Multifamily's Prime Target Aging Millennials

Multifamily’s Prime Target: Aging Millennials

Aging millennials make up the largest renter cohort, so why aren’t developers and investors taking their preferences into consideration?

A number of factors have contributed to making multifamily the hottest commercial real estate asset in the U.S. over the past few years. A chronic lack of housing combined with steadily rising rents and declining vacancy rates have more investors and developers targeting the sector.

As rising interest rates and inflation make it more expensive to purchase homes, the national demand for rental housing is expected to remain strong for the foreseeable future. To capture this demand, multifamily owners and developers must focus on delivering properties that cater to evolving consumer preferences.

However, recent development trends suggest that the needs and preferences of the market’s biggest renter cohort — aging millennials — are not being considered in critical design decisions. As a result, more product is being delivered that is unsuited to renter needs, creating a supply and demand imbalance.

Evolving Housing Preferences and Development Trends

With more than 72 million members, millennials (ages 26 to 41) are the largest age group in the country. Many millennials are finally entering the stage of life where they are forming and growing families, maturing in career positions, and building wealth. This has historically been a catalyst for evolving housing preferences, including single-family homes in more suburban environments.

However, this phenomenon is being curtailed by significant barriers to homeownership, including lasting impacts of the global financial crisis, student loan debt, and a lack of savings, as well as the differentiated values held by millennials that tend to support the renter-by-choice phenomenon. This group is generally attracted to the flexibility, access to amenities, community feel, and lack of maintenance costs that comes with renting an apartment.

One would expect that multifamily owners and developers are taking the preferences of the nation’s largest renter cohort into consideration. However, recent residential development patterns demonstrate that this is not the case.

The urban core has seen historically massive construction activity in the past decade, growing the existing base by more than one-third since early 2010. Annual inventory expansion rates have remained at 3.5% or higher in the urban core since 2014 while remaining at 2% or less in the suburbs. With most multifamily development concentrated in dense urban core areas with smaller units, aging millennials looking to access the suburbs find themselves with much less optionality.

Most of this development has resulted in efficiently sized studio and one-bedroom units designed for a younger, more affordability-driven generation. Over the course of the past decade, the share of deliveries in two-bedroom configurations has declined to 38.5% from 45.4%.

Although these smaller units appear to be more attractive to developers and investors as they achieve higher value on a per square foot basis, thus offsetting high construction costs, they miss the mark when it comes to attracting aging millennials who need more space to accommodate their lifestyles and growing families.

Capitalizing on the Imbalance

Savvy investors and developers who look beyond rent per square foot and focus on millennials’ preferences are poised to deliver stronger returns. Typically, as units get bigger, rents per square foot get smaller, resulting in the studio and one-bedroom units achieving a higher value on a per-square-foot basis.

Although this would appear to be attractive to developers and investors, rents on these units can only be pushed so much, as they are an affordability play and only cater towards a specific renter profile. In markets that are inherently affordable, where you don’t have as many renters needing to give up space for location, rent per square foot actually trends back upwards as units get bigger. Once you surpass that 1,200-square-foot threshold, you are dealing with a different renter pool: the aging millennial, which is a large, growing and underserved population.

At Palladius, we are already seeing evidence of this play out. On average two- and three-bedroom units are seeing 200 basis points higher annual rent growth than studio and one-bedroom units. As demand shifts to larger units, capital should, as well. Larger unit renters aren’t as affordability driven, suggesting that most of our renovation dollars and luxury finishes should be focused on these units. Not only do we optimize renovation scope based on the unit type, but we also assign different annual rent growth projections for each.

With more capital continuing to be committed to multifamily development and investments, data shows that the bulk of investors are targeting the new renter generation presumably with the goal of generating higher returns on smaller formats. While it is tempting to avoid high overhead costs by creating smaller products marketed toward new renters, stronger returns await those who can meet the shifting demands of aging millennials.

