumes in the next three years with forecasts falling just short of 2019’s peak of $617 billion,” ULI notes, adding that issuance of Commercial Mortgage-Backed Securities (CMBS) is expected to rise to approach the 2019 peak of $98 billion.

Vacancy is expected to remain high in 2021 rising 200 basis points with only minimal improvement in 2023. Office vacancy rates are expected to reach a ten-year high of 16.9% annually in 2021 and 2022.

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Source: ULI Says US CRE Should Return To Pre-COVID Levels by 2023

https://www.creconsult.net/market-trends/uli-says-us-cre-should-return-to-pre-covid-levels-by-2023/

Increasing Costs and Delays Hamper Multifamily Development

 

As evidence that builders are facing the combined headwinds of rising material and labor costs as well as supply chain delays, the pace of multifamily development is down.

Multifamily starts slipped 5.1% to 467,000 units in September from August’s revised annual rate, while building permits fell 21% to 498,000 units, according to the U.S. Census Bureau. However, for the year, multifamily starts are up 38.2% and permits are up 18%.

As further evidence that multifamily builders are facing headwinds, the seasonally adjusted annual rate (SAAR) for multifamily completions plunged 18.1% from last month and 41.8% from last year to just 280,000 units, while at the same time the rate of units under construction edged up 1.4% to 701,000 multifamily units, its highest total since 1974.

Single-family homebuilders are facing the same industry headwinds for development with the addition of low inventory of developed lots. Single-family starts were unchanged from last month at 1.08 million units but are down 2.3% from September 2020. Building permits for single-family homes were also virtually unchanged (-0.9%) from August at 1.04 million units and were also down for the year (-7.1%). The number of single-family homes currently under construction is also elevated at 712,000 units, the most since the waning period of the housing bubble bust in 2007.

Together, total residential permits were down 7.7% from August to 1.589 million units and total residential starts were down 1.6% to 1.555 million units. Compared to one year ago, total residential permits were unchanged while total starts were up 7.4% due to the sharp increase in multifamily starts from September 2020.

The annual rate for multifamily permitting was up in three of the nation’s four Census regions, with the largest annual increase in the West (up 36.7% to 142,000 units). The Midwest’s annualized rate increased 29.8% to 79,000 units from last September while the South was up 24.6% to 223,000 units. The small Northeast region decreased 30.2% to 56,000 units. Compared to the previous month, all regions decreased, with the Northeast down 28.6% and the South and West down about 23% each. The Midwest region had a more modest decline in annual permitting from last month of 2.8%.

Regional annual multifamily starts were up significantly in the South (+72.2% to 201,000 units) and West (+64.4% to 136,000 units), while the Northeast region fell 8.4% from last year to 52,000 units started and the Midwest slipped 4.6% to 78,000 units. Compared to August’s pace, the South (-5.2%) and Northeast (-45.8%) regions declined while the Midwest (+6.8%) and West (+22.5%) had increases in multifamily starts.

At the metro level, nine of the top 10 permitting markets in September returned to the list from August with only the first two in order and several others changing places. New York continues to lead the nation in multifamily permitting with about 32,200 units but the market’s pace is continuing to slow. Austin again ranked #2 with 23,313 units permitted, an almost one-quarter gain from last year.

Dallas replaced Houston at #3 this month with 16,914 units permitted, an increase of more than 27% from 2020’s slower pace. Houston continues to slow its multifamily permitting despite ranking at #4 this month. More than 15,300 units were permitted in the year-ending September but that was a decline of nearly one-third from last year.

Seattle returned at #5 with about 14,600 units, up about 13% from the previous year, while Phoenix jumped up two spots to #6 with 14,238 units permitted, only an 8% gain over September 2020. Los Angeles ranked #7 this month with about 14,200 units permitted in the year-ending September, up about 10% annually.

Washington, DC and Denver each inched up a spot to #8 and #9 with 14,123 and 13,612 units permitted, respectively. DC grew by 36% annually, while permits in the Mile-High City were up more than 63% from last year. Last month’s #7 – Philadelphia – dropped out of the top 10 this month, replaced by Minneapolis-St. Paul at #10 with annual multifamily permitting of 13,507 units.

