Apartment Owners Likely To Reap Rewards Of Housing Market Headaches

Ballooning costs in the for-sale housing market have served as an adrenaline shot for apartment demand, driving valuations up. However, ablation pummels the construction industry, and the development pipeline still can't keep up.

That's good news for existing apartment owners who are set to benefit from increasing rents bu. Still, it continued pain for those searching for a place to live and cities seeking relief from the nationwide housing crisis.

Investors are flooding the for-sale homebuyer's market to turn them into rentals.

"People are working, they're paying their rent, they've gotten through Covid, and maybe they've been saving for years to buy a house — but suddenly the cost of everything about buying a house is way up, so they're going to be renters still," said New Standard Equities CEO Edward Ring, whose company is an active investor in multifamily on the West Coast.

A deep recession might bring the cost of housing down quickly, as it did in 2008. Still, in that case, job losses would keep people in their apartments, Ring points out, though he's skeptical that a recession in 2022 or 2023 would be the kind of implosion that happened during the Great Financial Crisis.

"A lot of institutional money seems to be mistaking today's outlook with that of 2008," Ring said. "They're bracing for another massive recession. There are some similarities, such as rising home prices, but otherwise, dynamics aren't the same."

In short, he expects home prices to remain relatively high, along with the cost of mortgages, as long as the Federal Reserve tries to tamp down inflation via interest-rate increases.

Multifamily will be the beneficiary of that situation this year and maybe longer.

And there are already indications that the heated for-sale housing market is cooling, at least a bit.

According to the National Association of Realtors, inventory of for-sale homes increased year-over-year in May for the first time since June 2019; all, the annual increase of 8% over 2021 leaves the national housing market far short of its pre-pandemic levels, with just over 500,000 homes available.

Accordingly, the median asking price for single-family houses rose 17.6% over last year to a new high of $447K, while time on the market dropped six days to 31.

But rising interest rates are expected to clearly impact housing sales moving into the second half of the year.

In June, Fannie Mae lowered its forecast of mortgage originations and home sales for 2022, the result of climbing mortgage rates.

Higher mortgage rates are the housing market's "primary constraint," the agency said. Fannie Mae forecast that home sales will fall 13.5% year-over-year to 5.96 million units in 2022. Further, the GSE expects about 5.29 million homes to sell in 2023.

Rather than being good news for would-be buyers, fewer people will be able to afford homes at today's elevated prices, even though Americans are making more money. Household incomes have increased since the pandemic, but inflation is eating up those gains.

Historically, renters entered the market by moving into starter homes, allowing them to build equity to progress into larger, more expensive properties. But that dynamic was disrupted by the 2008 recession, Fogelman Properties President Mark Fogelman said. His company is an active multifamily investor, especially in the Southeast.

"As recently as the 2000s, developers were building subdivisions aimed at people making $40K to $80K a year, allowing people in that income group to matriculate from apartments to their own houses," Fogelman said.

"But because of lack of credit and a change in builder focus, now there's virtually no starter home inventory in the country," he said. "A 'starter home' now is $400K, which isn't affordable to many renters."

Even if developers wanted to build lower-cost housing, the current climate makes that very difficult. Rising construction costs and long construction timelines are limiting supply.

"The next six months will be like the last six months, only worse," Associated Builders and Contractors Chief Economist Anirban Basu told Bisnow, referring to the rising cost of everything that goes into construction. "Construction spending has likely fallen over the past 12 months after accounting for inflation."

 

The squeeze on first-time homebuyers comes as the number of household formations increases, which drives demand for all housing, primarily rental since new households tend to skew younger with lower incomes and fewer savings necessary for down payments.

U.S. household formation took a hit during the early months of the pandemic as the economy contracted. Still, much like the broader economy, it bound ced back with gusto by 2021, according to the Federal Reserve.

Over the past year and a half, household formation has been primarily driven to return to the pre-pandemic rates at which younger adults lived with parents or other family members, the Fed notes. The rebound has been an essential contributor to a surge in housing demand.

From the end of 2019 through March 2022, men's rents and house prices have ballooned to record highs, even as permits for new residential construction have risen to their highest level since 2006, according to the Fed.

The current climate might make things challenging for renters who want to own, but owners stand to benefit as renters remain in place. Currently, that dynamic is reflected in multifamily valuations and vacancy rates.

MSCI reported in late June that apartment asset prices set an all-time high rate of growth rateMay, up 23.3% compared with the same month in 2021, with demand for apartments still rising as household formation increases.

RealPage reported in May that the national vacancy rate for investment-grade apartments ticked down in Q1 2022 from the previous quarter to 2.4%, the lowest quarterly vacancy rate since the company began tracking in 2000.

A more comprehensive measurement of apartment vacancy also showed that rates have been dropping since last year. The U.S. Census Bureau's rental vacancy rate for all apartments (buildings with five or more units) rose from 0.6% in the first quarter of 2022 to 7%.

