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Midterm Primer: What’s At Stake For CRE In Elections Across The U.S.

Inflation. Gas prices. Crime. Abortion rights.

These are some of the most pressing issues driving voters nationwide as they ponder the future of both chambers of Congress, weigh in on heated gubernatorial campaigns and consider local races and ballot measures that could reshape their communities.

Undoubtedly, these U.S. midterm elections are consequential, but for commercial real estate, there is really only one issue at play: the economy.

Still reeling from the aftereffects of the pandemic, the industry has faced one setback after another in 2022 — aggressively shifting consumer and workplace habits, multiple interest rate hikes that have dragged property values down 13% this year alone, and the acute pain of the highest inflation in 40 years.

As one lender said at a Bisnow event last month, “It's a lack of trust, because we were all told that this inflation is transitory and it's going to kind of go away … So I already had trouble trusting politicians, and now it's even more."

President Joe Biden's approval numbers have sunk this year as Americans grow anxious about inflation and the perception of rampant crime across the country. Biden is currently on pace with his political rival and predecessor, President Donald Trump, who also had weak approval numbers at this point in his presidency — and succumbed to a “blue wave” after the 2018 midterm elections.

On Monday, the Dow Jones, S&P 500, and Nasdaq all rallied in anticipation of a potential Republican sweep, but nationwide polls have increasingly been difficult to rely on, with some polling experts claiming these midterms are literally unpredictable.

“We are, in many respects, stumbling through the dark with headlamps and flashlights,” Dave Wasserman, the U.S. House editor at the Cook Political Report, said this week. “And we have a vague understanding of where these races stand, but there are bound to be surprised.”

Whatever happens, here is what commercial real estate professionals should be looking out for as the results are tallied.

Congress

A unified federal government over the last two years has generated trillions in new spending, much of it with a direct impact on commercial real estate. With an eight-seat majority in the House of Representatives and Vice President Kamala Harris breaking the Senate’s 50/50 ties, Biden has signed the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act in the last two years.

While the narrow majority in Congress has cleared the way for significant investment into the country’s infrastructure and manufacturing and a shift toward renewable energy, it has also stymied Biden’s campaign promise to repeal CRE’s beloved carried interest loophole.

If Republicans take control of one or both houses of Congress, it is unlikely they will continue to approve big-ticket legislation pitched by the Biden administration. A federal government divided along party lines could also be less responsive to a recession.

The real estate industry has donated $83.9M to Republican candidates and committees in the 2022 election cycle compared to $68.6M to Democratic campaigns, but the industry’s donations to congressional races are far more closely split, according to OpenSecrets.org.

In races for the House of Representatives, real estate donors have given $90,600 to Republicans and $90,030 to Democrats after House Democrats outraised Republicans by more than $5K in 2020, according to OpenSecrets.

And while the real estate industry donated more than $487K to Republicans running for Senate in 2020 compared to nearly $286K to Democrats, Senate Democrats have outraised Republicans by more than $70K from real estate sources this year.

The largest industry donor — after the National Association of Realtors, which largely spends on nonpartisan issues — was Marcus & Millichap, which has spent more than $7.2M on Democrat campaigns and progressive groups. The second-largest donor is Hillwood Development, the firm founded by Ross Perot Jr., which has given almost $6.9M to Republican candidates and conservative organizations, according to OpenSecrets.

Gubernatorial Races

Residents of 36 states are casting their votes for governor Tuesday. In many, like Texas, California, Florida, Illinois, and Colorado, the incumbent is expected to win handily, which will mean business as usual for the commercial real estate industry — for better or for worse. In Georgia, Republican Gov. Brian Kemp is drawing donations from real estate players near and far and looks likely to hold off Democratic challenger Stacey Abrams again.

CRE players are hoping that will not be the case in New York, where the real estate-backed Republican Lee Zeldin is creeping up on Democratic incumbent Kathy Hochul in the polls.

Massachusetts will get a new governor one way or another, but real estate’s money is flowing to Democratic candidate Maura Healey over Trump-endorsed Republican Geoff Diehl. If Healey wins, it would be a shift in party control of the statehouse, but CRE players told Bisnow they wouldn’t expect a massive shift in real estate-related policy under her leadership. Her housing policy in particular has drawn praise from the industry.

