eXp Commercial Economist KC Conway Offers Insight and Tips on How to Pivot During Strong Economic Headwinds

As the U.S. confronts inflation and, increasingly, signs of a recession, eXp Commercial called on economist and futurist KC Conway for his take on what’s ahead. With 2022 Q4 in the headlights, and instability forecasted for 2023 and beyond, Conway delivers a master class on current and coming market conditions. His advice serves as a blueprint for all real estate agents – commercial and residential – on signs to look for and steps to take to navigate strong economic headwinds.

The following are key excerpts from this dynamic Q&A between eXp Commercial President James Huang and KC Conway:

There’s No Sugar-Coating It: A Challenging Period Is Ahead

The Federal Reserve is in panic mode on inflation. The inflation metrics are all coming in hotter and indicators for inflation are double the expectation at 8.5%. It would be a lot worse if we hadn't tapped the strategic petroleum reserve to bring gas prices down.

But inflation is not abating, mortgage rates have risen to 7%, throwing cold water on the residential real estate market. On the commercial side, banks are essentially being told by the Federal Reserve to quit lending. So you’re starting to see deals being canceled.

“I think we face a very, very challenging fourth quarter ahead of 2023. We're going to have to dust off some skills that take us back to the 1980s. How do you finance and get the market moving in a high inflationary market?

“This is only about the fifth time since post-World War II that the global GDP is down to the 2% range. Each of those times has been very serious times not only for the global economy but for us here in the U.S. So the kind word to say is ‘it is not great.’ ”

Inflation Impacts Urban Retail Most, Multi-family Least

Residential real estate leads in a recession and commercial real estate follow because they are dependent. And right now “the rooftops” of residential real estate are telling us their problems.

So commercial lags. We're just starting to see all of the commercial property price indices starting to turn downward. In fact, they essentially were about 0% in the latest month. Other takeaways:

Urban areas that have not gone back to work at 50% post-pandemic are being hit harder. That’s the barometer for a better urban commercial retail market: Workers back to the office at over 50%.

The office is healthy in the suburbs. Smaller chunks of office space and adaptive reuse of a branch bank to an office building, for example. Smaller chunks of about 4,000 to 6,000 square feet where employees can come in, and meet with a client, it’s in and out.

Big pension funds are starting to sell their office assets. They've already lost 15 to 20%. They don't want to lose 40% so they're moving aggressively to try to sell. That will be interesting to see how that plays out.

Suburban Commercial Markets Can Better Sustain Inflationary Forces

There is a term that influences density. It’s where you have a density of housing in the suburbs where the houses are actually occupied, and you have households that have good jobs. People can work and they’re doing pretty well. It’s in those pockets where you can do quite well in retail.

Supply Chain Rebuild Helps Defy Inflation in Certain Corridors

A shift is taking place from a West Coast-centric model to a supply chain that moved to Chicago and the East, and to a more North-South concentration. The Port of Savannah and other East Coast, Gulf Coast, and South Atlantic ports are seeing the great expansion of ships and goods.

Long Beach and Los Angeles used to dominate but that’s not the case now. We’re seeing shippers use the Panama Canal and come into Savannah and Charleston. We’ve also seen New York overtake California ports as the busiest container port in North America.

Additionally, those container ships are leaving East Coast ports loaded with grains, agricultural goods, durable goods, and manufactured goods. That mitigates shipping costs vs. 60% of ships leaving California ports empty.

Highlights of Commercial Sectors That Can Do Well in 2023

The efficiency of e-commerce facilities as big as 1 million square feet can close 100 stores. That’s the metric that moves the needle as they build more of these.

Multifamily is going to stay strong. The reason is, it now costs over $300,000 a unit to build a new stick-built apartment. Three years ago, that was the median price of a single-family home in the United States.

Housing Shortage + Young Workforce = Need for Housing Innovation

The young workforce – the Millennial workforce, the Gen Z – cannot buy housing. They have student loan debt. They don't have the credit. They don't have cash savings, and they can't afford a 7% mortgage.

We're going to have to see some innovation on the mortgage side to bring them into housing. The supply will add maybe 450,000 to 470,000 new apartments this year, and that'll be a record since 1980.

But if you look at the top 50 markets, that's a thousand units that do not make a dent in the supply shortage. So rents are going to continue to rise 6-8% and 10-12%, especially in markets like Texas and Florida and other inland markets where the workforce is going.

