Drilling Down Into the Hot Apartment Submarkets

Areas near Phoenix and Dallas are poised to perform well in 2022.

There are hot apartment markets such as Phoenix and Dallas projected to do well this year, but understanding the fundamentals in those areas’ key submarkets can prove even more valuable to investors and developers.

Much has been written about the scorching hot Phoenix market, for example. Greg Willett, Vice President of Marcus & Millichap’s Institutional Property Advisors (IPA) multifamily research, points more specifically to its nearby cities such as Tempe, Chandler, and Gilbert on the west side of metro Phoenix.

Development is the heaviest downtown and in West Valley suburbs such as Glendale, Ariz., according to Marcus & Millichap’s report. Net absorption surpasses 19,000 units, the highest annual total since at least 2000. Still, the record-setting wave of supply results in a slight vacancy increase to 2.8 percent.

Rent growth will settle from last year’s 21.9 percent gain but remain strong. The mean will jump to $1,630 per month in 2022, aligning with the 2016-2020 annual average growth rate.

More buyers pursue Class B and C assets Downtown and in North Phoenix. These may better align with the budgets of some renters in the area amid a wave of new modern facilities.

A Closer Look at Dallas

Likewise in the Dallas metro, Willett said nearby locations such as Frisco, Allen, and McKinney on the north side of metro Dallas were ones to watch.

Amid rapid population growth and household formation, assets in Dallas-Fort Worth are attractive to investors throughout the world, according to the report.

“The sizable field of buyers eager to acquire properties in the Metroplex is pushing up sale prices and compressing yields. From 2013 to 2020 the mean sale price increased by an average of more than 10 percent per year, a trajectory sustained in 2021.

“The average cap rate also dipped below 5 percent for the first time on record last year. Many buyers are following household formation trends to North Dallas suburbs, with deal velocity ramping up in locations beyond Interstate 635 like Carrollton, Frisco, and Garland.

“Areas that will receive the most new supply include Frisco, South Arlington-Mansfield, and Intown Dallas. Following a 190-basis-point drop in 2021, downward vacancy movement continues this year as net absorption exceeds new supply. The rate will fall to a two-plus decade low of 3.6 percent. It will be difficult to mirror the 12 percent gain from last year, but rent growth in 2022 will be the second-fastest in the past six years.”

The mean effective rate will reach $1,395 per month, Marcus & Millichap forecasted. Competition for assets in North Dallas suburbs, Downtown, and in the Mid-Cities will lead buyers to search farther out. Denton, McKinney, and Waxahachie may offer compelling prospects.

Willett added that key suburban job centers across the entire state of Florida continue to perform well.

Looking Elsewhere

“Performances lagged to some degree in most urban core settings across the country, but even the worst-performing neighborhoods generally made progress viewed relative to 2020 results,” Willett said. “By the end of 2021, the only places where rents had not fully recovered to pre-pandemic levels were in the San Francisco Bay area and select neighborhoods in metro New York.”

Marcus & Millichap this week released its full 2022 apartment market forecast, citing Orlando and Las Vegas as its best bets overall for 2022.

 

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Source: Drilling Down Into the Hot Apartment Submarkets

https://www.creconsult.net/market-trends/drilling-down-into-the-hot-apartment-submarkets/

Goldman Sachs Says Rent Increases Should Slow Down This Year

 

• The rent-price surge seen through 2021 likely peaked in the fourth quarter, Goldman Sachs said Tuesday.
• Shelter inflation gauges suggest price growth will start to slow faster by mid-2022, the bank added.
• The bank sees rent growth peaking at 5.1% in 2021 and slowing to 4.2% by the end of 2024.

Renters have been on a rollercoaster ride throughout the pandemic. That choppiness is cooling down soon, according to Goldman Sachs.

City rents have been on a tear. Prices were up 11.5% year-over-year in November, according to CoreLogic's Single-Family Rent Index, much higher than the 3.8% annual growth rate in November 2020 and marking the fastest inflation in at least 16 years. Popular pandemic moving destinations like Austin, Las Vegas, and Miami led the charge in 2021, and rents in major metro areas like New York City and San Francisco more recently roared back as people prepared to return to offices.

The surge raised concerns that the affordability crisis in the housing market could bleed into rentals. Yet early signs suggest the US is past peak rent inflation, and apartment prices should start to stabilize this year, Goldman analysts led by Jan Hatzius said in a Tuesday note.

