WHICH CRE PROPERTY TYPES ARE OUTPERFORMING?

 

• Investor sentiment elevated for the outperforming sectors – Apartment, Industrial and Self-Storage
• All three property types saw operations hold steady or even improve over the past year
• Economic recovery & positive demographics drove Apartment net absorption to an all-time, record high in 2Q 2021
• Industrial properties, an asset class favored pre-pandemic, got a boost from the jump in eCommerce usage and retailers increasing safety stock amid supply chain disruptions
• Vacancy for Self-Storage dropped to the lowest level ever as remote working/learning drove additional space needs in people’s homes
• All three sectors have strong investor expectations for rising values over the next 12 months:
  • - Apartment:     74%
  • - Industrial:       74%
  • - Self-Storage:  62%

 

Chicagoland housing market stabilizes after unpredictable year

 

Although demand, and therefore prices, remains high, the end of the summer shows signs of stabilization in the local housing market. According to new data released by the Mainstreet Organization of REALTORS®, the time that detached single-family Chicagoland homes spent on the market during summer 2021 did not fluctuate much: 31 days in June, 29 in July, and 27 in August.

Comparing data from August 2021 to August 2020, the time detached homes spent on the market decreased 42 days on average. Meanwhile, the number of detached homes sold shrunk by 4.3% year over year, during August 2021. However, some Chicago suburbs did experience significant increases in the number of detached homes sold: Bartlett (18.9%), Buffalo Grove (25.0%), Burbank (42.9%), Darien (30.4%), Homewood (26.7%), North Aurora (27.3%) and Park City-Waukegan (22.2%).

On the other hand, the number of attached homes sold across Chicagoland rose by 5.5% year over year during August. See the various sales data visualized here.

As for pricing, both detached and attached homes’ median sale prices both rose roughly 10% in August 2021, compared to August 2020. While this demonstrates a large bump year over year, it’s a slight decrease from the start of summer 2021. “At this point, we’re seeing buyers who have been on the market for a while, and they’re savvy,” Mainstreet’s Immediate Past President Linda Dressler said of the findings. “The most desirable houses with all the modern updates have already sold over the past year, and buyers are not going to pay the premium prices or add escalation clauses for houses that are not ready.”

She went on to tell homeowners: “As winter approaches, don’t be afraid to list your home over the holidays,” referring to the low levels of inventory that the market currently faces. “If it’s ready to go on the market, listing in a time of low inventory can only help you attract the most qualified buyers.”

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Source: Chicagoland housing market stabilizes after unpredictable year

Mark Zandi US Economy Is Shifting But Changes Good for CRE

 

Mark Zandi, the chief economist of Moody’s Analytics and founder of Economy.com told more than 1,000 attendees of NAIOP’s CRE. Converge conference taking place in Miami Beach, Florida, that while the pandemic is altering the U.S. economy, changes in store bode well for commercial real estate.

On the positive side, the economy has recovered 17 million of the 22 million jobs that were lost due to the pandemic. The policy response on the part of the Federal Reserve, Congress, and the White House, including maintaining low short- and long-term interest rates, the CARES Act, and the American Rescue Plan, have collectively kept the economy from failing.

“I’m assuming that the pandemic is going to continue to wind down and that with each new wave the disruptions to the economy will be less significant. Over the course of the next 18-24 months, the pandemic doesn’t go away but it largely fades away in terms of what it means in terms of our work and lives.”

Zandi noted that however it shakes out, the infrastructure spending packages will also be beneficial to the economy.

And he said that with respect to monetary policy, the Fed will slowly take its foot off the monetary accelerator – raising short-term interest rates by spring of 2023 and tapering the quantitative easing of buying bonds.

The pandemic has not only accelerated certain trends, but it is also causing permanent shifts. These include remote work, less domestic travel generally, less business travel, and increasing net migration from urban cores.

Prior to the pandemic, a net of 275,000 people on average were leaving urban cores in the U.S. to live in other locales; during the pandemic, that number jumped to more than 600,000.