Rents for professionally managed apartments rose 15.2% year-over-year in Q1 2022, RealPage reported, up 1.3 percentage points from the previous quarter. It is also the third consecutive quarter of double-digit rent growth on the national level.

With its shorter lease terms, multifamily (as well as self-storage and hotels) has a more remarkable ability to monetize rental increases, LEX Chief Financial Officer John Todd said.

"In this market environment, you have a millennial household formation that is bolstering the need for housing, which generally people can't substitute," Todd said.

"All that pent-up housing demand has been released, and that shift will be here to stay for several years," Todd said. "Being an owner or investor in a multifamily property is a perfect place."

But despite a positive outlook, New Standard Equities Chief Operating Officer Julie Blank said that multifamily owners should be cautious.

"Operators must take a strategic look at the demographics they are targeting and set their business plans according to real-life scenarios," she said. "What can residents afford? Business owners can't be swayed into thinking everybody can afford something better."

 

Source: Apartment Owners Likely To Reap Rewards Of Housing Market Headaches

https://www.creconsult.net/market-trends/apartment-owners-likely-to-reap-rewards-of-housing-market-headaches/

New study shows people would rather rent proven by the rise of the millionaire renter

It’s been reported that people are being priced out of homeownership, forced to settle for another lease, but that’s not the case across the board.

Homeownership is not a priority for everyone, and a new study by RentCafe found renting is preferable for many Millennials and Gen Zs—and it has nothing to do with cost.

With 43 million families living in apartments, the highest level in half a century, renting is popular even among high earners who are able to buy but prefer to rent instead. In fact, RentCafe’s recent analysis of IPUMS data reflected that the number of renters with annual incomes of over $150,000 grew by 82% between 2015 and 2020, faster than renters overall, who increased by 3.2% during the same period.

Now, from the 2.6 million high earners renting in the U.S. a new kind of tenant has risen: the millionaire renter, as the number of renter households with incomes of more than $1 million has tripled since 2015.

When looking at the total number of high-income renter households, New York is the “it” place for renters that earn over $150,000 with nearly 300,000 such households in 2020. Los Angeles is just behind New York with 82,655 high-income renter households, followed by San Francisco and Chicago with 80,020 and 51,000, respectively.

In fact, Chicago had a 97% increase in high-income renter households from 2015 to 2020, one of the biggest in the U.S.

Source: New study shows people would rather rent, proven by the rise of the “millionaire renter” – REJournals

https://www.creconsult.net/market-trends/new-study-shows-people-would-rather-rent-proven-by-the-rise-of-the-millionaire-renter/

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Cushman & Wakefield, Marcus & Millichap Quietly Cut Jobs Last Year As Business Slowed

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Two of the nation's largest brokerage firms saved millions of dollars by quietly laying off workers at the end of last year.

Cushman & Wakefield and Marcus & Millichap reported headcount reductions in their fourth-quarter earnings reports. However, details regarding the number of layoffs and which departments were most impacted were scant.

Cushman & Wakefield cut $24.4M in operating and administrative expenses in Q4 primarily through lowered employment costs. The firm also reported an increase of $800K in restructuring changes, which was linked to severance payouts.

Marcus & Millichap's workforce shrunk by 5% last year, with the majority of turnover concentrated among employees who had been with the firm for one to three years, CEO Hessam Nadji said during the firm's earnings call.

In December, the company tightened expenses by reducing headcount, Nadji said, though he stopped short of sharing how many employees were laid off.

The reduction at Marcus & Millichap was relegated to corporate staff, Vice President of Public Relations Gina Relva told Bisnow. She said that despite economic headwinds prompting some layoffs, the company has also hired new agents and loan originators.

"Marcus & Millichap remain focused on strategically managing controllable expenses while continuing to provide best-of-class services on behalf of our clients and sales professionals," Relva said in an email.

Cushman & Wakefield did not respond to Bisnow's request for comment.

A growing number of large brokerage firms have implemented cost-cutting measures following a steep decline in transactions and capital market activity in the latter half of 2022.

JLL reported spending $9.3M in severance costs in Q3 before laying off an unspecified number of workers in November. CBRE also confirmed plans to reduce expenses by $300M through staff reductions.

Those staff reductions are "largely done," a CBRE spokesperson told Bisnow Thursday following the firm's Q4 earnings call.

 

Read: eXp World Holdings Reports Q4 and Full-Year 2022 Results

 

Source: Cushman & Wakefield, Marcus & Millichap Quietly Cut Jobs Last Year As Business Slowed

https://www.creconsult.net/market-trends/cushman-wakefield-marcus-millichap-quietly-cut-jobs-last-year-as-business-slowed/

Reversing Pandemic Trend, Apartment Sizes Shrink As Developers Try To Boost Yield

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Rising interest rates and the proliferation of build-to-rent contributed to a decrease in the average size of U.S. apartment units in 2022 as developers chased yield after two years of pandemic-driven upticks.