Eight of the top 10 multifamily permitting markets boosted annual totals from the year before and they were generally large increases, ranging from a low of 1,107 units in Phoenix to more than 5,200 additional units in Denver. Austin’s increase of almost 4,600 units was second only to Denver and was about 1,000 units more than in Dallas and Washington, DC’s increases over last year (around 3,600 to 3,700 additional units each). The remaining top 10 with increasing permitting averaged about 1,500 additional units permitted over last year’s totals.

Other markets outside of the top 10 that saw significant year-over-year increases in annual multifamily permitting in the year-ending September were Philadelphia (+7,954 units), Jacksonville, FL (+4,028 units), Charlotte (+3,493 units), Raleigh/Durham (+3,438 units), and San Antonio (+2,240 units).

Only two of the top markets saw decreases in the year-ending September 2021. Houston permitted almost 6,500 fewer units than last year and New York’s annual permitting fell by 5,363 units. Significant slowing in annual multifamily permitting also occurred in the non-top 10 markets of Cape Coral-Fort Meyers, FL (-2,972 units), San Jose (-2,714 units), Kansas City (-1,744 units), and Bridgeport, CT (-1,180 units).

Six of the top 10 markets had more annual multifamily permits than the previous month, with Dallas jumping almost 7% from August’s annual total. Phoenix, Washington, DC, Minneapolis-St. Paul and Denver were up an average of about 5% from last month, while Los Angeles improved only about 1%. Houston fell 11.6% from last month with Austin and New York retreating close to 7% from the previous month’s annual totals. Seattle slipped only 1.4%.

The annual total of multifamily permits issued in the top 10 metros – 172,036 – was about 7% more than the 160,754 issued in the previous 12 months. The total number of permits issued in the top 10 metros was almost equal to the number of permits issued for the #11 through #35 ranked metros.

All of last month’s top 10 permit-issuing places returned to this month’s list with five remaining in the same order. The list of top individual permitting places (cities, towns, boroughs, and unincorporated counties) generally includes the principal city of some of the most active metro areas.

The city of Austin returned as the #1 permit-issuing place with 12,235 units. However, that annual total was 1,329 units less than last month’s. The city-county of Nashville-Davidson and the city of Los Angeles returned in order, permitting 11,526 units and 10,850 units, respectively.

The city of Seattle replaced the city of Houston at #4 on the list with about 8,100 units permitted, a decrease of 1,039 units from August, while the cities of Denver and Houston came in at #5 and #6, permitting about 7,800 units for the year each. The borough of Brooklyn permitted almost 7,200 units for the year-ending September, ranking at #7.

Mecklenburg County (Charlotte) moved up to #8 from #10 last month with 6,378 units permitted, close to last month’s total. The city of Phoenix remained at #9 in September with almost 6,300 units permitted, while the Bronx borough slipped two spots to #10 with about 5,800 multifamily units permitted for the year.

Texas still dominates the list of permitting places with seven of the top 20 permit-issuing places, while no other state has more than two spots on the list. While the list of top markets for metro-level multifamily permitting generally saw increases over last month, only three place-level cities or counties had increased permitting from August’s annual totals.

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Source: Increasing Costs and Delays Hamper Multifamily Development

https://www.creconsult.net/market-trends/increasing-costs-and-delays-hamper-multifamily-development/

Multifamily Market Conditions Showcase Strong Improvement

 

Three key indicators continue their steady rise, according to the organization's latest survey.

The National Multifamily Housing Council’s Quarterly Survey of Apartment Market Conditions for October 2021 show strong and ongoing improvement continues across the multifamily industry. For the third quarter in a row, the Market Tightness (82), Sales Volume (79) and Equity Financing (65) indexes reflected results considerably above the breakeven level of 50. And while the Debt Financing (48) index showed weaker conditions, most respondents felt conditions were unchanged from last quarter.

“Ultimately, this is good news for the multifamily industry,” Caitlin Sugrue Walter, vice president for research at Washington, D.C.-based National Multifamily Housing Council (NMHC), told Multi-Housing News. “This data highlights the ongoing strength of the sector based on the strong demand and fundamentals underlying the market.”

Sales Volume vs. Market Tightness. Data and chart courtesy of NMHC

Tighter conditions

The Market Tightness Index fell from 96 to 82, indicating tighter market conditions. Almost three-quarters (71 percent) of respondents reported market conditions were tighter than three months earlier. Only 8 percent reported looser conditions, and 20 percent felt conditions were unchanged from the second quarter.