Shelter inflation accelerated to an annualized rate of 5.1% in the fourth quarter, according to the Census Bureau. Trends in other inflation measures, however, show rent growth starting to ease through the end of last year. The Consumer Price Index's rent and owners-equivalent rent measures both decelerated in December. The gauges track prices of new and continuing leases, and it takes longer for the latter to follow price increases in the former. By modeling when the new leases saw the biggest price hikes, the economists estimate that the rent-price surge was the strongest in the fourth quarter and will fade moving forward.

The cooldown won't be quick. Shelter inflation will linger at a year-over-year pace of about 5% through the third quarter before dropping to 4.8% at the end of 2022, Goldman said. Price growth will continue to ease to 4.5% at the end of 2023 and to 4.2% at the end of the following year, the team added. The forecast offers new hope that the country's broader inflation problem will also improve. Rent growth is a "sticky" form of inflation, meaning prices are not likely to decline after soaring higher.

Persistently strong rent inflation is potentially a bigger problem for the economy than more temporary price increases for things like gasoline or food, as it could spark a new inflation crisis and the need for large-scale intervention. Goldman's outlook, then, assuages some concerns that the rent boom of 2021 would keep inflation stuck at its four-decade highs.

Still, risks exist on both sides of the bank's forecast. Rent inflation could accelerate again in 2022 if less of the bump from new-lease rents has made its way to renewals than expected, the team said. That would prolong the cycle and likely drive shelter inflation higher. Conversely, rent growth could drop even faster if most of the new-lease boost has already hit renewal inflation, the team said. Weaker underlying shelter-inflation trends could also drag on rent growth, they added.

For now, rent is still growing at its fastest rate since the financial crisis, according to BLS data. Even the weaker inflation rates forecasted by Goldman sit above the pre-pandemic trend, but after a year of skyrocketing shelter prices, the bank's projected peak offers some respite for those struggling to keep up.

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Source: Goldman Sachs Says Rent Increases Should Slow Down This Year

https://www.creconsult.net/market-trends/goldman-sachs-says-rent-increases-should-slow-down-this-year/

State of Commercial Real Estate 2022

 

On Tuesday, Feb. 15, eXp Commercial hosted a free virtual seminar in the eXp Commercial Campus metaverse featuring founder and president of Red Shoe Economics, KC Conway as the keynote speaker. The 60-minute "State of the Commercial Real Estate Industry" seminar is open to all eXp Commercial agents and other interested parties. 

With more than three decades of experience as an economist, Conway will provide industry research, data, analytics, and economic insight on the complex and changing commercial real estate market.

 

 

 

About KC Conway:

Economist and Futurist Kiernan “KC” Conway, CCIM, CRE, MAI is the mind trust behind Red Shoe Economics, LLC, an independent economic forecasting and consulting firm furthering KC’s mission as The Red Shoe Economist by providing organic research initiatives, reporting, and insights on the impact of Economics within the commercial real estate industry.  A proud graduate of Emory University with more than 30 years experience as a lender, credit officer, appraiser, instructor, and economist; KC is recognized for accurately forecasting real estate trends and ever-changing influences on markets all across the United States. With credentials from the CCIM Institute, Counselors of Real Estate, and the Appraisal Institute, KC currently serves as Chief Economist of the CCIM Institute and as an Independent Director for Monmouth REIT MNR. A gifted and prolific speaker KC has made more than 850 presentations to industry, regulatory and academic organizations in the last decade, and has been published in many national and regional newspapers and journals with frequent contributions to radio and television programming.

 

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https://www.creconsult.net/market-trends/state-of-commercial-real-estate-2022/

Not just a national surge Chicago area multifamily market soaring too

Last year was a particularly unique year for the real estate industry as it pertains to the residential trends and migration patterns left in the pandemic’s wake. With a majority of the corporate real estate sector opting to implement work-from-home or work-from-anywhere models in order to retain staff and reduce overhead, there was a significant surge throughout the country in workers relocating to more suburban areas.

This occurred for a variety of reasons, such as individuals seizing the opportunity to live farther away from their offices and others realizing the potential financial savings and change of scenery that suburban living can provide. From a health and wellness perspective, moving to areas with smaller populations appeared as a practical solution in terms of lowering the risk of virus transmissions as well as a way to reduce the sources of stress that often accompany urban life, such as noise pollution and smaller living spaces.

