Rising Lumber Prices Are Back With a Vengeance

 

An expected détente of predictable pricing for planning purposes went elsewhere.

As recently as October, lumber prices seemed to be moving to a new sustainable norm. It seemed as though prices in the $500 to $600 range per thousand board feet might become the new normal for the next year or so.

Or so it seemed … until the middle of November, when prices again began to rise. Yesterday closed at $979.30.

“The factors that caused the rise in lumber prices earlier in the year are still at play today,” Chip Setzer, director of trading and growth at commodities platform Mickey, tells GlobeSt.com. “Weather continues to be a driving factor for both supply and demand. We’ve seen unseasonably warmer temperatures across the US which has allowed construction to continue well into the start of winter. This has allowed the demand for building materials to remain strong. Also worth noting is that interest rates remain low, which is continuing to fuel housing demands.” Canada has also seen ongoing bad weather conditions, including major flooding affecting highway systems, that delayed and even stopped many lumber shipments into the U.S.

Prices “may continue to rise to above $1,000, which was last seen in Spring 2021,” Ross Price, director of finance at Mickey, tells GlobeSt.com. “This has been driven by a combination of strong construction activity, limited supply due to labor shortages, flooding in Canada, and an announcement by the US government that it would double tariffs on Canada’s lumber.”

The tariffs had been about 9%, but just before Thanksgiving, the U.S. decided to double duties to 17.9% on Canadian softwood lumber. Softwood is the material used in such applications as framing and concrete forms.

“As a result, the cost of home prices is expected to increase, which will continue to cause issues to homebuilders,” Price continues. “At some point, demand for new housing should subside which will lower the demand for lumber and prices could potentially fall.”

The housing market’s growth has shown recent signs of slowing, although the S&P CoreLogic Case-Shiller Index has still been above the 2006 through 2019 average.

“Traditionally in Q4 we see a large push for orders to be filled prior to the holidays,” Alex Meyers, Mickey’s director of operations, says. “In export markets to Asia for example, manufacturers and distributors will take larger than normal inventory positions to ensure sufficient levels of stock are arriving prior to and after lunar new year, which typically grinds the market to a halt for 3-4 weeks.” Given existing low availability of materials and ongoing supply chain problems, “demand far outweighs available supply and prices trend up as a result.”

Call it a lump of coal in the stocking of development and construction.

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Source: Rising Lumber Prices Are Back With a Vengeance

https://www.creconsult.net/market-trends/rising-lumber-prices-are-back-with-a-vengeance/

A Huge Demand for Housing Leads to a Spike in Multifamily Conversions

 

Apartment developers will create more new apartments in 2021 in old office, retail, and hotel buildings than at any time in the last decade.

The pandemic didn’t slow down apartment developers who adaptively reuse old buildings. Rising apartment rents allow investors to spend more to buy and redevelopment old buildings—income from the finished apartments should eventually pay for the high cost of development.

“We will likely see a fair amount of this—redevelopment and converting properties to apartments—over the next few years,” says John Sebree, senior vice president and national director of multifamily for Marcus & Millichap, working in the firm’s Chicago offices. “That is the result of being in a housing crisis, and without new product being built at the same pace as demand.” Developers are likely to finish a record 20,100 new apartments in 2021 in buildings converted from other uses, according to Yardi Matrix. That will make 2021 the busiest year for conversions in the last 10 years. It’s also up sharply from an average of about 12,000 a year over the last five years. “The pandemic has accelerated the need for a rapid supply of housing stock,” says Doug Ressler, manager of business intelligence for Yardi Matrix, working in the firm’s Scottsdale, Ariz., offices. The number of new apartments created in converted buildings grew steadily from about 5,000 in 2010 to 15,000 in 2017. It dipped to less than 9,000 in 2018… but quickly recovered to close to 12,000 a year in both 2019 and the pandemic year of 2020. The cost of redevelopment varies a lot depending on the building being repurposed—but it is generally significantly cheaper than building similar new apartments from the ground up.