The Home-Building Industry Is In a Full-Out Recession

“They are shut down. They can't sell the homes because of the mortgage rates. They can't build them at the cost and the price point that work. So housing is completely shutting down. Look at the big public builders, especially with a lot of speculation inventory. They're in a lot more trouble.”

Foreign Money Will Continue to Flow to the U.S.

The United Arab Emirates, Israel, and South Korea continue to look to the U.S. for cash, 401K, and other asset investments. They are in a position to buy for cash deals that are falling out of escrow here.

“What's happening is that with our stronger dollar and because we're raising interest rates … our 4% looks very attractive to other parts of the world paying 1% or less. So we're seeing more of that money go into U.S. dollar denomination, and that further drives the demand for U.S. assets with such a strong dollar.’’

The Fed Needs to Be Careful With Europe

Conway on Europe’s woes: Europe is going to be very, very challenged. They're looking. Where can they go to a safe haven? They're going to have a tough winter this year with the energy issues and companies having to idle plants.

“The Fed has put the UK in the same position that we were in in 2008 and Lehman Brothers. They've locked up the capital market side, so we better be careful because Europe is a very important customer and ally for us. The Fed needs to take on a third mandate, which does not destroy Europe.”

There Will Be No Soft Landing

There’s a lot of talk about a soft landing, about whether or not we’re already in a recession. There’s talk about two more quarters before some of these measures start to unwind inflation and housing costs. That’s not going to be the end of it.

“I don't think a soft landing is in the cards, and anybody that keeps talking about it, I think they're being very disingenuous, to be honest with you.’’

Steve Forbes in the 1970s invented a phrase called the “Misery Index.” He took unemployment and inflation and put them together and we got to a peak of about 13%. That formula has been modernized. They added the S&P 500 because now almost 60% of American households own stock in some capacity.

“Right now, you end up with a Misery Index of 29 compared to 13 in the 1970s.”

What the Federal Reserve does in November and December, depending on whether energy costs go back up after the November midterm elections, and what kind of increase there is in unemployment:

“I think there is more pain ahead. There will be no recovery in 2023. We can get a real shock in mid-2023 and see we’re now 6-8 quarters into negative GDP. We’ll see the damage we've done to the housing industry, which is 40% of our GDP. We’ll see the damage we’ve done to our retail industry and to the consumer.”

“Maybe at that point, both political parties in this country will come together and say we’ve got to deal with this. Maybe they put things in place in early ‘24 or late 2023 to give us some hope. But the best case is the second half of 2024, but I honestly think we’re really at the year 2025 or 2026 before we start to see recovery.”

Conway’s Suggestions on Safe Places to Go and Opportunities

REITS

Workforce growth in places where companies are relocating: Tractor Supply in Little Rock, Arkansas; Hyundai going into Montgomery, Alabama.

Florida: The rebuilding is going to be phenomenal.

The Carolinas continue to be strong. Toyota, EV batteries, high tech, biosciences.

South Korea and Vietnam are moving manufacturing away from North Korea due to threats to U.S. plants.

What eXp Commercial Agents Can Do In the Meantime

Clean energy: Investigate states that have passed property assessments for clean energy. These assessing authorities have capital to tap for updating HVAC and other energy-efficient improvements.

“That underutilized or vacant retail or restaurants that – if you had a little bit of capital and you could cloak it under a clean energy upgrading for efficiency. You can get all the capital, fix the building, never have to go to a bank and get turned down or wait six months”

Reassessments: Big box retailers finally realized they're not worth 200 bucks a square foot, and the assessments are now in the $50 to $75 square-foot range. They're coming after the big industrial buildings and e-commerce. They're coming after the full-rent subdivisions and self-storage, which was up 60%. So that’s going to be another pivot.

ESG pressure: Every public company has to get an ESG score. They have to show what they’re doing. They have to deploy capital. An organization’s ESG score is a measure of how the company is perceived to be performing on a range of environmental, social, and governance (ESG) criteria.

 

Source: eXp Commercial Economist KC Conway Offers Insight and Tips on How to Pivot During Strong Economic Headwinds

https://www.creconsult.net/market-trends/exp-commercial-economist-kc-conway-offers-insight-and-tips-on-how-to-pivot-during-strong-economic-headwinds/

Under-The-Radar Community Upgrades and Strategies | National Apartment Association

According to the National Multifamily Housing Council, nearly 80% of the country’s existing apartments were built prior to the year 2000 — meaning a majority of U.S. multifamily properties often compete in today’s tight rental market with outdated layouts and less-than-ideal amenities.