 

Source: Multifamily’s Prime Target Aging Millennials

https://www.creconsult.net/market-trends/multifamilys-prime-target-aging-millennials/

Don't expect home prices to come crashing down soon

What's happening: Home prices were up 18% in June compared to a year ago, with Tampa, Miami, and Dallas reporting the highest annual gains, according to the S&P CoreLogic Case-Shiller Indices

That was a slower pace than in May when they rose 19.9% annually. But the bottom line is that prices are still going up a lot, even as home sales have declined from their peaks.

So are we in a housing bubble?

Economists at the Federal Reserve Bank of Dallas examined this very question earlier this year, noting in a blog post that home prices were rising faster than market forces would indicate they should, and were becoming "unhinged from fundamentals."

That isn't just a big deal for buyers and sellers. The housing market is an important economic indicator and a reflection of how interest rate hikes by the Federal Reserve are playing out.

Watch this space: The market is changing as the Fed's efforts to cap inflation take effect. Climbing mortgage rates are making it more expensive to buy a home. In theory, that should cool demand and prices over time.

And to the extent we are in a bubble, economists think it will slowly deflate rather than suddenly pop. The team at Goldman Sachs predicts that home price growth will slow sharply in the next couple of quarters and eventually flatten out.

"We expect home price growth to stall completely, averaging 0% in 2023," Jan Hatzius, Goldman's chief economist, wrote in a recent research note. "While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely."

That said: There's a reason prices have shown more resilience. Supply is still constrained.

Pandemic-era shortages have limited the pace of new home building. In the past, downturns in housing have been accompanied by economy-wide recessions, leading to a flood of existing home inventory. Recession leads to unemployment, and cash-strapped homeowners are forced to sell.

Today's labor market is robust, and that influx of housing seems unlikely to happen in this cycle — further prolonging the lack of inventory.

On the radar: Unfortunately, Goldman reports that the slowdown in home price appreciation isn't likely to impact shelter costs, which are a crucial component of the Consumer Price Index tracking inflation.

That's because as higher mortgage rates increase the cost of buying a new home, more people will be inclined to rent, boosting prices in that market.

What job openings data could mean for Fed rate hikes

Companies are hiring, but Americans aren't biting. The latest: The number of open positions in the United States ticked up in July, surprising economists.

There were close to two jobs available per job seeker in July, up from 1.8 in June, according to the latest Job Openings and Labor Turnover Survey, or JOLTS, data.

That's not what the Federal Reserve was hoping for. The Fed is worried that

near-record job openings

are helping to drive wage increases, which in turn can prop up inflation, reports my CNN Business colleague Alicia Wallace.

"The Fed will not be happy with this report," Mark Zandi, senior economist for Moody's Analytics, told CNN Business. "It is critical that the job market cools off, and this report suggests that it remained very strong in July." The takeaway: A strong labor market is likely to encourage Federal Reserve officials to continue aggressive interest rate hikes in an attempt to cool the economy. Fed Chair Jerome Powell reiterated his resolve to bring down inflation and to "keep at it until the job is done," last week, even though that plan — which involves a series of hefty interest rate hikes — will bring "some pain to households and businesses."

It's all about oil

US markets tumbled to their third straight day of losses on Tuesday. And while it might be easy to blame Wall Street's bad mood on Fed Chair Jerome Powell, reports my

CNN Business colleague Paul R. La Monica, the most likely culprit is actually falling oil prices. US crude dropped 5.5% to settle at $91.64 a barrel, marking its worst day in five weeks.

The drop is good news for consumers. It could mean that prices at the pump keep falling and that a key measure of inflation — energy prices — continues to recede.

On the radar: The national average for a gallon of regular gasoline hit $3.84 on Wednesday, according to AAA. That's down from $4.22 one month ago.

But what's good for consumers isn't always good for markets. The drop in oil prices led to a big sell-off in energy stocks. Shares of Chevron (CVX) fell more than 2%. The S&P 500 (INX) was down 1.1%, and oil stocks were the biggest losers. The S&P Energy Select Sector SPDR Fund slid 3.4%.

