LIVING COST SENSITIVITY AND SLOWER HOUSEHOLD CREATION MODIFY DEMAND FLOWS

 

The sequence of rate hikes decay housing affordability. In late July, the Federal Reserve again lifted the overnight rate by 75 basis points to a target range of 2.25 to 2.50 percent. This will likely apply additional upward pressure to mortgage rates, with the 30-year fixed rate already climbing more than 200 basis points this year to 5.3 percent at the end of July. Higher borrowing costs amid towering home prices make ownership difficult for a growing share of the population. As of June, the estimated affordability gap, or the difference between a monthly payment on a median-priced home and a rent obligation, in the U.S. surpassed $1,000. That margin was about half as large just 12 months earlier, demonstrating how the relative affordability of apartments is improving, despite robust rent growth. For some markets, however, higher home and rent costs amid inflation is slowing demand.

Demand cools in some pandemic-era darlings. Both the number of homes sold and apartment units absorbed fell in the second quarter, a signal that household formation may be moderating. This contraction occurred during the same three-month span in which more than 1.1 million jobs were added, a process that typically supplies residents with incomes and the stability to form households. More renters are likely opting for roommates or moving back in with family. These trends are most evident in the secondary and tertiary metros in the Sun Belt that led the nation in net absorption during 2021. After such a heated pace, this cooling of demand is giving supply a chance to catch up.

Resident bases are reshuffling. Among the 30 U.S. metros that topped the nation in net apartment absorption during the second quarter, about half had an average effective rent at least 25 percent below the national mean. Places such as Huntsville — situated within 200 miles of Nashville and Atlanta — recorded their highest quarterly absorption on record. Lower-income residents priced out of larger metros in the region, and migrating households seeking less costly living options with proximity to bigger cities may be moving in. Relatively affordable Midwest metros like Madison, Omaha, and Des Moines also had a strong second quarter.

Developing Trends

Household creation may be hindered in the second half. Coming off a record year in 2021 when more than 1.3 million new U.S. households were formed, a near-term slowdown is materializing. Approximately 85,000 fewer households were created during the first half of 2022 compared to the same six months of last year. The housing shortage contributed to this, as a lack of available homes and rentals kept some young adults living at home or in roommate situations. Rental vacancy and single-family home listings remain very low, enforcing a persistent constraint on household formation. In the coming months, economic headwinds and growing affordability challenges could inhibit young adults’ ability to find jobs and willingness to move out on their own.

The streak of monthly home price rises ends. The median sale price of an existing home fell 1 percent month-over-month in June, the first reduction since mid-2020. Sellers are adapting to the new environment, with purchase activity down almost 13 percent year-over-year. Even with the abatement, the median cost held above $400,000 in June, up 39 percent since the onset of the pandemic.

16.9%	38.0%
Year-Over-Year Change in Average Effective Apartment Rent	Year-Over-Year Change in Average Monthly Mortgage Payment

* Through 2Q Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; RealPage, Inc.; Redfin; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Wells Fargo

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Source: LIVING COST SENSITIVITY AND SLOWER HOUSEHOLD CREATION MODIFY DEMAND FLOWS

https://www.creconsult.net/market-trends/living-cost-sensitivity-and-slower-household-creation-modify-demand-flows/

Chicago Multifamily Market Report

2Q 2022

Demand Returns to Central Neighborhoods; Suburban Apartment Market Maintains Strength

Absorption in urban locales accelerates. Due to space constraints in the urban core, new supply has been and will continue to be limited in the core this year. This has produced historically tight conditions in many central neighborhoods, as construction in the core has been unable to match renter demand. Preliminary data shows a 440-basis-point annual drop in vacancy within Chicago proper at the end of March. Competition for units here is likely to result in sharp rent climbs this year, especially in locales like Lincoln Park, Ukrainian Village, and Andersonville. Also, the return to in-person work downtown supported near nation-leading annual vacancy contraction in The Loop and West Loop areas entering the second quarter. This tightness may spur more development in central locales in future years.