In Maryland, real estate has largely thrown its hat in for Democrat Wes Moore, who is well up in the polls over Republican Dan Cox and is poised to become Maryland’s first Black governor. Experts told Bisnow real estate’s financial support of Moore may be more about currying favor from the clear front-runner than a true alignment of priorities, and many of Moore’s backers in real estate previously donated to outgoing Republican Gov. Larry Hogan.

Whether Pennsylvania votes for Republican candidate Doug Mastriano or Democrat Josh Shapiro may also determine whether abortion remains legal in the state, which could have an impact on economic development. Duolingo, for one, has said it would relocate its headquarters out of Pennsylvania if the state outlawed abortion. The polls favor Shapiro, who has said he would veto any state legislation that restricted access. Mastriano has said he supports a total ban.

Local Ballot Measures

California

     — Los Angeles mayoral race: Developer Rick Caruso (R) is taking on Karen Bass (D) to lead Los Angeles. Caruso has dramatically outspent Bass on the campaign trail and gained on her in recent weeks to bring them neck and neck in the polls. The real estate industry is largely behind its own, saying Caruso could bring a “fresh perspective” to the city and expressing support for his platform on homelessness and how his experience in development could be a benefit in tackling the housing shortage.

     — Proposition 30: This measure would fund electric vehicle infrastructure by raising the income tax rate on California residents earning more than $2M per year. About 45% of the money would go toward helping people buy EVs, and 35% would go toward installing chargers in commercial and residential real estate. The real estate industry is heavily opposed to the measure. Read more here.

     — Bay Area lodging taxes: Multiple cities in the San Francisco Bay Area have measures on their ballots to increase hotel taxes to pay for infrastructure improvements. Alameda, Millbrae, and Belmont have similar proposals to increase the tax rate and have seen little opposition, although one Alameda council member raised concerns that the region’s hospitality industry has not improved enough from the pandemic to take on new taxes at this time. Brisbane’s Measure O would impose a tax on hospitality business owners of $2.50 per day for every room booked. Read more here.

     — Proposition M: This measure would impose a tax on the owners of residences in San Francisco that sit vacant for 182 days or more per year. It is seen as a way to discourage real estate speculation and increase housing stock. Opponents come from both sides, with some saying the measure goes too far and some that it doesn’t go far enough to significantly address the severe home shortage in the city. Read more here.

     — Measure D or Measure E? San Francisco has two competing measures on the ballot aimed at streamlining the housing permitting and development process. The tech industry and San Francisco Mayor London Breed are behind Measure D, known as the Affordable Homes Now Initiative, which is seen as the more moderate proposal compared to Measure E, or the Affordable Housing Production Act. Both initiatives would reduce the timeline for approvals and eliminate the need for environmental reviews but differ in what percentage of units must be affordable in mixed-income projects and what percentage of area median income is required to be eligible. Read more here.

     — Measure ULA: Also known as United to House LA, this initiative proposes a tax on real estate transfers over $5M to fund new affordable housing and emergency housing interventions, such as legal aid for tenants facing eviction. The real estate industry is staunchly opposed and is dropping dollars to fight it, saying the measure would depress property values, decrease economic investment and ultimately drive rents higher. Read more here.

Maryland

     — Question 4: Maryland is one of five states voting Tuesday on legalizing recreational marijuana use. Nineteen states and Washington, D.C., have already approved recreational use, and an additional 18 allow medical use. Legalization has largely been seen as an area of opportunity for the real estate industry, though capitalizing on it isn’t easy.

Pennsylvania

     — City Council special election: After four of Philadelphia’s 17 city council members resigned in the last few months to run for mayor in 2023, the city called a special election to backfill their spots. The special election is seen as a way to shore up councilmanic prerogative, the unwritten policy of allowing council members to decide what developments do or don’t get approved in their districts without opposition from other members. The Democratic candidates picked by party leadership are all but assured victory — they will then face a general election next year — so the question is what the new council members will do, especially in terms of housing policy. Read more here.