Add in ongoing inflationary challenges and an uncertain economic climate, and many property owners may believe their options to drive value and bolster the bottom line are limited to nonexistent.

However, despite the numerous economic challenges multifamily owners and managers face today, major renovations are not the only value-add strategy available. Several lesser-known, relatively low-cost options are available for managers and owners to improve their properties and drive long-term value.

Simple, Low-Cost Amenities and Updates That Residents Appreciate

Improvements don’t always have to be extensive and costly, like a new clubhouse or fitness center. Some of the best ways to add value to a property are simple, cost-effective improvements:

• Punch Up Curb Appeal: Enhancing a property’s curb appeal is a critical but often overlooked strategy to drive value and attract residents. After all, first impressions matter. If the property doesn’t look well-kept and welcoming, prospective renters won’t bother touring the vacant apartment. Improvements such as updated signs, landscaping, parking lots, walkways, and entryways can significantly affect attracting — and retaining — residents.

• Upgrade Blinds: Blinds are another small thing that can generate big returns for multifamily properties with a relatively low upfront cost. Upgrading apartment windows from basic vinyl to aluminum or faux wood blinds enhances aesthetics and provides an immediate ongoing return on investment.

• Communal Updates to Common Areas: Another relatively simple value-add strategy is to upgrade common areas with nice chairs, loungers, and benches that make them more welcoming. Replacing common-area lighting with energy-efficient LED bulbs and fixtures is another simple strategy. Adding grills or TV areas in tandem with launching community events also are great low-cost ways to add value.

• Install New Cabinet Hardware: Nothing dates apartments more than outdated cabinet knobs and pulls. Instead of installing costly new cabinetry, upgrade to more modern hardware with polished brass or chrome finishes. This affordable alternative gives every unit an updated look without the cost of a full-blown renovation project. Not only do they improve aesthetics, but new hardware also protects cabinets from oils on people’s hands that can damage the finish.

• Freshen Up Faucets, Showerheads, and Toilets: Is there anything more overlooked when making apartment upgrades than the humble faucet? Shower heads and toilets likely come close. Taking a fresh look at this necessary trifecta can drive property value for a relatively low cost. Not only do modern faucets, showerheads and toilets provide an immediate upgrade in aesthetic value, newer options are more efficient, cutting down on water usage. Additionally, consider upgrading supply lines and valves to reduce the chance of leakage and minimize maintenance calls, which help control and protect net operating income.

• Replace Outdated Flooring: Carpet may be affordable and standard, but it may be time for an upgrade. Upgrading the flooring in apartments regularly has a positive effect on resident interest and value. An affordable alternative, laminate flooring options provide the style of pricier options like hardwood at a fraction of the cost. Laminate is more durable and easier to install, but ongoing maintenance isn’t as challenging as cleaning carpets.

Adding Value Beyond Upgrades

Making upgrades is a tried-and-true tactic to drive value for multifamily properties. However, they aren’t the only option. Property managers can maintain and improve long-term value with a few critical changes in their maintenance procedures and policies. Here are a few to consider.

• Standardize Products and Parts: A simple and effective approach to trim costs and improve efficiencies is to standardize the maintenance products used on the property. For example, installing only one type of faucet or showerhead across all units requires stocking replacement parts for only one type rather than a range of parts for various models throughout the property.

• Establish Maintenance Routine: It may sound boring, but the best way to maintain and drive a property’s long-term value is a proper maintenance routine. This includes regular checkups of HVAC units and ensuring filters are regularly changed, as well as draining water heaters to increase longevity and reduce calcium buildup. The National Apartment Association (NAA) offers a guide that lays out all standard and necessary preventative maintenance tasks for property managers.

• Set Part Limits: To improve efficiencies and better manage maintenance costs, establishing minimum and maximum limits for various maintenance parts and products can help with budget management and maintain long-term property value.

• Purchase in Bulk: Property managers should take advantage of opportunities to buy commonly used products in bulk when possible. This approach helps lessen the impact of price increases on maintenance budgets, and it helps improve the maintenance team’s ability to respond to and fix issues in a timely manner.

Because most apartments across the country are older than 20 years, finding cost-effective ways to maintain and add value is critical. Although major renovations may prove too costly for many property managers and owners, numerous solutions can resonate with residents, protect the bottom line and drive long-term property value.

 

 

Source: Under-The-Radar Community Upgrades and Strategies | National Apartment Association

https://www.creconsult.net/market-trends/under-the-radar-community-upgrades-and-strategies-national-apartment-association/

Commloans 11/21/22

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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/