Zandi also identified the risks inherent in the post-pandemic economy:

• The Delta variant of COVID-19 has unnerved consumers and workers.
• Fiscal policy is at risk with Congress threatening to not fund the government’s fiscal year, which begins Oct 1.
• Housing prices are stretched and possibly primed for a correction as interest rates begin to increase.
• Maybe not today, but at some point down the road, government debt and deficits will become a problem.
• Supply chain shortages continue to make it difficult to obtain building supplies and consumer goods.

Meanwhile, the pandemic has also fueled a significant rise in productivity.

“There are fundamental things going on in the economy that argue for stronger productivity growth. Businesses are investing in labor-saving software, baby boomers are retiring, and the workforce is becoming younger.”

“That’s a big deal for the economy. It goes to profits, wages, and our ability to address our fiscal policies.”

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Source: Mark Zandi: US Economy Is Shifting But Changes Good for CRE

U.S. Apartment Vacancy Plunges in September to Record Low as Lease Renewals Surge

Apartment vacancies nationally dwindled to another record low in September at just 2.7%, according to RealPage, Inc. This marked the fourth consecutive month of record-breaking lows in a dataset going back three decades.

Ultra-low vacancy traces to unprecedented demand from both new renters moving in and existing renters choosing to renew leases. Remarkably, new lease demand in the 12-month period ending in September shattered the pre-2021 peak by an incredible 50.5%. At the same time, apartment resident retention surprisingly surged to 58.0% – surpassing the all-time high set during the peak of the lockdowns in April 2020. Retention rates represent the share of renters with expiring leases who choose to renew in a given period.

The fact that more new renters are entering the front door, but fewer existing renters are leaving out the back door is an unprecedented phenomenon that translates to a severe shortage in rental housing availability at every price point and in essentially every city across the country.

In apartment operations, a vacancy rate of 4% to 5% is considered essentially full, accounting for normal turnover time. As of September, though, vacancy registered below 4% in 140 of the nation’s 150 largest metropolitan areas. Furthermore, 113 metros reported vacancies below 3% and 48 came in at or below 2%. Among large metros, the top three were Orange County, CA and Providence, RI (both at 1.12%) and Riverside, CA (1.37%).

In practical terms, such low rates equate to essentially no availability. Units are getting re-leased quickly upon notification of a move-out, and property managers are turning vacated units over in record time. Unlike in the single-family market, the lack of apartment availability does not trace to a lack of construction. In fact, new completions over the last 12 months reached a three-decade high of 362,807 units. Not long ago, that volume of supply was considered a major risk factor for apartment investors. Fast forward 18 months, and the supply wave proved surprisingly insufficient to meet the demand boom. Net absorption in the 12 months ending in September surged to a record high of 610,715 units. That topped the previous record set earlier this year and smashed the pre-2021 record set in 2000 by an incredible 50.5%. Incoming market-rate apartment renters are moving in with larger incomes than ever before. The typical household income for a new renter in the 3rd quarter of 2021 topped $70,000, compared to $62,600 in 2020.

Renewal demand has been equally surprising. Retention rates initially spiked as high as 57.8% in spring 2020 when renters couldn’t or wouldn’t move due to lockdowns. Retention then eased back once lockdowns subsided, and few expected retentions ever to approach lockdown-era highs again. But retention surged back up over the last three months and reached a new pinnacle of 58.0% in September 2021.

In other words, renters looking for other housing options are often finding that their best and most affordable option is to stay put. There are a few available apartments, single-family rentals, or for-sale homes. The options that do exist are often much more expensive. Plus, property managers routinely price renewal leases well below new lease rents.

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Source: U.S. Apartment Vacancy Plunges in September to Record Low as Lease Renewals Surge

Tax Reform Strategies for CRE Investors [Webcast]

 

Key Discussion Topics Are Changes to the 1031 Exchange and Step-Up Basis Off the Table? How Increases to Capital Gains and Personal Income Taxes Affect CRE Investors Implications of Prospective Changes to Carried Interest Adapting Investor Strategies to the New Tax Climate

Thursday, October 21, 2021 1 pm Pacific/4 pm Eastern REGISTER NOW

Mortgage Rates Are Heading Higher As Fed Plans Bond Taper

 Getty

 

As the Fed plans tapering its mortgage-bond purchases, mortgage rates are heading higher.

Mortgage rates rose to a three-month high last week as the bond markets reacted to the Federal Reserve’s announcement it would “soon” begin tapering its fixed-asset purchases.