 

 

Source: Midterm Primer: What’s At Stake For CRE In Elections Across The U.S.

https://www.creconsult.net/market-trends/midterm-primer-whats-at-stake-for-cre-in-elections-across-the-u-s/

Loan Assumptions Gain Appeal With Larger Multifamily Buyers Amid Spiking Interest Rates

The Federal Reserve's anti-inflation strategy is causing the price of debt to go up so rapidly that some large multifamily investors are opting for an acquisition strategy that doesn't maximize potential returns.

In the past two weeks, two apartment complexes in the Philadelphia area changed hands for over $100M apiece in transactions that saw buyers assume the properties' existing fixed-rate loans.

That practice is growing in appeal despite the fact it virtually requires a buyer to leave more equity in a deal and could meet resistance from lenders, Wealth Management reports.

In late October, Boston-based Jones Street Investment Partners purchased a 350-unit suburban Philly property for more than $100M and assumed its loan, which has nine years remaining at a fixed rate below 4%, Wealth Management reports. Days later, New York-based private equity giant KKR acquired the 1,018-unit Presidential City complex on the western edge of Philadelphia for $357M from local developer Post Brothers, assuming a loan with seven years remaining at a 4.3% interest rate.

"The financing in place on the property was potentially a liability when we took [Presidential City] to market," Post Brothers President Matt Pestronk told Bisnow on Nov. 1. "Then it became an asset."

The aggressive pace at which the Fed has hiked its benchmark rate means the cost of financing can rise with little warning, potentially scuttling deals between agreement and closing dates.

That combination of high cost and uncertainty has given the idea of loan assumption more appeal among those who can afford it — and with the higher level of equity often required, relatively few investors can, Wealth Management reports.

The degree to which loan assumption will infiltrate multifamily investing in the coming months is difficult to pinpoint, but even a few examples are likely to stand out, considering that inflation has hampered tenant demand and clamped down on rent growth.

When combined with rising interest rates, the weakening fundamentals in the multifamily market have slowed deal velocity to a crawl and created negative leverage among some properties acquired with floating-rate debt in the headier times of the past couple of years.

 

 

Source: Loan Assumptions Gain Appeal With Larger Multifamily Buyers Amid Spiking Interest Rates

https://www.creconsult.net/market-trends/loan-assumptions-gain-appeal-with-larger-multifamily-buyers-amid-spiking-interest-rates/

Apartment Market Pulse Fall 2022 | National Apartment Association

U.S. Apartment Market

Since 2021, apartment demand had been at record levels as people left cities for suburbs; however, in more recent months, there has been a sudden slowdown in apartment demand because of a halt in new household formation. As the economy becomes more uncertain due to inflation and fears of a recession, many would-be renters who are skeptical about their future choose to postpone moving into their own apartments.

The slowdown in the economy has caused apartment demand to drop well below third-quarter averages. According to RealPage, Q3 2022 marked the first time in the firm’s 30 years of tracking U.S. apartments that demand registered negative during a third quarter period. Annual absorption plunged to 77,936 units. This was far lower than the 338,398 units that came online. As a result of reduced demand, the national occupancy rate dropped to 95.9%, the lowest level since Q1 2021.

Developers continued to see the cost of materials and labor increase, although there has been some relief. According to CoreLogic’s Quarterly Construction Insights, the cost of lumber and plywood peaked in April 2022 and has been in decline ever since, but the cost is still elevated compared to prior years. Most notably, the cost of PVC pipe went up 47% between January and August. Looking at labor costs, companies paid over 2% more for teamsters, plasterers and painters in August than they did in January.

While construction costs are high, multifamily construction activity delivered an impressive performance during the third quarter. According to the U.S. Census Bureau, the seasonally adjusted annual rate for multifamily building permits jumped 25.5% year-over-year to 644,000 units in September. Construction starts totaled 530,000 units, an increase of 16.5%. Units completed increased by 33.3% to 376,000 units.

Despite a drop in demand, the apartment sector continued to record healthy rent growth, although at a slower pace. As reported by RealPage, effective rent increased nearly 13% year-over-year to $1,790. Looking at a quarter-to-quarter change, however, rent growth decelerated by 0.7 percentage points during the third quarter. The slowdown in apartment demand caused apartment owners and operators to be more strategic with how they attract residents. According to data from CoStar Group, concessions for existing market-rate properties increased slightly from 0.59% in Q2 to 0.67% in Q3.

