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

Uh-Oh Growth is Slowing Is CRE Next?

 

Nobody likes being corrected, especially an entire industry. But some are suggesting that one is overdue in commercial real estate. And some outside data seem to say that things are slowing.

JP Morgan cut its third-quarter GDP annualized growth forecast from 7% to 5%, Dow Jones reported. Morgan Stanley chief US equity strategist Mike Wilson reportedly said that as fiscal stimulus ends, the S&P 500 could see a 20% correction, according to The Street. A drop in equities could make them more appealing and draw some money away from alternative assets like real estate.

For some, that future is already here.

“For the first time in over a year, clients are reporting some softness in sale prices in what had otherwise been very strong markets, such as senior housing and apartments,” Kyle Hauberg, director of Dykema’s real estate and environmental services department, tells GlobeSt.com. “This is likely due to a combination of very aggressive pricing by sellers and some hesitation on the longer-term outlook by buyers and investors. Industrial continues to be very strong.”

Certainly, we are seeing cap rates of select asset types, particularly apartments and warehouses, compress at such a tremendous rate that the trajectory is realistically unsustainable, especially if you believe interest rates will increase over the intermediate-term,” Aaron Halfacre, CEO of Modiv, tells GlobeSt.com. “That said, buying opportunities do exist but your strategy needs to be focused and your underwriting thorough. Even with tighter cap rates, we are seeing compelling opportunities in the single-tenant net lease sector.”

Others also suggest a measured and detailed approach. “JPM’s forecasts around Q3 and Q4 are certainly relevant and indicative for the near term,” Brian Ward, CEO of Trimont, tells GlobeSt.com. “However, commercial real estate is inherently a long-term asset class, and unless there are certain transactions priced to perfection requiring near-term execution, then what goes on in Q3 and Q4 should not make a lot of difference.”

“We believe that the recovery momentum will not slow as much given where we started before the pandemic and all the money pumped into the economy from the government,” George Smith Partners managing director Gary Mozer says. “Growth is slowing because of supply chain issues, however conversely, commercial real estate transactions are speeding up because of potential changes to the tax code such as loss of 1031 tax treatment and increasing capital gains rate. This increase in transaction volume should offset much of the effects of the delta variant.”

Mozer adds that given the amount of money in the monetary system and the pressure it creates to invest, “investors are trying to invest in hard assets as an inflation hedge.” He adds, “Perception that the stock market is fully priced, and the bond markets are producing nominal yields, investors are pouring money into real estate. Real estate has historically outperformed on a risk-adjusted basis when economies are expanding, and inflation is diminishing returns.”

Mozer and others do say that some sectors are feeling the pinch. “Offices are still recovering from the impacts of the pandemic,” Dianne Crocker, principal analyst at Lightbox, tells GlobeSt.com.

“With low occupancy daily, corporations are postponing back to work plans.” And yet, she adds that “retail reinvention is well underway as companies are redesigning their spaces to appeal to today’s shoppers demanding more of an experiential visit than traditional brick and mortar.”

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Source: Uh-Oh Growth is Slowing Is CRE Next?

Rents are skyrocketing the most in these US cities

 

The national median rent rose to $1,302 in September, up 15% from a year ago, according to a report from Apartment List, a rental listing site.

After falling for much of 2020, rents are now rising much faster than before the pandemic. Since January, the national median rent has increased by 16.4%. From 2017 to 2019, a more typical rent increase during those months was 3.4%, according to the report.

In September, rents remained below pre-pandemic levels in just five large cities: San Francisco, Oakland, and San Jose, California, as well as Minneapolis and Washington, DC.

But the meteoric rise in rents may be starting to show signs of cresting.

Boise, Idaho, which saw the biggest increase in rent during the pandemic -- up nearly 40% since March 2020 -- did not see a monthly increase in September. Instead, according to the report, the median rent in Boise fell by 0.1%.

That's hardly much relief for Boise renters, but, according to Apartment List's report, it may begin to signal that the market is starting to stabilize.

Rents soar in Sun Belt cities

"What is happening now is a massive rebound in rents," said Anthemos Georgiades, CEO of Zumper, a rental listing site. And much of that rebound has come through steady increases throughout 2021, he said.

Several factors contributed to the higher rates, he said, including people coming back to urban cores for in-person work and school, would-be homeowners remaining renters because they are priced out of buying a home, and an overall lack of housing.

Rents are climbing fastest in Sun Belt cities like Phoenix, where rent for a one-bedroom apartment was up 22% year-over-year in September, according to Zumper.

Nearby, Scottsdale's one-bedroom median rent rose to $1,850 in September, up 23% from last year, according to Zumper's analysis. Overall, Sun Belt cities posted the strongest rent gains in the country during the end of the summer, according to a report from CoStar Group, a real estate data company that owns Apartments.com. Rents in this region were pushed up by robust economic recoveries and newcomers moving to the area, according to the report. "Sun Belt markets were already seeing good growth pre-pandemic and they are the standouts now," said Jay Lybik, the national director of multifamily analytics at CoStar Group. Other cities seeing rent increases are those that aren't the major city in their region -- like Fort Lauderdale, Florida, or San Diego, according to Zumper. "Maybe people don't need to live in Miami or Los Angeles, but they still want to be close," said Georgiades. Nearby cities often offer a lower cost of living, larger square footage, and an attractive lifestyle. "Only a minority of people will be fully remote going forward. The proximity is a realistic alternative for many people."

New York and San Francisco rebound

Rents in the two most expensive markets in the country, New York and San Francisco, cratered during the pandemic. Now both are coming back, with San Francisco lagging a bit behind.

The borough of Manhattan is heating up the most in New York City, said Nancy Wu, an economist at StreetEasy. "Manhattan residents were more mobile and had the ability to move. That's where we saw the biggest drops in rents [during the pandemic] and the biggest gains back up in the city."

Prior to the pandemic, rents in San Francisco were more expensive than in New York and there was less inventory. San Francisco may not be coming back as fast as New York, Wu said, because the Bay Area's tech industry might not require workers to be in the office to the extent the financial firms in Manhattan do.

Still, she said, New York and San Francisco have more in common than they do with other parts of the country. "They are different than Midwestern and Sun Belt cities that were relatively more affordable and have seen big rent growth."

Rents are not as strong in New York as some analysts thought they'd be at the beginning of the summer due to the ongoing threat of Covid-19. "That still leaves a lot of good deals for renters," said Wu. "You can still negotiate."

The median rent in Manhattan was $3,255 in August, according to a report from brokerage firm Douglas Elliman and appraisal firm Miller Samuel. That's up 1.5% from July, but still 3.2% below last year.

Demand is bouncing back, however, according to Jonathan Miller, President, and CEO of Miller Samuel. Even though leasing activity was strong heading into the fall, said Miller, it was more muted than expected.

"At the start of the summer, there seemed to be a consensus among corporate America that in-person work would resume in the fall," said Miller. "That consensus is much more diffused. Start dates are being kicked down the road, often to January and into the new year."

That uncertainty can be seen in the rental activity, he said. "Instead of having this moment that was going to be a light switch, when things were back to business in a significant way, that has become less of an obvious outcome," said Miller. "Now there is more uncertainty."

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Source: Rents are skyrocketing the most in these US cities