With the worst of the pandemic appearing to be behind us, these migration trends are beginning to shift once again. However, instead of an outright reversal of the exodus seen in 2020, the population has found a middle ground. Urban areas are seeing a surge in new residents while the suburbs continue to thrive. New York City, as an example, is seeing almost twice as many new residents compared to 2019 figures while Chicago’s urban market continues to be outpaced by the suburbs. The city of Chicago itself, however, continues to retain its title as the third most populous city in the United States despite 2020’s notable outbound migration.

Chicago in focus

The unique migration patterns in and out of the Chicago metropolitan area, have resulted in an incredibly diverse multifamily market landscape. The demand in this area mirrors the broader multifamily trends being seen throughout the entire country, with some residents continuing to demonstrate a heightened interest in the suburbs while others begin returning to the inner city.

This dichotomy is likely attributable in part to the vaccine and booster shots now being more widespread and available as well as businesses beginning to bring workers back into the office. Certain companies opting to continue using their WFA models or adopt hybrid strategies, however, present one possible explanation as to why the post-pandemic world is not simply snapping back to its 2019 landscape.

My firm Pensam has been consistently exercising its team’s market insights to meet this spectrum of demand. Over the past year, the firm has acquired four multifamily properties in Chicago and its surrounding suburbs as well as preferred equities and other transactions throughout Illinois and the rest of the country. This focus on the Chicago MSA is not by chance, as the area’s multifamily market activity over the past year has shown a clear interest in both urban areas and their surrounding suburbs. This interest has paved the way for firms like Pensam to execute deals inside of a particularly diverse pool.

Transactions across the spectrum

1900 at Canterfield, a 260-unit stabilized multifamily community in West Dundee, Illinois, acquired by Pensam in the summer of 2021, provides an example of the types of suburban properties that saw a surge in interest following the pandemic. 1900 at Canterfield contains 18 buildings across 23.6 acres, providing the suburban atmosphere, low density, and spacious design that city emigrants are seeking, but is located less than a mile from I-90, granting easy access to the Schaumburg job market.

The building’s amenities also include a clubhouse, outdoor lounge area, and swimming pool–amenities that today’s suburban residents are expecting to accompany the increased space available.

More recently, Pensam also acquired Lakeside Apartments in Wheaton and Aspen Place in Aurora, both Chicago suburbs. These two properties, containing 204 and 416 units respectively, demonstrate not only a high level of interest in the Chicago MSA but an interest that is continuing to grow. Combined with the firm’s latest acquisition, the 336-unit Butterfield Oaks in Aurora, Illinois, evidence points to this momentum carrying forward.

A promising 2022

Pensam’s strong focus on Chicago and its surrounding suburbs indicates that the firm is placing great confidence in the real estate industry’s continuing rebound from the pandemic, poising itself to keep both the urban and suburban multifamily markets in focus throughout 2022.

Against the backdrop of Pensam’s performance in the national multifamily market throughout last year, this is further evidence that the worst of the pandemic’s effects on the U.S. multifamily market are likely behind us. Going forward, all signs point to this sector continuing to improve in 2022 and lead the country to pre-pandemic levels of activity and beyond.

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Source: Not just a national surge Chicago area multifamily market soaring too

https://www.creconsult.net/market-trends/not-just-a-national-surge-chicago-area-multifamily-market-soaring-too/

The spotlight may be on Chicago’s single-family market but multifamily sector is also hot

 

While investors and homebuyers’ focus has been on Chicago’s soaring single-family market, multifamily properties in and around the city are also hot.

The trend is driven by migration patterns in Chicago as workers reassess their situations now that the availability of vaccines and booster shots makes living with Covid more manageable, according to an analysis by Hen Shoval, principal and director of Investment at Pensam Capital, a Miami-based real estate investment firm, in REjournals.

“The demand in this area mirrors the broader multifamily trends being seen throughout the entire country, with some residents continuing to demonstrate a heightened interest in the suburbs while others begin returning to the inner city,” said Shoval.

Chicago’s housing market is seeing record activity. The supply of suburban homes earlier in February fell below one month and realtors say sellers can expect $20,000 over asking price. The multifamily sector is setting records as well. A suburban multifamily complex in January sold for $73.5 million, a DuPage County record. 