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Source: Don’t expect home prices to come crashing down soon

https://www.creconsult.net/market-trends/dont-expect-home-prices-to-come-crashing-down-soon/

Housing Market Outlook: Builders Could Stop Construction Due to Expense Falling Demand

 

• Despite falling demand from homebuyers, experts have maintained that the US real estate market is healthy.
• But recent data on homebuilding highlights a dark storyline brewing.
• Builders are feeling the pain of tanking demand and are slowing down new construction, fueling a vicious cycle.

For months economists and housing experts have maintained that the US housing market is in relatively good standing despite a decline in affordability and buyer demand.

While it's not the foreclosure crisis of 2008, today's real estate market also has a dark side.

It all stems from the fact that fewer and fewer Americans can afford to buy the limited homes available, especially as interest rates rise. Homebuilders are feeling the pain of tanking demand and are slowing down housing construction — contributing to the housing crisis vicious cycle.

Peter Schiff, the chief economist at investment company Euro Pacific, told his more than 800,000 Twitter followers that soon "new home construction will almost completely shut down."

"That's because it will be too expensive to build new homes that most buyers can actually afford," he said in a tweet. "The housing market will consist almost exclusively of existing homes that will sell for less than the cost to replace them." Although dramatic, Schiff's pessimistic tweet may foreshadow what's to come in the real estate market.

In July, residential housing construction plummeted 9.6% to an annualized rate of 1.4 million units, according to the Census Bureau. The decline marked the slowest rate of home construction since February 2021 and highlights how rising costs are leading to less affordable housing options for Americans.

"Affordability is the greatest challenge facing the housing market," Robert Dietz, the chief economist at the National Association of Homebuilders said in a housing report. "Significant segments of the home buying population are priced out of the market."

Indeed, higher housing costs have dampened affordability for many Americans. Data from the US Census Bureau shows that an increasing number of people are falling behind on their rents.

Americans have a volatile economy to blame for surging housing prices. Inflation and interest rate hikes have increased the costs of everything from construction to mortgage lending. It has made it harder for builders to construct more low-cost homes and as a result, buyers' ability to afford home purchases. This has led to increased rental demand and ultimately higher rents across the nation — it has also created a downturn in the US real estate market.

With fewer people competing for homes, the real estate market is losing steam. In July, nationwide new home sales fell to a six-year low, declining to just 511,000 units. During the month, existing home sales — a measure of sales volume and prices of existing housing inventory — declined for the sixth consecutive month, falling to a two-year low as only 4.81 million units were sold.

In August, Diane Yentel, the president and CEO of the National Low Income Housing Coalition, testified in front of the US Senate Banking committee that the nation's housing ecosystem has taken a turn for the worse.

"Pre-pandemic millions of extremely low-income households — disproportionately people of color — struggled to remain housed and more than half a million people experienced homelessness," she said. "Now as resources are depleted and protections expire, low-income renters are faced with rising inflation, skyrocketing rents, and eviction filing rates are reaching or surpassing pre-pandemic averages."

As emerging data points to a possibility of a housing recession, Yentel is not alone in her concerns — more economists are giving warnings.

"The whole housing sector is now in retreat," Ian Shepherdson, the chief economist at Pantheon Macro, "told Forbes, adding that housing construction will likely continue falling until early 2023 — and that could mean the US housing affordability crisis is just getting started.

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Source: Housing Market Outlook: Builders Could Stop Construction Due to Expense Falling Demand

https://www.creconsult.net/market-trends/housing-market-outlook-builders-could-stop-construction-due-to-expense-falling-demand/

Sunny with a chance of headwinds: CRE forecast, according to its leaders

 

If you don’t like the weather in Chicago, wait a few minutes…it’s likely to change.

Another thing that is seeing a fair amount of change is the overall sentiment for CRE in Chicago. Last year’s DePaul Real Estate Center Mid-Year Report found that 60% of industry participants were generally optimistic about the industry as they looked ahead. But in 2022? The DePaul-ULI Chicago Report found that 65% are trending toward concern when looking at 2H2022.