According to REIS, the top-ranking markets for annual effective rent growth included Seattle; New York City; Greensboro, S.C.; Boston; and Charleston, S.C. In contrast, Minneapolis; suburban Maryland (Montgomery and Prince George’s Counties); Sacramento, Calif.; Little Rock, Ark.; and Wichita, Kan., saw the slowest rent growth. Charleston was also among the top five markets for improved vacancies. The Charleston metropolitan area has seen significant economic growth as manufacturing companies including Boeing, Volvo, Mercedes-Benz and Bosch have recently expanded there. This growth has brought new employment opportunities and renter demand to the area.

In late September, Hurricane Ian ripped through southwest Florida and the Carolinas and caused devastation to various communities. Many people, particularly along Florida’s Gulf Coast, completely lost their homes. A recent report from CoreLogic estimates insured and uninsured damages for Hurricane Ian to be between $41 billion and $70 billion. The aftermath of Hurricane Ian is expected to slow construction and drive-up rents in southwest Florida markets.

 

U.S. Capital Markets

According to Real Capital Analytics, closed apartment sales transactions during Q3 2022 totaled $46.5 billion, decreasing by 45.1% year-over-year. The decrease in deal activity is likely due to the rise in interest rates, which has made financing more expensive and has caused some investors to pause their purchase decisions. The average price per unit for properties that traded in the third quarter was $253,471, a 16.5% increase from the same quarter last year. Investors exchanged nearly 211,446 units, a 50.6% decline from the previous year. The average cap rate was 4.5%, down 20 basis points. As cap rates continue to fall, experts predict this trend will lead potential buyers into lowering their offers due to rising interest rates and the increasing cost of capital.

U.S. Build-to-Rent Market

Demand for build-to-rent (BTR) apartments remained solid as more Americans found it more difficult to afford homeownership amid soaring interest rates. The U.S BTR sector’s rent growth rate has slowed down but still posed a gain of 10.3% since the same time last year. Of the top 32 BTR markets tracked by Yardi Matrix with 50 or more units, Washington, D.C.; Orlando, Fla.; Toledo, Ohio; Nashville, Tenn.; and San Antonio had the highest annual rent growth in September. Atlanta was the only market that registered negative year-over-year rent growth.

With over 2,400 new units delivered, occupancy rates dropped 1.1% since Q3 2021 to 95.9%. The top-ranking markets for occupancy growth included Philadelphia; Lansing, Mich.; Cleveland; Raleigh, N.C.; and Pittsburg. In contrast, BTR communities in Las Vegas, Miami and Tampa, Fla., posted the largest increase in vacancies since the same time last year.

U.S. Economy

Cracks are beginning to be revealed in the labor market, although indicators remain weighted to the positive. Job growth, unemployment rates and initial claims for unemployment all point to strong labor market fundamentals. Layoff announcements surged in September but were down more than 21% year-to-date from last year, and the Q1-Q3 period was the lowest on record since Challenger, Gray & Christmas began collecting the data in 1993. Job openings dropped by about 890,000 in August, an initial indication that some companies might be pulling back on expansion plans, but September’s reading showed a 437,000 increase. There are still 1.9 jobs for every unemployed person in the U.S.

Employment growth slowed in September to 263,000 jobs, but at a 420,000 monthly average this year, remained well above long-term trends. The unemployment rate dropped back to its 50-year low of 3.5%, largely due to a slight decline in the labor force participation rate. Initial claims for unemployment have been running below the 250,000 per-week threshold, which is indicative of a healthy labor market.

At 10.7 million, job openings remained well above pre-pandemic levels, with the leisure and hospitality sector still leading the way and responsible for half the increase in openings. Education and health services job availability jumped by 138,000. Openings decreased in the wholesale trade sector (-104,000) and in the finance and insurance sector (-83,000), which has experienced declines for three consecutive months due in part to the strain that soaring interest rates have put on financial markets.

Quit levels have come off their peak of 4.5 million in November 2021, but remain at historic highs. Employees quitting for other jobs are contributing to wage increases lingering at or above 5% year-over-year as switching jobs typically comes with a loftier raise than staying in place. Sectors experiencing the highest level of quits were professional and business services and state and local government.