Pensam is one such out-of-state buyer. It bought four multifamily properties around Chicago last year and expects activity to continue. Pensam bought a 260-unit stabilized multifamily community in West Dundee, Ill. last summer and more recently bought two properties in Aurora, Ill.

“Against the backdrop of Pensam’s performance in the national multifamily market throughout last year, this is further evidence that the worst of the pandemic’s effects on the U.S. multifamily market are likely behind us,” Shoval said. “Going forward, all signs point to this sector continuing to improve in 2022 and lead the country to pre-pandemic levels of activity and beyond.”

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Source: The spotlight may be on Chicago’s single-family market but multifamily sector is also hot

https://www.creconsult.net/market-trends/the-spotlight-may-be-on-chicagos-single-family-market-but-multifamily-sector-is-also-hot/

How a DST Can Rescue You from a Failed 1031 Exchange

As an astute investor, you know that long-term capital gains taxes can quickly eat away at the profits you make on your investments. Consequently, avoiding or at least deferring payment of these taxes for as long as possible is likely one of your main objectives.

For real estate investments, this usually means doing a 1031 exchange whereby you exchange your substantially appreciated real estate for other “like property,” placing your sale proceeds with a qualified intermediary (QI), also called an accommodator, who holds them until the exchange completes.

Failed 1031 Exchanges

One of the biggest downsides to 1031 exchanges, however, is that they don’t always complete. In fact, they often fail. Why? Because 1031s have many moving parts. Not only must you find “like property” to invest in, but you must also designate this replacement property within 45 days of your sale and close on the replacement property within 180 days. If you miss either deadline, 1031 fails, your sale proceeds revert to you, and you are immediately liable for payment of the capital gains tax on your sale.

DST Rescue

If you find yourself facing a potentially failed 1031 exchange, you likely are in a state bordering on panic. But what if you could rescue yourself and avoid immediate payment of your capital gains taxes? You can. The mechanism is called a Deferred Sales Trust. This legal, tested, and innovative option allows you to engage with Reef Point’s Estate Planning Team and its tax attorneys, who will create a DST specifically structured to accommodate your needs as well as your overall investment goals.

You then transfer your funds from your qualified intermediary-held funds into your new DST. In other words, the sale proceeds from your failed 1031 revert to the DST, not to you. You thus have no constructive receipt of them and consequently have no capital gains tax liability. Nor do you have any liability for depreciation recapture. The DST option also works as a rescue for a failed 721 exchange.

Additional Advantages

Your DST doesn’t just rescue you from a failed 1031 or 721 exchange, however. It gives you far greater investment flexibility because it allows you to acquire assets or financial instruments disallowed by 1031s and 721s. Nor does a DST involve strict time frames in which you must make and implement your investment decisions.

Finally, a DST does not limit you to “like-kind” property. In fact, it doesn’t limit you at all regarding what types of “prudent investments” your DST Trustee can make on your behalf. For instance, you can instruct your Trustee to invest in any of the following:

• Stocks
• Bonds
• Mutual funds
• Securities
• Annuities
• Real Estate Investment Trusts (REITs)
• Start or acquire a business

This extraordinary investment flexibility makes a DST an extremely useful tool, especially if you want to diversify your investment portfolio as part of your retirement planning strategy.

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Source: How a DST Can Rescue You from a Failed 1031 Exchange

https://www.creconsult.net/market-trends/how-a-dst-can-rescue-you-from-a-failed-1031-exchange/

Q1 State of CRE & Industry Outlook

Summary

Tune in on Wednesday, Feb 23 at 2 pm EST for a conversation about the current state of US commercial real estate markets and a look at key investment trends.

 

Experts from NYU Schack Institute of Real Estate, the Federal Reserve Bank of Atlanta, and CBRE will discuss recent macroeconomic and market data and the recovery outlook for multifamily, industrial, office, and retail properties as the 2022 kick-off. 

 

You'll learn about:

• How last quarter's macroeconomic, public, and private market data will impact your business
• Industry outlook for 2022 
• Economic recovery implications across property types and markets
• Data-backed areas of opportunity and risk for your business 

 

REGISTER

Speakers

Brian Bailey Subject Matter Expert, CRE Federal Reserve Bank of Atlanta

Bryan Doyle Managing Director, Capital Markets CBRE

Timothy Savage Professor NYU Schack Institute of Real Estate

Richard Kalvoda Senior EVP Altus Group

https://www.creconsult.net/market-trends/q1-state-of-cre-industry-outlook/