Headwinds have gained steam locally, nationally, and internationally, as professionals are concerned about construction costs, labor issues, inflation, interest rates, and speculation of a recession. There’s also less confidence that related issues like crime and the effectiveness of the local political system can be resolved quickly or easily. But through it all, one asset class has remained largely untouchable. Industrial.

According to DePaul, Hugh Williams, Principal, MK Asset Brokerage, and Director of Entrepreneurship/Strategic Relationships for Sterling Bay, when asked about the health of the market, pointed to Prologis’ initial offer to acquire Duke Realty. Prologis was offering a premium, plus upside.

“When you see that, and with vacancies in the sub 4% range, it signals strength and optimism,” Williams said. “We are at one of the high water marks. No one knows if we are at the top, but over the recent long-term, the strength of the market has only gone in one direction, and new baselines have been established.”

That’s not to say the market is exempt from concerns, though. Even the strongest markets must remain creative and be willing to approach issues a little differently. CRG President Shawn Clark noted that, on a recent project in Country Club Hills, the increasing cost of steel prompted CRG to purchase the necessary steel for the 1,033,450-square-foot building before they closed on the 70 acres of land, based on the report. But if the steel had been purchased as typical, the cost would have been more than double.

From the perspective of Molly McShane, CEO of The McShane Companies, “Going from just-in-time to just in case is a real strategy businesses are using, and it is driving demand. As long as that continues, the market is in a good place.”

So while it’s true that there are concerns about the remainder of 2022, 50.9% said they are bullish or optimistic about market conditions in 2023. And despite headwinds, there are investors who continue to believe in the future of Chicago. DePaul said while it may be based, in part, on a “right corner, right project” viewpoint, there remains an appeal about Chicagoland and a belief that all issues will soon be resolved.

 

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Source: Sunny with a chance of headwinds: CRE forecast, according to its leaders

https://www.creconsult.net/market-trends/sunny-with-a-chance-of-headwinds-cre-forecast-according-to-its-leaders/

Fed’s Beige Book Is a Mix of News for CRE

 

Interest rates are staying but there’s some welcome easing of commodity prices.

The Federal Reserve’s September Beige Book—more formally known as the “Summary of Commentary on Current Economic Conditions by Federal Reserve District”—is not going to make commercial real estate professionals jump for joy. But the bad news is already known and the good provides hope for some relief in construction.

First, the obvious bad, that inflation is still proceeding, as “price levels remained highly elevated.” That means don’t hope for an early cessation of interest rate hikes.

“Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services,” the report said, although nine of the Fed’s 12 districts “reported some degree of moderation in their rate of increase,” indicating that at least the rate at which inflation was increasing had slowed. That’s an important sign of eventually prices coming back under control. But that is still apparently some way off.

“The Fed still has an inflation problem and is committed to front-loading rate hikes as aggressively as possible,” Jeffrey Roach, Chief Economist for LPL Financial, said in an emailed statement. “The likelihood of a 75-basis point hike later this month could increase if next week’s inflation report surprises to the upside.”

Also, the Fed noted that parts of real estate continue to face challenges. “Despite some reports of strong leasing activity, residential real estate conditions weakened noticeably as home sales fell in all twelve Districts and residential construction remained constrained by input shortages,” the report said. “Commercial real estate activity softened, particularly demand for office space. Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates.”

Among the districts that specifically mentioned real estate, Boston saw the outlook worsen, in Richmond activity was flat to moderately down, Atlanta had mixed commercial real estate activity, construction and real estate declined modestly in Chicago, and residential activity eased in San Francisco.

There was also some positive news in an important area: materials. “While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates,” the report noted. “Several Districts reported some tapering in prices for steel, lumber, and copper.” But most contacts outside of the Federal Reserve system though price pressures would continue at least through the end of the year.