“One estimate could be that renovations could cost about 30 to 40 percent less than new construction for the same number of units,” says Emil E. Malizia, a research professor in the Department of City and Regional Planning at the University of North Carolina at Chapel Hill. “Total development cost per unit should be less as long as the cost of the site and building is not significantly more expensive than the cost of site acquisition for new construction.”

The pandemic has hurt demand for hotels, offices, and retail space—but the occupancy rate for apartments is still well above 90 percent and rents continue to grow on average, even in the once-bustling downtown areas hurt the most by the pandemic. The relatively strong demand for apartments compared to the demand for office space and hotels is helping to make more deals work to adaptively reuse these buildings.

Nearly half (41 percent) of the conversions being completed in 2020 and 2021 are in former office buildings.

“The trend toward office conversions is a significant departure from the last decade when hotel conversions were popular,” says Ressler. Old hotels were relatively easy to turn into apartment buildings because the existing floorplans and utilities were already a good fit with residential use. “However, consistent urban demand and increased preference for open-plan layouts and out-of-the-box designs revealed the housing potential in non-residential buildings.” In cities like Philadelphia and Washington, D.C., the return of capital and demand in submarkets in and around the central business district has made it possible for developers to create thousands of new apartments in converted buildings. The top cities where developers created the most new apartments in converted office building in 2020 and 2021 include Washington D.C. (1,091 apartments) and Chicago (1,020 apartments).

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Source: A Huge Demand for Housing Leads to a Spike in Multifamily Conversions

https://www.creconsult.net/market-trends/a-huge-demand-for-housing-leads-to-a-spike-in-multifamily-conversions/

Apartment Rent Concession Utilization at All-Time Low

 

More apartment operators are ditching rent concessions offers as vacancies across the country have dropped to historic lows.

The share of apartment leases containing rent discounts is at the lowest ever in RealPage’s database that goes back to the early 1990s. This comes as occupancy remains at all-time highs and available apartment units are scarce. However, there are pockets of the market bucking that trend, and they tend to be pricey geographies where discounts are deep. The result is a larger-than-average rent discount for the nation overall.

As of 3rd quarter 2021, only 10.9% of units across the U.S. offered some kind of rent concession. That is less than half the rate seen just two quarters ago and hovers far below the long-term average of about 20%.

Such concessions generally come in the form of free rent, translating to a monthly discount. Over the past five years, monthly discounts for units offering concessions averaged about $50. As of 3rd quarter 2021, concession discounts had more than doubled to stand at $116 per month, on average.

Simply put, fewer units are utilizing concessions, but the value of those concessions has increased.

In another contrast from the recent past, the markets offering the most concessions as a percent of asking rent has drastically shifted since the pandemic. Prior to the COVID-19 pandemic, markets offering the steepest discounts tended to be high-development markets, such as Texas and Sun Belt locales. It was common for operators to offer move-in specials to entice renters at new properties. The pandemic changed that.

As of 3rd quarter 2021, the markets offering the largest discounts as a percent of asking rent tended to be pricey, gateway markets that were plagued with net move-outs and rent cuts throughout the earlier months of the pandemic. Many of these areas are also still seeing a larger-than-average number of units offering concessions as they continue to recover from the pandemic.

New York claimed the title for the market offering the highest concession value at over 12% of asking rent. That’s far higher than what the 7% average concession for New York over the past five years. In San Diego, average rent concessions account for nearly 8% of asking rent, far above the 3.6% average seen over the last five years. Other West Coast markets such as San Francisco, Portland and Seattle also have far higher concessions today compared to the five-year average. East Coast markets like Fort Lauderdale and Boston also top the list.

Across the U.S., concessions as a percent of asking rent averaged 6.4% in 3rd quarter, about 2.4% higher than the five-year average of 4%. Average asking rents registered at $1,589 in 3rd quarter, equating to about $1,473 after a concession discount of $116.

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Source: Apartment Rent Concession Utilization at All-Time Low

https://www.creconsult.net/market-trends/apartment-rent-concession-utilization-at-all-time-low/

Is It Time to Worry About Multifamily’s Slowing Rent Growth?

 

This could be a problem for investors as inflation continues to rise.