The average U.S. rate for a 30-year fixed home loan jumped to 3.01%, the highest since June 24, from 2.88% in the prior week, Freddie Mac said in a report on Thursday.

That means the 2.65% bottom in January’s first week likely will stand, at least for this cycle, as the lowest ever recorded in a Freddie Mac data series that goes back to 1971. “It’s clear that rates are probably more inclined to trickle up, to increase, as opposed to decreasing,” said Daniel Roccato, a professor of finance at the University of San Diego and a money coach at Credible. That outlook comes with a caveat: If the Covid-19 pandemic worsens with new variants and consumers snap shut their pocketbooks again because they’re too afraid to go to stores and restaurants, all bets are off, said Roccato.

“As long as consumers continue to leave their bunkers and continue to spend money, the economy is going to continue to improve, and that’s going to cause mortgage rates to edge upward,” Roccato said.

The average rate for a 30-year fixed mortgage probably will rise to 3.1% in the final three months of 2021 from 2.8% in the prior quarter, according to a forecast by Mortgage Bankers Association on Sept. 21. That would be the highest since 2020’s second quarter, in the opening weeks of the Covid-19 pandemic.

The Fed began buying Treasuries and mortgage bonds in March 2020 to support the economy during the pandemic and prevent a credit crunch. The increase in demand meant investors had to accept smaller yields, which translates into lower home loan rates.

In July 2020, mortgage rates fell below 3% for the first time on record, as measured by Freddie Mac.

Since last year, the Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities a month. Both types of purchases put downward pressure on home loan rates because mortgage-bond yields tend to track long-term Treasuries.

As of last week, the central bank held $5.4 trillion in Treasuries and $2.5 trillion of mortgage bonds backed by Fannie Mae, Freddie Mac, or Ginnie Mae, according to a report issued by the Fed on Thursday.

While interest rates for home loans are heading higher, no major forecaster is predicting a spike. The average rate for a 30-year fixed mortgage probably won’t reach 4% until the end of 2022, according to the MBA forecast. That would be the highest since 2019’s second quarter.

“The pending taper and change to the monetary policy outlook will likely contribute to a modest increase in mortgage rates over the medium term,” MBA said in a commentary issued with its forecast.

“The biggest challenge to the housing market continues to be the lack of supply, hindered by the same supply chain constraints that are impacting the broader economy,” MBA said.

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Source: Mortgage Rates Are Heading Higher As Fed Plans Bond Taper

Housing Affordability Expected to Decrease In Months Ahead

 

Rising home prices and interest rates will decrease housing affordability even further in the months ahead, predicts National Association of Home Builders Chief Economist Robert Dietz.

In a recent NAHB newsletter, Dietz said his outlook comes as home prices have risen more than 30%, on average nationwide since the start of 2020. A year ago, 43% of new home sales were priced below $300,000. In August, the share fell to 30%.

New homes are 24% lower than a year ago because of higher construction costs and some limiting of sales.

“While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume and encourage more home construction,” Dietz said.

He bases his prediction of continuing declining affordability not only on rising prices but also in the belief interest rates will rise as the Federal Reserve tightens monetary policy.

“Indeed, the 10-year Treasury rate has increased 37 basis points since the start of August. And consumer confidence declined to a seven-month low in September because of virus and inflation concerns. The prospect of higher taxes is certainly having a negative impact as well,” Dietz pointed out.

He cautioned builders will need to watch resale inventory in local markets to gauge how higher prices and rates are affecting available demand.

Dietz noted the surge in single-family construction at the end of last year means that for the first time since 2013, there are now more single-family homes currently under construction than individual apartments.

But year-to-date multifamily starts are up almost 17% on a year-to-date basis thus far in 2021 as a rebound for the rental market has taken hold while single-family starts were down 2.8% for the month.

While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume (and encourage more home construction). Unsold inventory stands at just a 2.6-month.

NAHB is not alone in its assessment.

In the summer, Frank Martell, president, and CEO of CoreLogic predicted price rises would continue in 2021 and could very well push prospective buyers out of the market in many areas and slow home price growth over the next year.

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Source: Housing Affordability Expected to Decrease In Months Ahead