“Cost" to develop has played more of a factor in the decrease than market location,” Yardi," I Matrix Senior Analyst and Manager of Business Intelligence Doug Ressler told Bisnow.

The average size of new apartments started in the United States last year came in at 887 SF, a 30 SF year-over-year decrease, according to RentCafé calculations, based on Yardi Matrix data.

It’s tIt'sirst decrease since the pandemic spurred the development of slightly larger units aimed at people working from home. But now, developers are figuring out how to build remote workspaces while keeping overall floor plans small, motivated by the need to outsmart a high interest-rate environment.

“Small"r apartment units can largely be attributed to changing floor plans and unit mixes,” Ress" er said. “These" two factors and minimalist living explain the decrease in apartment size across markets and cost trends.”

Coun"intuitively, work-from-home office space can shrink or at least not increase a unit'sunit'sll size, especially when it is built instead of more oversized bedrooms or storage plans. Access to green space or nearby amenities can also mean tenants don't need large units.

“Two-b"droom units have decreased from about 40%-plus of the total share of teams to 30% of total units,” Ress" er said. “The i"production of the single-family build-to-rent product, which accommodates larger families and three or more bedrooms configurations, may influence this trend.”

Butthehe decreases in unit size aren’t intake across the board, with some surprising changes coming in the countrcountry'sst-cost markets like New York City and San Francisco, where unit sizes crept up.

Apartments in Manhattan, for example, grew 19 SF, or 3% compared with a decade earlier, despite the borougborough'sation for minuscule domiciles. In San Francisco, the average unit size grew 52 SF, or 7%, from 2013, according to RentCafé, and in Los Angeles, renters had an average of 45 feet more space.

Still, the U.S. average is down as developers up the proportion of studios and one-bedroom apartments they develop. Indeed, 57% of the apartment units set last year were studios or one-bedrooms, RentCafé reports. In 2013, studios and one-bedroom units represented 50% of multifamily units.

“There" is a trend for smaller units as developers try to squeeze out more yield in the same amount of space given the current challenges with interest rates and hard-cost pricing,” NRPgroupup Vice President of Development Jason Mochizuki said.

“Oourou" projects, so far, we haven'haven'tdoing that yet. Still, as this year progresses and pro formas continue to get tighter, I can see some developers increasingly shrinking unit sizes,” Moch" Mizuki said.

In early February, NRP Group broke ground on South Tryon, a market-rate community in Charlotte, North Carolina, bringing 310 units, including a mix of one-, two- and three-bedroom apartments, with den floor plans available in one-bedroom units to accommodate post-pandemic work-from-home.

PTM Partners Managing Partner Michael Tillman said his company has been building units that are “more "efficiently sized” sinc" its inception, typically averaging 5% to 10% smaller than comparable developments. PTM is active in Florida and the mid-Atlantic.

“Our p"primary motivation for smaller unit sizes is to create a Class-A building that that's-accessible to a larger percentage of residents within a 1-mile radius of the property,” Till,"  said. “But w" also realized that the next generation of renters was spending more time in the common areas and utilizing those amenities. Thus we typically provide amenity spaces that are significantly larger in size and variety.”

Unit size shrank during a record year for the construction of new apartments.

Given the sharp rise in the cost of debt and continued higher costs of construction and labor, Tillman said one possible way to reduce costs is to reduce unit sizes. Still, not all markets are the same, and smaller unit sizes may not be commercially acceptable in specific needs where land is more readily available. Also, he noted that merely shrinking unit sizes doesn'doesn'tatically mean cost savings.

“You n" ed to consider unit layouts, appliance sizing, storage, and lighting,” Till,"  said. “For e"ample, a smaller unit may reduce the ability to have walk-in closets or larger furniture pieces, so built-ins and millwork might be necessary. Smaller units to reduce costs may not be the best solution.”

Some"developers say they aren'taren'ting their unit size yet, but acknowledge that market realities increasingly require more attention to design and construction details rather than geography.

“What ha"en'haven'tapartments shrunk in size, either during Covid or continuing to the present,” Dive"sified Properties Managing Partner Nicholas Minoia said. “As mattered of fact, the outer ring markets we serve are still seeing demand for somewhat larger units that include either a den or — minimally — a work-from-home area for employees working a hybrid schedule.”

Acti"e in most property types, Diversified ProperProperties'family development focuses on metro New York City, including outer ring communities and dense urban cores. Minoia acknowledges that supply chain delays persist and development costs are high.

“Still" we also recognize the need to balance these construction and financial realities with the space needs of renters in our markets,” Mino,"  said. “Looking"g ahead, developers will need to be even more hands-on in understanding the specific demands of the renters in their respective markets.”

 

 

Source: Reversing Pandemic Trend, Apartment Sizes Shrink As Developers Try To Boost Yield

https://www.creconsult.net/market-trends/reversing-pandemic-trend-apartment-sizes-shrink-as-developers-try-to-boost-yield/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

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Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/