 

Source: Fed’s Beige Book Is a Mix of News for CRE

https://www.creconsult.net/market-trends/feds-beige-book-is-a-mix-of-news-for-cre/

Confused about the housing market? Here's what's happening

The slowdown in the otherwise red-hot housing boom has been stunningly swift.

The U.S. housing market surged during the pandemic as homebound people sought new places to live, boosted by record-low interest rates.

Now, real estate agents who once reported lines of buyers outside open houses and bidding wars on the back deck say homes are sitting longer and sellers are being forced to lower their sights.

That has both potential buyers and sellers wondering where they stand.

"As recession concerns weigh on consumer outlooks, our survey shows uncertainty has made its way into the minds of many buyers," said Danielle Hale, chief economist at Realtor.com.

Here are the major factors behind the topsy-turvy housing market.

Mortgage rates

The main driver of the slowdown is rising mortgage rates. The average rate on the 30-year fixed mortgage, which is by far the most popular product today, accounting for more than 90% of all mortgage applications, started this year right around 3%. It is now just above 6%, according to Mortgage News Daily.

That means a person buying a $400,000 home would have a monthly payment about $700 higher now than it would have been in January.

High prices, low supply

The other drivers of the slowdown are high prices and low supply.

Prices are now 43% higher than they were at the start of the coronavirus pandemic, according to the S&P Case-Shiller national home price index. The supply of homes for sale is growing, up 27% at the start of September compared with the same time a year ago, according to Realtor.com. While that comparison seems large, it's still not enough to offset the years-long shortage of homes for sale.

Active inventory is still 43% lower than it was in 2019. New listings were also down 6% at the end of September, meaning potential sellers are now concerned as they see more houses sit on the market longer.

Paul Legere is a buyer's agent with Joel Nelson Group in Washington, D.C. He focuses on the competitive Capitol Hill neighborhood, and he said he saw listings jump by 20 to 171 just after Labor Day. He now calls the market "bloated." As a comparison, just 65 homes were listed for sale in March.

"This is a very traditional post Labor Day inventory bump and seeing in a week or so how the market absorbs the new inventory is going to be very telling," he said. "Very."

Inventory is taking a hit nationally because homebuilders are slowing production due to fewer potential buyers touring their models. Housing starts for single-family homes dropped 18.5% in July compared with July 2021, according to the U.S. Census.

Homebuilder sentiment in the single-family market fell into negative territory in August for the first time since a brief dip at the start of the pandemic, according to the National Association of Home Builders. Builders reported lower sales and weaker buyer traffic.

"Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession," said NAHB Chief Economist Robert Dietz in the August report.

Some buyers are hanging in

Buyers, however, have not disappeared entirely, despite the still-pricey for-sale market and the equally expensive rental market.

"Data indicates that some home shoppers are finding silver linings in the form of cooling competition for rising numbers of for-sale home option," said Realtor.com's Hale. "Especially for buyers who are getting creative, such as by exploring smaller markets, this fall could bring relatively better chances to find a home within budget."

Home prices are finally starting to cool off. They declined 0.77% from June to July, the first monthly fall in nearly three years, according to Black Knight, a mortgage technology and data provider.

While the drop may seem small, it is the largest single-month decline in prices since January 2011. It is also the second-worst July performance dating back to 1991, behind the 0.9% decline in July 2010, during the Great Recession.

Affordability woes

Still, that drop in prices will do very little to improve the affordability crisis brought on by rising mortgage rates. While rates fell back slightly in August, they have risen sharply again this week, making for the least affordable week in housing in 35 years.

It currently takes 35.51% of median income to make the monthly principal and interest payment on the median home with a 30-year mortgage and 20% down. That's up marginally from the prior 35-year high back in June, when the payment-to-income ratio reached 35.49%, according to Andy Walden, vice president of enterprise research and strategy at Black Knight.

In the five years before interest rates began to rise, that income-to-payment ratio held steady around 20%. Even though home prices surged in the 2020 and 2021, record-low interest rates offset the increases.

"Given the large role affordability challenges appear to be playing in shifting housing market dynamics, the recent pullback in home prices is likely to continue," Walden said.