The pace of apartment rent growth is slowing, according to a report from RealPage. While it seems to be a seasonal issue, the news comes at a bad time for multifamily investors and property owners as rising inflation creates a greater need for investment hedging.

First the good news: Year over year, rents were up 13.1%. That compares to average annual rent growth between 3% and 4% during the last decade, the report noted. In 2015, prices jumped a bit more than 5%.

But, RealPage also reported that asking move-in rents were up in October 6% over September, the slowest pace since February.

The company called this “the normal seasonal pattern,” but other forces are in effect as well, such as progress in dealing with Covid-19 and uneven progress in pandemic rental assistance reaching tenants and then landlords. Also, in some major markets where vacancy rates went up as people bailed out, rental rates dropped, meaning a lower baseline that could make a return to normalcy look like growth when it was regaining lost ground.

Also, averages are never the whole story. Florida was a major factor in October growth, as “Florida markets accounted for nine of the country’s 12 metros with the biggest rent bumps in October.” A portion is likely due to the population shift from the Northeast. The resulting demand helps support higher prices.

 

Fort Lauderdale, Austin, Las Vegas, Jacksonville, Orlando, and Atlanta all saw annual growth of 20% or more in asking rents for new leases. Some larger metros, like San Francisco, San Jose, Chicago, Oakland, and Kansas City saw drops ranging from 0.1% to 0.9%. The apparent growth isn’t true for all geographic markets in the country.

There are also signs of backlash in some areas. “Despite the fact that rent growth in the Twin Cities rarely inches ahead of the national norm, voters in the city of St. Paul just approved one of the country’s most drastic rent control measures, and those in the city of Minneapolis granted local government office holders the right to enact unspecified rent control measures,” the report said.

The report noted all-time occupancy rates of 97.3% in October, though Apartment List’s numbers for September showed a slight rise in vacancies.

These figures take on a different meaning given the October consumer price index’s increase of 0.9%, making a cumulative inflation rate of 6.2% than a year ago. Real estate is considered a good inflation hedge because rent increases can cover the bite. But if rent increases start to drop, there may not be sufficient hedging ability. But then, it will take more data to understand trends more fully.

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Source: Is It Time to Worry About Multifamily’s Slowing Rent Growth?

https://www.creconsult.net/market-trends/is-it-time-to-worry-about-multifamilys-slowing-rent-growth/

How Was Commercial Real Estate Sales Activity in 2021?

 

How does transaction velocity in 2021 compare to past years?

What's driving such aggressive investment activity?

How does sales volume vary by property type?

 

 

https://www.creconsult.net/market-trends/how-was-commercial-real-estate-sales-activity-in-2021/

Chicago Rents Rising After Pandemic Slump

(iStock)

Chicago landlords may be back in the driver’s seat after being forced to offer concessions to lure tenants during the pandemic.

Rents rose steadily throughout 2021, though they were little changed last month, ReJournals reported, citing a report from ApartmentList. They jumped by about 8.5 percent in the past 12 months, half the national 16 percent rate and still behind 10 percent for the state of Illinois.

Median rents in the Chicago area now stand at $1,284 for a one-bedroom apartment and $1,415 for a two-bedroom. Rents rose fastest in Naperville, where they climbed 14 percent, followed by Arlington Heights at 13 percent. Two-bedrooms rent for a median of $1,990 a month in Naperville — the highest in the state.

Bolingbrook and Kenosha had smallest increases, at 7.1 and 5.7 percent respectively. Kenosha’s median rent for a two-bedroom unit was $1,190. The only area with a lower median rent was Waukegan’s $1,180. Evanston had the largest decrease, dropping 1.9 percent.

Chicago has the fourth-highest median rent among major metropolitan areas, lagging behind Washington D.C., New York and San Francisco. https://therealdeal.com/sanfrancisco/ New York, Baltimore and Columbus rents rose faster than Chicago.

The median rent in San Francisco at $2,770, an increase of 9.7 percent in the past year, while New York’s stood at $2,030, up 18.9 percent.

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Source: Chicago Rents Rising After Pandemic Slump

https://www.creconsult.net/market-trends/chicago-rents-rising-after-pandemic-slump/

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/