Explaining the Breakdown of One Dollar of Rent

With so much discussion around rent payments and the prevailing misconception that rental housing owners enjoy large margins, the National Apartment Association (NAA) has released an explanation of the breakdown of one dollar of rent for 2022.

Because education is an effective way to counter harmful public policy and negative industry stereotypes, NAA offers this explanatory infographic breaking down a dollar of rent into its component parts.

The apartment industry must help society understand the benefits of rent payments for all Americans, whether or not they reside in rental housing.

From supporting 17.5 million jobs to the dollars reinvested into apartment communities to ensure quality living for more than 40 million residents, and through paying property taxes that finance schools, emergency services and other local needs to investor returns that include public pensions and 401(k)s, rent payment is much more important than one might otherwise realize.

 

Source: Explaining the Breakdown of One Dollar of Rent | National Apartment Association

https://www.creconsult.net/market-trends/explaining-the-breakdown-of-one-dollar-of-rent-national-apartment-association/

10 Common Themes Amongst Apartment REITs In 3Q22

10 Common Themes Amongst Apartment REITs In 3Q22

As fall earnings season comes to a close, we take a look at the 10 themes apartment REITs and REIT analysts discussed. From economic pressures to resident retention, here are the themes that illustrate how apartment performance has changed, including a few refreshed themes from the fall 2021 earnings season, and what it means as we head into 2023.

1. New and renewal lease rent growth is beginning to invert. As we head into the slower winter leasing season, new lease rent change has moderated considerably (as is consistent with RealPage Market Analytics data) while renewal lease rent change has continued to increase leading to lower loss to lease heading into 2023

2. Resident retention remains elevated. As leasing traffic has cooled and we return to more normal seasonal patterns, more residents are choosing to renew their leases, bolstering back-end occupancy and allowing for stronger rent rolls heading into the slow winter leasing season.

3. Move-outs to home purchases are down year-over-year. The Fed’s interest rate increases have pushed 30-year mortgage rates above 7%. Consequently, would-be first-time home buyers have pivoted, keeping many in the renter pool and bolstering resident retention rates.

4. Concessions are back… sort of. Overall concession value of about 2-4 weeks of free rent has remained fairly consistent throughout 2022. However, REIT executives reported strategic use of concessions to move certain unit types, compete with nearby lease-up properties, or as a marketing tool to boost front-end leasing.

5. Resident incomes are up. REIT executives, echoing our own data and analysis, confirm that their resident incomes are up, and despite increasing rents, that rent-to-income ratio remains very healthy in the low 20% range. This is well below the long-held 33% affordability threshold and illustrates that market-rate renters are keeping pace with market-rate rent increases.

6. Resident payments remain healthy. Resident payments and rental collections maintain strength. REITs are not seeing an increase in bad debt or delinquency while working through their backlogs and COVID relief money from the beginning of the pandemic.

7. No signs of recoupling… yet. With resident incomes keeping pace with rent increases, REIT executives have not yet noticed any signs of a “flight to affordability” via recoupling or doubling up. REIT executives will certainly keep a keen eye on any movement, but nothing has materialized on this front yet.

8. Expenses are up across the board. REITs noted that the largest expense item – property taxes – remains elevated heading into 2023. Large increases in utilities due to energy prices have emerged as inflationary pressure keeps maintenance, labor, and material costs stubbornly high. All said REITs anticipate elevated expenses to persist into 2023.

9. Cap rates are expanding. How much and to what degree is hard to tell as regional variations and slowing transaction volume have clouded the overall picture. Many REITs have slowed their own activity, pausing acquisition and disposition plans to take a wait-and-see approach, while the Fed continues its plans to fight inflation via prolonged interest rate hikes.

10. Slowing development starts in 2023. With uncertainty in the capital markets environment, many REITs are slowing or pausing their development pipelines in 2023, as development yields clash in a tug-of-war situation with cap rates and rising interest rates. The staggering volume of units under construction across the U.S. – over 900,000 at the end of 3rd quarter of 2022 – has likely peaked for the near term.