For-sale housing has emerged as one of the weakest links in the economy. Driven by 20–year high mortgage rates, a runup in house prices and low inventory, existing home sales have decreased by 27% since January. Additionally, the National Association of Home Builders Housing Market Index, which measures homebuilder sentiment, was at its lowest level in 10 years. Sales prices have weakened but have not quite caught up to the deteriorating market conditions. Both the Case-Shiller and U.S. Federal Housing Finance Agency home price indices showed their first monthly price declines in July, but they were less than 1%. Price growth averaged 15% on a year-over-year basis, however. Since peaking in June, the National Association of Realtors median sales price has dropped 7% through September. These slight price reductions are not enough to lessen affordability challenges faced by would-be homebuyers.

Outlook

The preliminary estimate of third quarter GDP showed a 2.6% expansion after two quarters of decline. The growth was largely driven by trade, and given the strong dollar, it is expected to be temporary. It did not impact the Federal Reserve’s actions, as they raised interest rates by 75 basis points in November and appear to be on track for another 50 to 75 basis point-increase in  December.

A Bloomberg Economics model forecasted a 100% chance of recession in the next 12 months. A recent Bloomberg survey of economists was also more pessimistic with the probability of recession at 60%, up from 50% just one month earlier. CEOs of major corporations have been advising businesses and consumers to ready themselves for an upcoming downturn. The severity and duration remain major unknowns, although most economists are predicting a mild recession starting anytime within the next three-12 months.

Household formation has already begun to slow, supply is outpacing demand in some markets and rent growth has decelerated and even turned negative, according to some private sector data providers – all signs of normalization in the apartment market. Jobs and wages continue to grow, albeit at more subdued levels, which will keep apartment fundamentals solid, if not stellar. If the Fed cannot execute a soft landing and unemployment rates rise significantly, further downward pressure on both occupancy rates and rents are sure to follow.

 

Source: Apartment Market Pulse Fall 2022 | National Apartment Association

https://www.creconsult.net/market-trends/apartment-market-pulse-fall-2022-national-apartment-association/

Mainstreet | 12.7.22 Market Report on Canadian Markets

Join the Mainstreet Global Council virtually as we get an update on Canadian markets from the Manitoba Association of Real Estate, while we give their members our market report. Enjoy this meet-and-greet opportunity with members of this Association and learn about real estate opportunities within this region of the world. You will have the opportunity to share your contact info, and network after when we break out into small groups.

For Mainstreet members who are attending the NAR Conference in November, you will also have an opportunity to meet many members of this association at our joint reception together on Friday, November 11th from 5 - 7 p.m.

 

Date & Time

Wednesday, December 7, 2022
10:00 AM - 11:45 AM CST

Format: Live Stream

Price: Free

Register

Source: Mainstreet | 12.7.22 Market Report on Canadian Markets

https://www.creconsult.net/market-trends/mainstreet-12-7-22-market-report-on-canadian-markets/

Mainstreet | 1.13.23 Commercial Economic Outlook Breakfast

Date & Time:
Friday, January 13, 2023
09:30 AM - 11:30 AM CST

Location:
Lorena's Banquet
543 W. Lake St.
Addison IL 60101
View Map

Format In-Person

Price: $35 Member $45 Non-Member

Register

Dr. Chan received his BBA in Finance & Investments from Baruch College in 1979. In 1983, Anthony received his M.A. in Economics followed by his Ph.D. in Economics in May 1986 from the University of Maryland. In addition, Anthony also spent time at the Board of Governors of the Federal Reserve in Washington, DC as a Doctoral fellow from 1985 to 1986. Upon graduating, he became an Economics Professor at the University of Dayton from 1986 to 1989 and successfully published many academic articles. Next, he joined the Federal Reserve Bank of New York as an Economist from 1989 to 1991. Anthony also joined Barclays de Zoete Wedd Government Securities, a Government Securities Primary Dealer, from 1991 to 1994 as a Senior Economist.