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Source: Chicago Multifamily Market Report

https://www.creconsult.net/market-trends/chicago-multifamily-market-report/

Kankakee

For Sale - 23 Unit Multifamily Offering Fully Occupied Upside in Rents In Opportunity Zone 7.35% Cap Rate (Current) 9.60% Cap Rate (Pro forma) $995,000 Listing Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441 https://www.creconsult.net/listings-2/for-sale-fully-occupied-23-unit-multifamily-property-kankakee-il-9-6-proforma-cap-rate/

The changing face of multifamily development in Chicagoland

 

Developers in Chicagoland are responding to continued strong demand for multifamily housing and changing consumer expectations. The pandemic accelerated a trend that was already underway — a shift in consumer priorities from acquiring material things to embracing time, travel, and experiences. Long-term homeowners are taking advantage of a seller’s market for their homes, collecting the proceeds and moving into apartments that require little to no maintenance. Meanwhile, young people who can’t yet afford to purchase a home are renting apartments that provide abundant amenities. These changing dynamics are reflected in recent multifamily sector research.

According to CBRE’s Q1 2022 Apartment Fundamentals report, multifamily occupancy was at about 97% in Chicago. Between Q1 2021 and Q2 2022, vacancies dropped to 3.1% from 6.2%. The report goes further, saying “Total net absorption is forecasted to be a positive 9,027 units, lagging supply during the same period. By year-end 2023, the annualized vacancy rate is expected to be 2.8 percent, while rents are forecasted to grow, reaching $1,989.40 compared to current market rents of $1,760.67.”

For commercial real estate developers and investors, favorable forecasts like these are encouraging. While opportunities are plentiful, developers that understand what is trending from both a development perspective and a design and construction perspective stand to be more successful. Technology is Evolving The vast majority of renters want top-quality amenities, simplicity, and convenience. In addition to clubrooms, pools, fitness centers, and outdoor lounges, a growing number of renters expect “smart apartment” technology. Integrating advanced technology into multifamily projects has become a competitive advantage for developers.

Smart apartment systems offer residents fully-connected smart-home experiences controlled by an app on their smartphones. The first systems were introduced in the student housing sector, as college-age students are adept at using apps to control devices and their environment. Now the amenity is gaining traction with residents of market-rate apartments as well.

With smart apartment-managed Wi-Fi systems, residents download an app when they move in, receive a password, and within 10 minutes they can control locking and unlocking doors, the temperature of their apartment, appliances, outlets, and more – from anywhere inside or outside the building. So, instead of each apartment unit having its own network, there is one network throughout the entire building. There’s also a security component that benefits both residents and property managers. For accessing the building and unlocking certain doors, residents swipe their phones to gain access. Property managers can credential residents’ smartphones to access only certain areas of the building. For example, residents must be credentialed to access floors other than where their unit is located. This provides peace of mind to residents and reduces the risk for property managers. Residents can also authorize people outside the building to enter at certain times. For instance, the dog walker who comes every day between 10 a.m. and 11 a.m. can be credentialed to access the resident’s unit only during that timeframe. Everything is tracked, providing visibility to both the resident and the property manager.

These systems bring a whole new level of convenience and security but getting them set up can be a challenge for developers. Smart apartment platform providers or “integrators” that create the apps face a challenge coordinating the myriad of Wi-Fi programs and technologies used by manufacturers of appliances, outlets, and the like. Very few systems talk to each other, so integrators basically ride over the top of them and create one app to control everything.

At Opus, we are working with an integrator to create a smart apartment system for our Dash Downers Grove project, a seven-story, 167-unit multifamily building under construction in the Village of Downers Grove. These systems and capabilities are evolving very quickly, so integrators must be nimble.

As an industry, we are on the front end of this trend. For projects like Dash Downers Grove, the conveniences of smart-home systems for both residents and property managers will differentiate the property.

Certain Design Amenities are Gaining Traction The pandemic didn’t start the work-from-home trend, but it clearly accelerated it. Because a significant number of renters now work from home, multifamily designs are evolving. Many unit floorplans now have dedicated, semi-private spaces for desks and office equipment. In common areas, work-from-home suites are gaining popularity, providing residents with private space for conducting business. Also popular with residents is flexible seating space within common areas for bringing their laptops and working.