 

Source: 10 Common Themes Amongst Apartment REITs In 3Q22

https://www.creconsult.net/market-trends/10-common-themes-amongst-apartment-reits-in-3q22/

The Fed Will Slow Rate Hikes As Risks for a Financial Accident Grow

• The Fed will be forced to slow its pace of rate hikes as volatility ramps up, Charles Schwab said.
• Analysts pointed to strains in bond and currency markets, which stem from the Fed's aggressive hikes this year.
• That means risks are not only rising for a recession, but for a financial accident as well, Schwab warned.

The Fed will be forced to slow its pace of rate hikes as it risks not only sending the economy into a recession but causing a financial accident as well, according to analysts from Charles Schwab.

The central bank issued three consecutive 75-basis-point rate hikes this summer in response to growing inflation, which hit a 41-year high in June, with expectations now for the Fed to keep tightening until the policy rate hits 4.5% to 4.75%.

Markets are expecting another 75-basis-point increase in November, but the central bank could soon be forced to slow its pace of tightening, Charles Schwab analysts said in a note on Friday, pointing to growing volatility stemming from the hikes issued so far.

"In recent weeks the possibility of a more serious accident has emerged – the risk that the Fed's aggressive tightening will not just tip the US into recession, but potentially de-stabilize the financial system in the process," analysts said.

The bank pointed to choppy waters in government bonds, in which volatility is currently measured at 153, according to Merrill Option Volatility Estimate. That's nearing levels seen in March 2020, when the Fed began injecting liquidity into the financial system to quell markets during the pandemic.

The US dollar's rally this year is also ramping up volatility in markets outside the US. The Fed's rate hikes have an outsized impact on the global economy since most trade and debt are denominated in dollars.

Because a strong dollar makes imports less expensive, rate hikes are effectively exporting inflation to other countries, analysts said.

In addition, a rapidly rising dollar increases borrowing costs, especially in emerging markets, so servicing loans or debt with a depreciating currency raises the risk of defaults, Schwab warned.

"Volatility has spiked up in a range of markets from currencies to bonds, raising concerns about the ability of the global economy to cope with sharply higher US interest rates," the bank added. "While we don't expect the Fed to stop hiking rates, we believe a good case can be made that market pressures may force it to slow the pace."

 

Source: The Fed Will Slow Rate Hikes As Risks for a Financial Accident Grow

https://www.creconsult.net/market-trends/the-fed-will-slow-rate-hikes-as-risks-for-a-financial-accident-grow/

Cap rates jump 72 basis points in 6 months

Dive Brief:

• Data is backing up what many multifamily buyers and sellers already know —cap rates are rising in apartments around the country.
• A new report from CBRE says that going-in cap rates rose 33 basis points to 4.09% in the third quarter. In the second quarter, they jumped 39 bps (their biggest increase in a quarter ever) — marking a 72 bps increase over six months. Still, they are below their fourth-quarter 2019 level of 4.16%.
• Exit cap rates, or the rate used to estimate a property’s value at the end of the holding period, increased 21 bps in the third quarter versus 30 in the second quarter. However, the current 4.63% exit cap rate sits below pre-pandemic levels. Internal rate of return targets passed the pre-pandemic average, rising 35 basis points to 6.39%.

Dive Insight:

Investors are also becoming more pessimistic about rent growth as demand slows. They underwrote 3.6% annual rent growth over the next three years, compared to a 4.3% forecast in the first quarter. From 2014 to 2019, they underwrote 3.1% rent growth on average, according to CBRE.

This more tepid environment could attract buyers who are conservative when projecting rent growth.

“We’ve said, ‘If a deal doesn’t work with 3% rent growth, we’re not buying,’” said Stuart Zook, chief investment officer for Coconut Grove, Florida-based Monument Capital Management. “We're not assuming that we're going to get 5% on renewals. If we can, great.”

While gateway markets suffered during the pandemic, CBRE says investors are now optimistic about rent growth in those metros. Six months ago, anticipated gateway rent growth sat below other markets.

In Dallas, Philadelphia, and New York City, going-in cap rates were flat. In all other markets, they rose. In gateway markets, cap rates have only increased 58 basis points in six months — below the 82 average for other metros.