The Sales Volume Index registered a 79, a number unchanged from a quarter earlier. That indicated ongoing robustness in apartment sales volume. More than half (61 percent) of respondents said sales volume was higher than it had been three months earlier, while 32 percent believed volume had remained unchanged. Only 4 percent felt sales volume was lower than the prior quarter.

The Equity Financing Index inched lower, from 69 to 65. Just about one-third (33 percent) of respondents saw greater availability of equity financing than they had in the quarter prior. Meanwhile, more than half (52 percent) felt equity financing conditions had remained unchanged. Only 4 percent found equity financing less available.

Representing the only index to dip below break-even level for this quarter, the Debt Financing Index dropped from 71 to 48.

Some 17 percent of respondents indicated conditions for debt financing were better in the third quarter than in the prior three months. But 21 percent believed financing conditions had worsened. The majority reported conditions in the debt market were unchanged.

The strong demand and fundamentals underlying the market are good harbingers for the future, according to Walter.

“Looking ahead, this demand is likely to continue, making for a positive short- to mid-term horizon for the industry,” she said.

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Source: Multifamily Market Conditions Showcase Strong Improvement

https://www.creconsult.net/market-trends/multifamily-market-conditions-showcase-strong-improvement/

More Tenants Working From Home Means New Expectations Of Landlords And Amenities

 

CLA's Carey Heyman, Universe Holdings' Henry Manoucheri, AXIS/GFA's Cory Creath, Roundtree Properties' Tammy Harpster and Greystar's Kesha Fisher

With more and more tenants working from home, multifamily landlords are making adjustments to interior design, property management and amenities to keep up.

Nearly 19 months after the onset of pandemic lockdowns, adjustments that might once have been predicted to be temporary — working from home, dealing with high package volumes — are still very much influencing the multifamily market and how owners approach attracting and retaining tenants, real estate industry professionals speaking at Bisnow’s Multifamily Annual Conference West event said Tuesday.

“I don't think that work-from-home is going anywhere,” Greystar Senior Director of Real Estate Operations Kesha Fisher said. “And so you're going to have to ensure that you have different types of amenities.”

Developers are designing spaces with the anticipation that tenants will be working from home through modern changes to common and private spaces. The shared business center of old has been replaced by a WeWork-type space with individual pods for working in, Fisher said. In-unit changes range from creating nooks that can function as workspaces or adding USB chargers to all the outlets, she said.

Resident services are also increasingly important, Fisher said. Greystar has started using third-party providers to accommodate higher package volumes that have increased exponentially in the wake of the coronavirus. Greystar has also noticed an 80% increase in pets across its portfolio, which has led landlords to introduce pet amenities — dog runs or so-called yappy hours — as a tenant retention tool.

“If I love my neighbor and our dogs are friends, I'm going to stay there longer,” Fisher said.

Residents working remotely and spending more time in their apartments has translated into some higher expenses for property owners. Roundtree Properties CEO Tammy Harpster said utility bills are higher, prompting the firm to look at solar panels as a possible mitigator to reduce some of the higher overhead costs.

Another owner side effect: Tenants are far more attentive to the time frame it takes for owners to respond to their requests for repairs. Because more people are spending more time in their homes, there is a greater urgency to respond to noncritical maintenance requests, Harpster said.

“It might not be an emergency, but when they see it all the time, it's an emergency for them,” Harpster said.

The rent debt that many tenants now carry in the wake of the coronavirus pandemic is still very much weighing on the minds and bottom lines of industry leaders.

Fisher, Harpster and Universe Holdings CEO Henry Manoucheri all said that money from more than $1B of state funds for rent relief has begun to flow in. Fisher said Greystar has received about $300K in rental relief for back rent at California properties. Manoucheri said he’d received about $600K so far, though he voiced a concern that many of his tenants who are receiving assistance don’t actually need it.

“You have to make sure that you're looking at the rental assistance portal, you have to make sure that you're talking to caseworkers, and we do see that that recovery in California is happening,” Fisher said. “It's happening slowly, but it is happening.”

AXIS/GFA Architecture + Design Founding Principal Architect Cory Creath also spoke on the panel, which was moderated by CLA Principal of Real Estate Carey Heyman.