A new report from real estate brokerage Redfin showed that while homebuyer demand woke up a bit in August, the latest increase in mortgage rates over the past week put it right back to sleep. Fewer people searched for "homes for sale" on Google with searches during the week ending Sept. 3 – down 25% from a year earlier, according to the report.

Redfin's demand index, which measures requests for home tours and other home-buying services from Redfin agents, showed that during the seven days ending Sept. 4, demand was up 18% from the 2022 low in June, but still down 11% year over year.

"The housing market always cools down this time of year," said Daryl Fairweather, Redfin's chief economist, "but this year I expect fall and winter to be especially frigid as sales dry up more than usual."

 

Source: Confused about the housing market? Here’s what’s happening

https://www.creconsult.net/market-trends/confused-about-the-housing-market-heres-whats-happening/

Why These CRE Sectors Provide Safer Harbors

 

At a moment marked by inflation, slowing growth and recession fears, CRE asset categories that offer long-term potential for reliable returns are in the spotlight. Those most often cited by experts reflect a wide range, from steady perennial performers to vibrant, cutting-edge specialties. A connecting thread among these diverse examples: long-term demographic and economic trends that can withstand shorter-term shifts in conditions.

Retail stalwart

Grocery-anchored centers remain the retail category that is least impacted by online shopping. At midyear, online grocery sales accounted for 13.6 percent of the total grocery market, according to the  latest Brick Meets Click/Mercatus Grocery Shopping Survey. That’s up 1.5 percent year-over-year, a sign of gradual growth, but the modest share of online sales points to robust demand for brick-and-mortar grocery stores.

A principal reason is that shoppers still like seeing and touching perishable items before purchase. And grocery visits drive customer traffic at adjacent inline retailers and service businesses, such as liquor stores, dry cleaners and nail salons and similar.

Such national grocery chains as Trader Joe’s, Whole Foods, Aldi, Harris Teeter and Stop & Shop make particularly effective anchors, said Mitch Rosen, managing director & head of real estate for YieldStreet. “These grocers appeal to a more affluent consumer base,” he said. “Look at where pricing has gone in that sector; it remains very strong.”

Life science leaders

Robust growth of a wide range of health-care-affiliated scientific advances, together with the aging of the population, demographic trends, favor life science as a safe ground-up development or conversion play. Despite an 18.5 percent year-over-year decline, venture capital investment totaled $20.8 billion during the first half, according to a report from Newmark. In the four leading hubs alone—Boston, San Francisco, San Diego and Raleigh-Durham—the renovation and construction pipeline totals 33.2 million square feet.

Investors have multiple geographic and investment category options as the demand for space continues unabated and markets of all sizes vie to participate. Ground-up development, expansion and adaptive reuse are all on the menu for R&D and manufacturing facilities, as well as for office support space.

“We are seeing tremendous interest from early and mid-stage life science companies doing small-batch manufacturing . . . that don’t need enormous factories,” said Aaron Jodka, Colliers national director of capital markets research. The three dominant hubs offer diverse opportunities and distinctive characteristics for makeovers. Greater Boston often favors conversions of older properties with good bones, while in San Diego and the San Francisco Bay Area, one-story, 1980s-vintage buildings are frequently eyed for makeovers, he added.

Industrial potential

Multiple indicators speak to the staying power of industrial assets, even in a downturn. At midyear, vacancy stood at 4.7 percent nationwide, a 120 basis-point year-over-year decline, according to CommercialEdge data. Although the general conditions that have made the sector an investor magnet are well known, the factors that shape prudent industrial investment deserve a nuanced examination.

“We rank industrial as offering a moderate hedge against inflationary effects,” said Ian Formigle, chief investment officer at CrowdStreet. Providing that hedge are typical lease terms of five to 10 years, and when tenants also assume operating costs like insurance, property taxes and maintenance in triple net leases, that helps insulate operators from inflation.