With this uncertain market, Matt Vance, America's head of multifamily research for CBRE, commented in the report that apartment investors are being selective. “While a bid/ask price gap exists for many assets, transactions are continuing to close,” he said. “This reflects buyers’ long-term confidence and sellers’ willingness to lower pricing modestly in light of the significant embedded gains in assets purchased over the past several years.”

But that isn’t universal. Some observers have seen transactions fall because buyers and sellers still haven’t totally come together on pricing.

“Price discovery is taking place right now,” Manus Clancy, senior managing director of applied data, research, and pricing for data and analytics firm Trepp, told Multifamily Dive. “People are trying to figure out where the market is.”

In some markets, underwriting apartment deals are more complicated than in others.

“In the Seattle region, it has been difficult for us to make it work from an underwriting standpoint,” Derek Graham, president, and principal of Hermosa Beach, California-based Odyssey Properties Group, told Multifamily Dive in August. “And it’s largely because the pricing hasn’t shifted very much — the same as in all these other markets. Sellers are resistant to adjusting their pricing and I don’t blame them.”

 

Source: Cap rates jump 72 basis points in 6 months

https://www.creconsult.net/market-trends/cap-rates-jump-72-basis-points-in-6-months/

Commercial Real Estate Symposium October 25 2022 7 a.m. – 3 p.m. PT

Commercial Real Estate Symposium
October 25, 2022
7 a.m. – 3 p.m. PT

Hear from the industry’s top leaders, national economists and thriving entrepreneurs on the future of commercial real estate.

Register now for this FREE event.

Agenda

*All times are listed in PT.

7 a.m. 
Welcoming Remarks 
James Huang, President, eXp Commercial

7:15 a.m. 
Entrepreneurship and Small Business Financing 
Charles Rho, President, VelocitySBA

8:00 a.m. 
Using AR/VR Technology to Attract Investors to Your Property
Matt Bonds, U.S. President, RealSee

8:30 a.m. 
The Future of Technology in Commercial Real Estate
Duke Long, Second Century Ventures
Obie Walli, CEO, Dealius
Ember Erickson, Co-Founder and Head of Revenue, Biproxi

9:00 a.m. 
Inclusion in Commercial Real Estate
Jessica Nieto, ONEeXp
Donnel Williams, President, Black Real Estate Professionals Alliance
Desiree Patno, CEO, NAWRB

9:30 a.m. 
Comparing Business & Real Estate Brokerage
Kylene Golubski, Executive Director, IBBA
Neal Isaacs, VR Business Brokers

10:00 a.m. 
Corporate Services, RELO and Commercial REO
Dawn Conciatori, Vice President Referral Generation, eXp Realty
Eric Powers, CEO 7LCRE
Fred Schmidt, Managing Partner, Valuation Alliance

10:30 a.m. 
State of the Commercial Real Estate Industry
KC Conway, Founder and President, Red Shoe Economics 

11:30 a.m. 
Global Opportunities in Commercial Real Estate
Meghan Kelley, VP Global Operations, eXp Realty
Renata Sujto, Broker of Record – International, eXp Realty
Samuel Caux, Managing Broker, France, eXp Global
Andrew Thompson, Designated Managing Broker, South Africa, eXp Global

12:00 p.m. 
The Coming Digital Asset Disruption and How it Impacts Commercial Real Estate
Olivier Manuel, President, Rich Devices

12:30 p.m. 
Vylla Title
John Tavarez

1:00 p.m. 
JTC Americas
Justin Amos

1:30 p.m. 
O’Connor Tax Reduction Experts
Shalonda Marshall

2:00 p.m. 
TransGlobal
Philip Hu

2:30 p.m. 
CommLoan 
Jonathan Mangiapane

https://www.creconsult.net/market-trends/commercial-real-estate-symposium-october-25-2022-7-a-m-3-p-m-pt/

 

Chicago Multifamily Investors Pushing Deals Forward As Economic Conditions Worsen

Chicago’s once-red-hot multifamily investment market has chilled a few degrees amid higher interest rates, rising inflation and more big investors sitting on the sidelines to see how it all plays out.

But there are still deals to be had, money at the ready, and fundamentals like a gaping housing shortage that had panelists at Bisnow’s Multifamily Annual Conference in Chicago confident any lull in the action will be temporary.