Also likely influenced by the pandemic, resident preference surveys are showing increased demand for private outdoor spaces within each unit, like balconies and terraces. Entertainment amenities like rooftop decks, clubrooms, and outdoor kitchens also remain popular, as well as recreational amenities like fitness centers, pools, and space for bike storage and repair.

ESG Requirements are Accelerating Another trend affecting multifamily developers is increasing ESG (environmental, social, and governance) requirements by capital partners. With regard to environmental concerns, it’s becoming more common that they want to see third-party certification of buildings. Investors, especially European investors, are increasingly focused on what capital partners are doing with regard to ESG. And it’s not green-washing – they want to see real results.

Chicago is an environmentally-forward community. The city has required sustainable features for many years, like a green roof if zoning as PUD (planned unit development). But stricter regulatory requirements in Europe will likely make their way to the U.S. The Task Force on Climate-related Financial Disclosures (TFCD) in the U.K., which is a new international standard for reporting on climate risks, will be mandatory for all fund managers in 2025. Three additional governments are considering adopting the policy: the European Union, New Zealand, and Canada. The Opus Dash Downers Grove project will seek both Fitwel certification and National Green Building Standard (NGBS) certification. Fitwel focuses on quality of life and location – for example, does the project reuse an existing site, does it optimize health within the building and community, and is it close to transit, parking, fresh air, and parks. NGBS is more technical and focused on the building, for example, does it exceed building code, and how efficient is the HVAC system, insulation, windows, and blinds? The increased cost for a building to achieve these certifications can vary, depending on design and construction. At Opus, we already consider environmental impacts as part of our design and construction process, and we are increasingly integrating these standards in our multifamily projects. Trends like smart apartment technology, design amenities, and ESG will continue to evolve. Resident awareness of smart apartments is increasing at a rapid rate, as consumers expect to manage their life via their smartphones. And while the financial sector is currently a driving force with ESG requirements, resident awareness will likely increase with time and become a differentiator for apartment properties.

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Source: The changing face of multifamily development in Chicagoland

https://www.creconsult.net/market-trends/the-changing-face-of-multifamily-development-in-chicagoland/

July’s Multifamily Rent Increase Was Best in a Decade – Except for Last Year

 

RealPage cites a strong month, with pace moderating as expected.

Peak apartment rent growth – as well as the historically high-performance levels seen in 2021 – are by all accounts in the rearview mirror, according to data released this week by RealPage.

Effective asking rents increased by 0.8% from June to July, which represents about one-third of how they performed a year earlier. That moderation was as expected, RealPage said.

 

The spike in 2022 is nothing to sneeze at, though. It makes it the best performing July in the past decade, which shows just how impressive 2021 was for apartment operators, the company said.

Renewing Renters Paid 11% More in July

 

July 2022’s number “is a good encapsulation of the state of the apartment market: 2022 has been strong by comparison to any year other than 2021,” Jay Parsons of RealPage, said in a prepared statement.

“As we noted multiple times going into 2022, the historic numbers seen in 2021 are unlikely to be repeated for a long time to come. Year-over-year effective asking rent growth measured 12.2% in July, down from 13.8% in June.”

Replacement rents (actual, signed lease-over-lease trade-out for new leases) increased 17.2% in July, compared to 18.6% in June, RealPage reported.

 

Resident renewal rent rate increases of 11% in July were similar to what was achieved in June.

Renters in the lower-priced Class C apartment sector paid just 7.8% more than those in Class A and Class B apartments, which saw roughly a 12% increase.

Rising renter incomes continue to help support rising rents and keep rent-to-income ratios steady at around 23%. Household income on average rose 8% year-over-year.

 

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Source: July’s Multifamily Rent Increase Was Best in a Decade – Except for Last Year

https://www.creconsult.net/market-trends/julys-multifamily-rent-increase-was-best-in-a-decade-except-for-last-year/

What the Recent Inflation Numbers Might Mean for Multifamily

 

While inflation seems to be moderating, don’t expect the Fed to let up.