 

Source: More Tenants Working From Home Means New Expectations Of Landlords And Amenities

https://www.creconsult.net/market-trends/more-tenants-working-from-home-means-new-expectations-of-landlords-and-amenities/

Is a Bubble Forming in Commercial Real Estate?

[video width="1920" height="1080" mp4="https://www.creconsult.net/wp-content/uploads/2021/11/Untitled.mp4"][/video]

• The big question on many investors’ minds – “Is a bubble forming in CRE?”
• From a macro level, Retail, Urban Office and Suburban Office are clearly not in a bubble
  • -  Price growth has been moderate, and fundamentals have kept pace with price gains
• While Apartment values have climbed considerably, historically strong vacancy and rent growth support strong appreciation – Structural housing shortage also a strong tailwind
• Similarly, Self-Storage price gains are backed up by record property performance
  • -  Vacancy at all-time low and rent growth is strong
  • -  COVID helped quell overdevelopment risk, keeping supply and demand in balance over the short-term
• Even Industrial, where exuberance has been strongest, is likely not in bubble territory
  • -  Vacancy, rent growth and NOIs support the aggressive price appreciation
  • -  eCommerce and supply chain disruptions provide long-term tailwinds to the industry
• Investors should closely monitor the supply and demand outlook for the next 3 to 5 years

 

https://www.creconsult.net/market-trends/is-a-bubble-forming-in-commercial-real-estate/

Is a Bubble Forming in Commercial Real Estate?

[video width="1920" height="1080" mp4="https://www.creconsult.net/wp-content/uploads/2021/11/Untitled.mp4"][/video]

• The big question on many investors’ minds – “Is a bubble forming in CRE?”
• From a macro level, Retail, Urban Office and Suburban Office are clearly not in a bubble
  • -  Price growth has been moderate, and fundamentals have kept pace with price gains
• While Apartment values have climbed considerably, historically strong vacancy and rent growth support strong appreciation – Structural housing shortage also a strong tailwind
• Similarly, Self-Storage price gains are backed up by record property performance
  • -  Vacancy at all-time low and rent growth is strong
  • -  COVID helped quell overdevelopment risk, keeping supply and demand in balance over the short-term
• Even Industrial, where exuberance has been strongest, is likely not in bubble territory
  • -  Vacancy, rent growth and NOIs support the aggressive price appreciation
  • -  eCommerce and supply chain disruptions provide long-term tailwinds to the industry
• Investors should closely monitor the supply and demand outlook for the next 3 to 5 years

 

https://www.creconsult.net/market-trends/is-a-bubble-forming-in-commercial-real-estate/

Millennials Aren’t Abandoning Apartments After All

 

One shift expected from the pandemic was the movement of millennials away from apartments and toward single-family housing. Recent data and analysis show, however, that this trend may be petering out, according to a new report from Moody’s Analytics. Instead, multifamily fundamentals look bright for both the short and medium-term, it finds.

Absorption was buoyed by job growth, as more than 3 million jobs were added to payrolls during the first half of the year, according to Moody’s economist Thomas LaSalvia.

“While the potential for impactful, structural changes in how we live, work, and play still remain, worries that large swaths of the population will head for single-family housing are losing steam,” LaSalvia writes in a recent piece in the Scotsman’s Guide. He recognizes that while millennials are indeed moving toward SFR, “the rapid acceleration in US home prices has – and will continue to – price out many of these potential homebuyers.”

Still, the asset class is facing some headwinds.

For instance, inventory gains have been lackluster relative to absorption, he says: US apartment completions hit around 60,000 units through the first half of the year, a rate that’s on pace for the sector’s slowest year in nearly a decade. Developers finished many projects in 2020, according to LaSalvia, but “they were also busy reassessing the prospect of lease-ups and potentially tighter financing for upcoming projects. This uncertainty, combined with rising material costs and labor shortages, has reduced construction activities in 2021.”

Meanwhile, the recovery appears disparate across metros: while 80 of the 82 primary markets Moody’s analyzed posted quarterly rent increases, San Francisco apartment rents are not predicted to return to 2019 levels until 2027.

“While we remain bullish on the mid-to-long-term prospects of large, dense urban centers, divergent recovery rates are likely to continue in the short term – and potentially longer as remote-work policies continue to evolve,” he says.