“I think there's sort of the pig-going-through-the-python [situation] here that we're going to eventually digest,” National Equity Fund President and CEO Matt Reilein said at the Oct. 6 event, held at Loews Chicago Hotel. “I do think we will move into smoother territory, probably the end of '23 and into '24.”

Tenant demand for apartments turned negative in the third quarter after several quarters of strong rent growth, the first time it has done so in three decades, according to RealPage Inc., which clocked 82,000 units returned to the market across the U.S. for the quarter.

That hasn’t completely spooked investors, though it is giving them some pause.

While the spigot is still flowing, albeit less forcefully, KeyBank Senior Vice President Todd Linehan said many are awaiting more tempered inflation numbers, a better understanding of how high the Federal Reserve might go in raising rates, and more capital markets activity on the investment sales side to gauge what’s happening with real transactions.

In the short term, that has increased multifamily cap rates nationally and led to a slowdown in deals, Linehan said.

“It's a challenging, challenging market,” he said. “You just can't solve for a 300-basis-point increase, roughly, or 250 over 12 months.”

McCaffery Interests Director of Investments Brian Munin said the pace of the volatility has been the biggest pain point, one that has already killed a few deals he was working on.

“There was just brutal timing where the 10-year [Treasury yield] would bounce 25 basis points in the course of a few days,” Munin said. "And we're seeing that this week as well."

McCaffery Interests' Brian Munin, National Equity Fund's Matt Reilein, KeyBank's Todd Linehan, West Loop Community Organization's Damone Richardson, Ryan's Greg Salter, and CliftonLarsonAllen's Jim Milliken

Yet there is still optimism capital won't rest for long — not least due to a major supply-demand imbalance that has resulted in a national housing crisis. There are approximately 6.8 million fewer housing units than needed due to underproduction and the loss of existing units, according to a national estimate prepared by Rosen Consulting Group for the National Association of Realtors.

Multifamily also remains a favored asset class among banks and life insurers and is supported by government-sponsored enterprises like Fannie Mae and Freddie Mac. And multifamily is in a unique position of easily adapting to an inflationary environment, thanks to constantly evolving rents and leasing that can move with the market, Linehan said.

“Certainly, we're seeing it seems to be a smaller world, the acquisition market has slowed down as buyers and sellers need to feel out what the proper level is based off new interest rates,” Linehan said. “But transactions are still occurring, and we're still fairly active, just maybe off of the crazy high of this time last year.”

“Deals can still pencil,” Munin said, adding rising rates would weed out deals that shouldn’t have happened in the first place “and put some more focus on really good deals, the ones that should be funded.”

 

P3 Markets' Phillip Beckham III, Project Management Advisors' Jeffrey Zogby, Skender's Joe Pecoraro, JDL's James Letchinger, Oak Park Economic Development's John Lynch, Luxury Living Chicago Realty's Aaron Galvin, and Thomas Roszak Architecture's Thomas Roszak

Conditions are changing how deals are put together.

Munin said his firm is building in extra time to assess the market and lock in rates during the due diligence period of negotiations. McCaffery Interests is also seeing the return of land contributions, “sellers wanting to stay in the deal with us and contribute and be a partner for the long term versus just selling to get out.”

That is happening in the affordable housing space as well, Reilein said, as localities kick in land or soft dollars to get projects built. More deals are making use of American Rescue Plan funding, which can now be directed to affordable multifamily developments as a result of legislative and regulatory changes this year.

“And I'm not advocating for this necessarily … but looking at short-term versus long-term rates, look at hedging specific to the interest rate risk on your portfolio and/or new projects — not looking just at individual projects, looking at your global debt position,” Reilein said. “Given the volatility, there are a lot of opportunities out there, and we're seeing a number of our larger developers start to have those conversations where they haven't had to literally in 15 years.”

Affordable Housing Investment Brokerage's Kyle Shoemaker, Preservation of Affordable Housing's Kathleen Day, DL3 Realty's Tania Kadakia, and Red Stone Equity Partners' Cat Vielma

West Loop Community Organization President Damone Richardson said developers need to be more flexible in how projects are financed going forward, taking note that those who took on floating rates are likely in for short-term pain

“I'm seeing folks look to alternative sources for funding,” Richardson said. “People are trying to access [property assessed clean energy] funds to help offset some of those costs in lieu of, say, mezzanine financing. Nobody knows what's really going to happen next. So I think that there are sources, but right now, we are in kind of a wait-and-see mode.”