Inflation numbers for July were a pleasant change from the recent pace, with prices flat from June. But as the National Apartment Association noted in its NAA Inflation Tracker: August 2022, things are more complex and the chances of the Fed stopping the upward march of interest rates is unlikely to happen immediately.

First the good news: the results were the best since May 2020. There are also other signs that inflation may be near contraction, including the Producer Price Index. According to the Bureau of Labor Statistics, the PPI fell by 0.5% in July, seasonally adjusted.

 

But here’s where things get complicated. “The index for final demand goods fell 1.8 percent in July, the largest decline since moving down 2.7 percent in April 2020,” said the BLS. “The July decrease can be traced to a 9.0-percent drop in prices for final demand energy. Conversely, the indexes for final demand foods and for final demand goods fewer foods and energy rose 1.0 percent and 0.2 percent, respectively.”

The line from producer prices to consumer isn’t necessarily straightforward, but as the NAA noted, “The breather in price hikes was due to energy prices, which fell 4.6% over the month. Food prices continued to climb, however, notching another increase in excess of 1.0%. Core CPI rose 0.3% over the month, slower than the prior 3 months, but disturbingly high for prices that are considered to be more “sticky.” The largest increases in core CPI were car insurance (1.3%), car maintenance and repair (1.1%), and rent (0.7%).

 

So, a drop in energy prices masked an increase elsewhere, which means that in one part of life, consumers will feel a benefit, but not in most.

Total shelter costs compose about a third of CPI. “Owners’ equivalent rent, which is the price owner-occupiers think they could attain if they rented their homes, increased 5.8% while rent of primary residence was up 6.3% year-over-year, another 36-year high,” the NAA said. And those numbers lag actual changes in house costs because the data isn’t collected as often as other parts of CPI. Rents may not yet have hit a peak.

That will push people to look for greater pay to keep up with the cost of living, adding to tensions over employment. The last two months have seen big jumps in hiring, which is a big indicator to the Federal Reserve that the economy hasn’t slowed down enough. It seems unlikely that the Fed will back off from additional interest rate increases, which means higher construction and repair costs in the multifamily industry.

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Source: What the Recent Inflation Numbers Might Mean for Multifamily

https://www.creconsult.net/market-trends/what-the-recent-inflation-numbers-might-mean-for-multifamily/

Sacrificing space: Why are U.S. renters downsizing?

 

In today’s housing market, future homeowners must compromise to save for a down payment. One way to put aside money for a first home? Give up a little space.

In fact, RentCafe found that renters who dream of transitioning to homeownership could save an average of $3,735 per year by simply downsizing by just one bedroom — a sacrifice many renters are jumping on. Nearly 4,000 RentCafe website visitors revealed that 36% of renters were willing to use this method in order to afford their first home.

So where in the nation can renters save up the fastest for a down payment by surrendering one bedroom in their current rental? Well, Chicago secured the No. 4 spot on the Top 50 list, despite having some of the smallest apartments nationwide.

Not only is Chicago the third-largest city in the U.S., it’s also a hot spot for young people. Renters here could save $8,916 per year if able to adjust to one less bedroom, meaning they’d be able to afford a down payment for a starter home in just over two years. The median price of homes is much higher than the preceding three locations on RentCafe’s list, but the higher income earned by Chicagoans makes saving for a down payment almost as achievable as it is in Jackson, MS. Can you guess which city landed at No. 1 on RentCafe’s list? Hint: It’s also in the Midwest. Yep. Renters in Dayton, Ohio are the closest to ownership. The median price of starter homes, $57,652, combined with the yearly savings derived from downsizing a rental, $3,168, would make it possible for a renter to afford a down payment in a little over a year and a half, based on the report. And contrary to Chicago, Dayton is also one of the places with the most apartment space per person, which makes downsizing less of a challenge. Other Midwest locations to make the Top 20 on RentCafe’s list include Lansing, Michigan; Cleveland, Ohio; and Columbia, Missouri.

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Source: Sacrificing space: Why are U.S. renters downsizing?

https://www.creconsult.net/market-trends/sacrificing-space-why-are-u-s-renters-downsizing/