Decades of underbuilding is an often underappreciated factor in the sector’s current appeal. Until the middle of the last decade, Class A urban infill industrial properties were typically 1970s-era structures, noted Aaron Appel, co-head of New York capital markets for Walker & Dunlop. A mismatch between project costs and rents hampered development for years. That started to change only when demand finally enabled projects to pencil out.

“Tenants said, ‘I can pay 25 to 75 percent more than I have, and my business will benefit from a brand-new building,’” Appel recalled. “That building may have more bays, higher ceilings, fewer columns or allow simpler egress.” The pandemic and the closely related rise of ecommerce have further advanced the trend since early 2020.

Growth factors

Moreover, newly built Class A facilities provide efficiencies that permit manufacturing closer to the final distribution of goods. That trims transportation costs and reduces the risk of supply chain disruption. Chris McKee, principal and chief development officer for development firm CRG, identifies distinct regional factors that may offer hedges against an economic slowdown. The Sun Belt offers population growth; the Midwest has an abundance of skilled labor, lower living costs and stable economies; and in the Northeast, the limited supply of sites and long entitlement periods generate high demand for new product.

Acquiring and developing infill logistics properties near population centers is a common but still-reliable strategy. Dwight Angelini, co-founder & managing partner at Longpoint Realty Partners, names geographically diverse locations—northern New Jersey, Los Angeles, Dallas and Miami—as offering the greatest imbalance between warehouse supply and demand. “The challenge and opportunity is (that) these top-tier infill markets are inherently supply-constrained due to … challenges associated with sourcing, acquiring and developing” industrial product, he said.

Some experts favor advanced logistics and distribution facilities in markets with expanding populations. They cite the well-known trends of e-commerce expansion and reshoring manufacturing. Arizona Land Consulting is buying land in the western Phoenix suburb of Buckeye, Ariz. Its clients like the market’s comparative proximity to the Ports of Los Angeles and Long Beach, about four and a half hours away, reported the firm’s CEO, Anita Verma-Lallian.

Coastal markets where port authorities are investing in robust upgrades are sometimes overlooked indicators of long-term potential. East Coast ports are attracting increased container volume following much-discussed bottlenecks on the West Coast, noted Stephen Evans managing director at Black Salmon.

One example is the Port of Mobile, noted James Huang, president of eXp Commercial, eXp World Holdings. The port is engaged in a $368 million project that will deepen its channels 50 feet. When work is complete in 2025, the port will better serve Birmingham’s emerging distribution some 250 miles to the north.

Even in areas whose industrial markets are thriving overall, some categories may be underbuilt and offer superior safety. Such is the case in Contra Costa County, Calif., where the focus has been on larger, order-fulfillment warehouses at the expense of smaller, multi-tenant buildings. Combined with development costs 20 percent higher than will pencil out in the area, that is a formula for a low volume of new multi-tenant product.

“One can forecast that with little new supply and strong demand, rents will continue to climb for smaller-sized units in industrial buildings,” said Eric Rehn, vice president at Kennedy Wilson Properties.

Future snapshot

Growing construction costs may lead investment to thin out in coming months. “Rents have continued to rise to offset increased costs,” CRG’s McKee said of the industrial sector. “If that stops, we’ll see a significant downward pressure on construction starts. For now, we can’t build fast enough to meet the demand.”

The widespread bid-ask gap stemming from rising interest rates will be brought into alignment during the next few quarters. For many asset classes, that adjustment will occur in the next half year, but it will “take longer on CBD office buildings and convention center hotels as we adjust behaviors” in a post-COVID world, predicted Terranova chairman & CEO Stephen Bittel.

Jodka says his firm is seeing gaps between buyers and sellers, price adjustments due to higher borrowing costs and deals slowing down. “A slowdown is not unexpected, [nor is] a resumption early next year when interest rates have settled and buyers can more confidently underwrite borrowing costs.”

 

Source: Why These CRE Sectors Provide Safer Harbors

https://www.creconsult.net/market-trends/why-these-cre-sectors-provide-safer-harbors/