Ryan Cos. Vice President of Capital Markets Greg Salter said many national banks have explicitly told him they are out of the market on making construction loans until next year. But super-regional banks like Linehan’s KeyBank are very much open for business.

Large national banks are requiring 9% debt yields that bring leverage on construction loans into the high 50% to 60% range, he said.

33 Realty's Mary Gibala, McCaffery Interests' Kimberly Williams, Magellan Development's Renee Wersching, Greystar's Colleen Darken, Daniel Management Group's Roger Daniel, and Xfinity Communities' Javier Jugo

"One of the great things actually about the regional banks is they'll make policy exceptions and go sort of around the credit committee and, if they believe in the deal, get you up to 65%,” Salter said. "So the debt is still there, it’s just tougher underwriting and lower leverage.”

Linehan said things get murkier for deals that involve three or four banks, but the market is robust for projects in the $20M to $40M range and involves a single bank lender.

“There's no rosy investment opportunity in this rising interest rate environment, so multifamily continues to be a strong investment opportunity,” Linehan said. “It just might not match the yields of the past 10 years."

 

 

Source: Chicago Multifamily Investors Pushing Deals Forward As Economic Conditions Worsen

https://www.creconsult.net/market-trends/chicago-multifamily-investors-pushing-deals-forward-as-economic-conditions-worsen/

Multifamily Proposal Activity Stays Hot Single-Family Flattens

Multifamily Proposal Activity Stays Hot, Single-Family Flattens

Architecture, engineering, and construction firms express a telling forecast, according to PSM

Proposal activity for single-family homes and residential developments plummeted in the third quarter but remained solid for multifamily-for-rent and senior/assisted living properties, according to PSMJ Resources’ Quarterly Market Forecast (QMF) survey of architecture, engineering, and construction (A/E/C) firm leaders.

David Burstein, PE, director and senior consultant at PSMJ, an A/E/C industry consulting and publishing firm said he’s seeing a divergence in the A/E housing markets.

“The homeownership markets – new single-family homes, condos, and subdivisions – are feeling the effects of higher interest rates and tighter lending policies,” Burstein said. “The rental markets aren’t feeling the same pinch, at least not yet.”

Even Multifamily Index Cooling Some

Burstein often highlights the influence that the housing sector has on all markets served by A/E/C firms, estimating that it directly or indirectly impacts approximately 80 percent of the industry’s total revenue.

Even though multifamily proposal activity continues to be relatively strong, the index has cooled somewhat, likely due to the rising cost of borrowing money to finance new projects, says Burstein.

PSMJ created the net plus/minus index (NPMI) to measure proposal activity and assess the A/E/C market outlook when it began its QMF survey in 2003. The NPMI is the delta between the percentage of respondents in a given category seeing an increase in proposal activity for the quarter, and those experiencing a decrease.

For several quarters after the initial rebound from the COVID-19-related downturn in late 2020, all segments of the housing market reported proposal activity at elevated levels rarely seen in the history of the QMF.

In Q1 2020, the overall housing market’s NPMI fell well into the negative (minus 19.3), but rebounded to set its record-high index score of 77.4 one year later.

Single-Family and Condo Proposal Activity Sinking

Activity remained robust across the board in the first half of 2022, but the Q3 report saw housing’s NPMI fall 33.6 index points (from 55.0 to 21.4), quarter over quarter, and 49.1 points, year over year.

More telling are the results from the five submarkets measured in the survey. While multifamily (NPMI of 44.8) and senior/assisted living (17.0) remained positive in Q3, proposal activity for single-family individual homes (-2.4), single-family developments (-3.9), and condominiums (-6.8) all sank into negative territory.

PSMJ chose proposal activity because it is among the earliest stages of the design and construction project lifecycle, thereby offering a look at the longer-term outlook for markets, submarkets, and the overall industry.

 

Source: Multifamily Proposal Activity Stays Hot Single-Family Flattens

https://www.creconsult.net/market-trends/multifamily-proposal-activity-stays-hot-single-family-flattens/