Which 3 Property Types Had the Best Price Growth?

 

• RCA’s Commercial Property Price Index said the below sectors had the strongest YOY price increase as of August
  • •  Suburban Office: +14.8%
  • •  Apartment: +14.7%
  • •  Industrial: +13.6%
• Elevated prices for Multifamily and Industrial is unsurprising – Both registered strong rent growth & falling vacancy
• Meanwhile, Suburban Office prices are driven more by the future outlook than current fundamentals
• As Millennials age, many investors are betting the cohort will start families and move to the suburbs much like previous generations
• As a result, employers could begin to shift office operations out of the CBD and into surrounding areas where their workforce is relocating, strengthening office space demand
• Investors are positioning assets in the path of this growth, hoping to capitalize on the trend

 

What CRE Would You Overpay For Today?

 

As the CRE investment climate continues its aggressive trajectory across virtually all asset classes, some industry experts question whether current pricing remains in line with valuation.  But a better question may be what properties are worth overpaying for today, says John Chang, senior vice president of research services at Marcus & Millichap.

“Integral to this idea is that beauty is in the eye of the beholder,” Chang said in a recent video breaking down the current investment climate. “Some people look at a deal and say ‘whoever pays that much for that asset is nuts.’ Then five or 10 years later the investor who bought the property is proven to be a genius. Maybe it’s luck or maybe the rising tide lifted all boats—or maybe that investor simply says something that others didn’t.”

That, Chang says, is the beauty of real estate.  “There’s a real opportunity for investors to use knowledge and expertise to outperform the market and to create value,” he says.

Chang says the current investment climate is very aggressive, pointing to deals selling with “unheard of cap rates” such as apartment deals in Texas with cap rates in the twos and industrial transactions in major hubs like Southern California’s Inland Empire or Los Angeles selling in the same range.

“There are trades happening that really pressure the pricing envelope” in virtually all sectors, including self-storage, retail, seniors housing, manufactured housing, hotels, and biotech space. Why? Investors are looking at longer-term drivers,” he says, and “baking those factors into their underwriting…and investors are looking for the angle that others simply aren’t considering.”

Chang says he’d overpay for assets that capitalize on a long-term trend that’s not already baked into the price—think a hotel catering to vacationing young families or suburban office buildings in markets with strong in-migration of talent and companies. Other solid bets: seniors housing catering to aging baby boomers, self-storage facilities in supply-constrained areas with rising millennial populations, and retail centers positioned for new uses.

“Honestly, there are countless properties that could be a big winner for investors with a vision, but there are three really important ingredients,” he says. The first: information. Investors must understand the property, the market, and submarket, as well as forces that will impact the property over the next five to 10 years, Chang says. The second is insight: what can the property be in the future? Finally, the third factor is perspective: can you align the piece of real estate within the context of who the tenants will be and what the submarket will look like in five years?

“Yes, the anomalies and nuances affecting the market today can create opportunities, but in real estate, the big payoff usually comes over the span of years,” he says.

Chang has previously said many investors will find selling is a much better option now than holding for one to three years, especially if capital gains taxes and interest rates rise.

In remarks this summer, he recommended considering new markets and out-of-favor liquidity types to balance portfolios. “The market could shift quickly, and opportunities may not stay long. There is a relatively short window of opportunity,” Chang said then.

 

Which CRE Property Types Were More Impacted by COVID?

 

• Property types most impacted by COVID – Hotels, Seniors Housing, Retail and Office
• Summer travel surge supported Hotel recovery; Bifurcation evident depending on the segment
  • - Buy-side sentiment at 9-year high as investors pursue an opportunity
• Seniors Housing is on a slower path to recovery, but trending in the right direction
  • - Consolidation by large operators driving much of the investment activity
• Like Hotels, Retail sector facing steep bifurcation, but elevated consumer spending is positive
  • - Necessity-based centers doing well while in-person retailers & older indoor malls struggling
• Office sector outlook still shrouded in uncertainty; COVID containment and future of WFH key
  • - Absorption turned positive in 2Q 2021, but Delta surge and return to work delays damaging
• Although these asset classes faced hardship over the last year, opportunities still exist
• Some investors opting to consolidate or pursue value-add/adaptive reuse investments

 

HOUSING RESEARCH BRIEF: SEPTEMBER 2021

Housing Construction Pushes Toward a Record; Still Not Enough to Meet Demand

Tight multifamily vacancy supports permit surge. Across the residential sector, permit activity climbed in August. The rise was mostly attributed to multifamily, as filings for single-family houses remained relatively in line with preceding months. Meanwhile, apartment permits soared 15 percent month over month, reaching the highest level since June 2015. Greater construction is warranted by extremely tight vacancy, as apartment availability in June fell below 4 percent for just the second time in the past 20 years. Preliminary data points to additional downward vacancy pressure in the third quarter, reiterating the housing shortage and putting upward pressure on both rents and home prices.

A large 2022 pipeline is imminent, but the ceiling is capped. Residential starts in August were up year over year, even as single-family groundbreakings tapered over the past few months. The 53 percent annual advance in multifamily starts spearheaded the rise. Some previously stalled developments pushed forward as the lumber price index retreated by 36 percent over the past two months. Still, the cost of lumber remains 30 percent above the pre-pandemic level. Elevated material costs and labor shortages limit the potential supply output next year, but recent permit activity and starts signal a weighty pipeline nonetheless. Early forecasts project 400,000 apartments will finalize, while the single-family addition will be the largest since 2006.

Builders face tall tasks in catching up with demand. Despite multifamily completions in 2022 expected to be a 40-plus year record, oversupply concerns are mostly absent. Instead, the new supply will continue to lag demand as the aging millennial cohort drives robust household formation. The U.S. is expected to add 1.5 million additional households next year, given there are enough residences available to support the demand amid a housing shortage. Apartment vacancy sits at a historical low, and demand for single-family homes has consistently outpaced supply, driving inventory down and pushing up prices. The influx of apartments next year is especially crucial as these will provide living options to those priced out of homeownership.

 

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