Anthony joined JPMorgan in1994 and retired in 2019. During his tenure, Anthony addressed over one hundred thousand clients each year and delivered presentations to many Central Banks around the world, including China’s PBOC, the Bank of Korea, and almost every Central Bank in Latin America. Currently, Anthony also spends a great deal of his time traveling around the world (e.g., to Asia, Europe, and Latin America) and in the United States delivering Client Presentations that focus on the Global Economy/Global Financial markets. Anthony is also a member of the prestigious Blue-Chip Monthly Forecasting panel. In addition, he served on the Economic Advisory Committee of the American Bankers Association from 2001-2002. One of his most important responsibilities of this ABA group was to brief Alan Greenspan and the rest of the board members in Washington, DC twice a year in an off the record session.

Anthony has also been quoted in media outlets such as The Wall Street Journal, Barron’s, The New York Times, The Washington Post, The Chicago Tribune, The Los Angeles Times, and Investor’s Business Daily. He has made over 650 live TV appearances in media outlets such as CNBC, CNN International, Fox Business News and CGTN, Chinese Television.

Deeper Personal Background
From Public Housing to Banking Royalty
Turning Adversity into Impact

Dr. Anthony Chan spent a quarter of a century as chief global economist for JPMorgan Chase, driving imperative dialogue around world markets and their impact on consumers and global communities. He’s fluent in the needs of different cultures and geographies; able to tailor his talks to industries, sectors, and convenings that are looking for insight and inspiration from someone who built their career from the ground up.

While Anthony retired at the top of his game, he didn’t get there through luck or leverage. His story is one of sheer grit. Born in New York City, to a Puerto Rican mother and Chinese father, his parents were blue collar; the former a maid, the latter a waiter at a Chinese restaurant. Their drug infested neighborhood tested Anthony but the powerful work ethic instilled by his parents kept him focused, dodging the perils of drugs and other risky behaviors. He worked the fryer at a local KFC which left him with scars on his arms from hoisting lard in and out of the scalding hot french fry machines - scars that, mistaken for track marks, earned him street cred and a wide berth from menacing neighborhood youth.

Sadly, Anthony’s dad died of a brain aneurysm when Anthony was in elementary school; an event that rocked his mom and caused her to dissuade Anthony from pursuing higher education and a demanding career for fear he would meet the same demise. She wanted him to stay the course: stick to his working class roots and help keep the family afloat. Anthony wanted more out of life. After becoming intrigued by a segment about economics on tv, so he told his mom he was going out partying but he snuck off to the New York Public Library to learn more about his new found passion. He studied courses on his own since no one - not his mom or his teachers - would support him in his quest to be and do better. He was told he was a half breed and that kids like him would never make it into the higher levels of society.

Anthony went on to become the first person in his family to receive his high school diploma and his bachelor’s degree, all on public assistance. Let that sink in.

He would go on to get his master’s degree and then his PhD. His thirst for knowledge is boundless; his desire to engage and move the world forward unstoppable. And now, in the next chapter of his life, Anthony is putting his vast experience to work for your audience: sharing insights, information, and inspiration that will accelerate innovative thinking and results for organizations and the communities they serve.

Dr. Anthony Chan was Managing Director, Chief Global Economist at JPMorgan Chase & Co. (1994-2019) in New York City. He earned his B.B.A. in Finance and Investments degree from Baruch College in 1979, and his master's (1983) and doctorate (1986) from the University of Maryland. He has worked as a professor at the University of Dayton, and was an Economist at the Federal Reserve Bank and at Barclays. From 1985 to 1986, Chan was a Doctoral fellow at the Board of Governors of the Federal Reserve in Washington, D.C. Anthony also serves as the Treasurer of the Skyhook Foundation.

 

 

Source: Mainstreet | 1.13.23 Commercial Economic Outlook Breakfast

https://www.creconsult.net/market-trends/mainstreet-1-13-23-commercial-economic-outlook-breakfast/

2023 State of The Commercial Real Estate Industry

2023 State of The Commercial Real Estate Industry

Join eXp Commercial President James Huang and Economist KC Conway on January 17 for a fireside chat as they discuss the state of the 2023 economy and how you can prepare your business for success in the changing market.

Date: January 17, 2023
Time: 9 a.m. PT / Noon ET
Location: eXp World > eXp Commercial Auditorium

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