LaSalvia’s end conclusion: While the rebound may be somewhat uneven across metro areas, robust economic growth and the potential for a sub-5% unemployment rate by the end of this year will undoubtedly lift the rising tide of the apartment sector.

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Source: Millennials Aren’t Abandoning Apartments After All

Senior Living Must Adapt as Demographics Transform Real Estate

 

The baby boomer generation will change senior living and long-term care even more than some experts predict, and the industry is not nearly prepared to handle the influx of boomers entering the space over the next two decades.

That is because the boomers are sitting on untapped wealth resources, and are willing to spend money to achieve positive health outcomes and prolong their lives for as long as possible. This is according to Ken Gronbach, a demographer and futurist who shared his predictions Tuesday during a webinar on how demographic trends drive transformation in real estate, hosted by real estate investment and services firm Marcus & Millichap (NYSE: MMI). The boomer generation, spanning 1946 to 1964, currently totals 78.2 million people, and the oldest wave is only beginning to consider senior living as an option. Gronbach believes the true transformation will take place when the final wave of boomers, born between 1960 and 1965, turn 75. He estimates that nearly 4 million boomers were born annually during that span. Collectively, the boomer demographic’s population total is nearly double that of the preceding generation and will bring enormous wealth with them, once they decide to exit the workforce. Gronbach estimates the boomers have a collective $12 trillion in banking assets, $20 trillion in stock, and $70 trillion in real estate holdings. Gronbach’s predictions are supported by other data and reporting. The boomers have held the most real estate wealth in the U.S. for nearly 20 years, peaking at 49.1% in 2011, according to a New York Times analysis of Federal Reserve data. And they still control 44% of the nation’s real estate wealth.

The boomers are holding on to their real estate longer than the preceding generation and preferring to age in place. This is opening up opportunities for senior living providers to offer home- and community-based services to older people in their homes, and could be further accelerated with the possible passage of the Choose Home Care Act in Congress. That bill would allow certain Medicare beneficiaries to receive extended Medicare services such as skilled nursing or rehabilitation services in their homes for up to 30 days following hospitalizations or surgeries, in addition to their usual home health allowance.

Additionally, the boomers were the only generation that did not recover their wealth lost during the Great Recession. While their average wealth is still higher than the recession low point in 2010, it remains far below what it was pre-2008. This leaves a wide swath of boomers in need of middle-market senior housing.

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Solving the middle-market equation will free up more personal resources for boomers to spend on health care, and Gronbach predicts spending in this sphere will increase exponentially. He is not alone.

In 2019, the Office of the Actuary at the Center for Medicare and Medicaid Services (CMS) predicted health care spending would top $6 trillion by 2027, fueled primarily by boomers. This will account for 19% of the country’s gross domestic product (GDP).

In other words, the aging population will transform real estate markets, and that extends to senior living — longer, healthier lives could mean that older adults defer moves into senior living, but providers also have a potential opportunity to appeal to this demographic and gain a share of their spending as they seek options to boost their health and wellbeing.

“[Boomers] don’t have dying on their punch list,” he said.

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Source: Senior Living Must Adapt as Demographics Transform Real Estate

US Real Estate Price Growth Gathers Pace in August

 

All four major U.S. commercial real estate types posted double-digit annual price growth in August, propelling the US National All-Property Index to a 13.5% year-over-year increase, the latest RCA CPPI: US report shows. The index rose 1.5% from July.

Apartment prices posted a 14.7% gain, the fastest annual growth rate seen since the housing boom before the Global Financial Crisis. Prices for the sector increased 1.6% from July.

Industrial prices climbed 13.6% year-over-year and retail prices jumped 12.1%. While the retail sector, in general, has suffered during the Covid era, some segments such as grocery-anchored centers have remained buoyant. The office sector index accelerated to an 11.2% year-over-year growth rate in August, again fueled by suburban office prices which increased 14.8%. CBD office prices continue to move in the opposite direction, posting a 3.7% annual decline in August.

Deal activity in the U.S. commercial real estate market rose at a triple-digit rate in August as the market continued its bounceback from lows of 2020, as shown in the latest edition of US Capital Trends.

 

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Source: US Real Estate Price Growth Gathers Pace in August