Renter incomes continue to grow, but the pace is moderating ... and interestingly, the moderating pace of growth mirrors the trend in asking rents. Still, this is an encouraging trend for renter affordability -- with household incomes among new lease signers up 8.1% year-over-year in November.
This data is specific to market-rate, professionally managed apartments (which cater to mid- and upper-income renters) and looks at household incomes from lease applications versus the effective asking rents for new leases.
Of course, the sheer number of lease signers was significantly higher in 2021 than it is in 2022 -- given the historic wave of demand in 2021 followed by the big slowdown this year. That's a remarkable part of the story that hasn't gotten widespread notice... that the demand wave of 2021 was notable not only for its size, but also the big incomes behind those numbers. It's also a big reason why rent collections have held up consistently better in this segment of the rental market than what Census HPS has shown from the broader rental pool.
Remember this data (neither rent nor income) will match Census data on the overall population, since market-rate professionally managed apartments cater to mid- and upper-income renters
Source: https://www.linkedin.com/posts/jay-parsons-a7a6656_renters-apartments-multifamily-activity-7006272451416391681-FMUW?utm_source=share&utm_medium=member_desktop
https://www.creconsult.net/market-trends/renter-incomes-continue-to-grow-but-the-pace-is-moderating/
A seller's net proceeds sheet is a document that estimates the amount of money a seller will receive after all closing costs have been paid. The amount of the net proceeds will vary depending on the purchase price of the property, the seller's existing mortgage balance, the amount of real estate taxes due, and other closing costs.
The following factors affect the net proceeds of a sale:
The net proceeds of a sale are important to capital gains tax exposure because they determine the amount of profit that is subject to tax. The seller's taxable gain is calculated by subtracting the adjusted basis of the property from the net proceeds. The adjusted basis is the original purchase price of the property plus the cost of any improvements that have been made.
For example, if a seller sells a property for $500,000 and has an adjusted basis of $300,000, then the seller's taxable gain is $200,000. The seller will owe capital gains tax on this amount.
The amount of capital gains tax that a seller owes will depend on the seller's income tax bracket and the length of time that the property was held. For example, a seller in the 22% income tax bracket who held the property for less than one year will owe a capital gains tax of 22% on the $200,000 gain.
Selling a property can be a profitable transaction, but it is important to understand the factors that affect the net proceeds and how this can impact your capital gains tax exposure. By understanding these factors, you can make informed decisions about when to sell your property and how to minimize your tax liability.
Here are some tips for sellers to minimize their capital gains tax exposure:
By following these tips, you can minimize your capital gains tax exposure and keep more of the money you earn from selling your property.
https://www.creconsult.net/market-trends/what-is-an-estimated-net-proceeds-sheet-and-how-is-this-important-to-estimate-capital-gains-tax-exposure/
Real Estate Syndication is the phrase used to describe the concept of pooling the resources of and bringing together several different real estate investors in order to do a large commercial deal. In this video, you'll discover the basics of real estate syndication; from the 4 most important things to know when raising capital, to the 3 way you can profit from syndicating real estate, how to find private investors, how to convince investors to invest with you, the top 3 questions all investors will ask you (and how to answer them) along with a very detailed real deal example.
Real estate syndication is when you raise capital from private individuals. It is an effective way for investors to pool their financial resources together to invest in properties much bigger than they could afford on their own. If you were to find an outstanding deal but didn't have the funds to afford the down payment, you could syndicate it by finding other people to help fund the deal. Or, if you had the down payment but no real experience or confidence to operate the property on your own, you could use real estate syndication to get experienced partners to help with the project. Real estate syndication allows you to close more deals because it allows you to leverage partnerships and other financial resources.
You can even use real estate syndication for retirement planning. Many people, including myself, use syndication as our pension. You might want to consider doing real estate syndication because you can make a nice amount of monthly income through asset management and acquisition fees, or if you are the agent, you can earn lots of commission from selling your own deals.
It is important to relax and be yourself. I want you to be genuinely interested in the potential investor you are dealing with. Be sure to call them back when you say you're going to call them back and do the things you tell them you are going to do. Commercial real estate is a relationship-based business. If you do not understand that, you're not going to be successful in raising capital.
When you’re raising capital, I want you to have the mentality that your grandmother is the person investing in your deal and that she is doing so with her life savings. If this is the mentality you have, then you will be very careful with the money and not put it towards any iffy deals.
Real estate syndication is about compliance with the strict laws, rules, and regulations that are set up to protect the investor. Before syndicating a deal, make sure you understand those laws and regulations.
Do not try to set up a real estate syndication without the help of a good attorney. An experienced attorney will make sure you have the exact documents you need, give you the lawful disclosures you need, and provide legal protection when you close a deal with a private investor.
If you were to forget just one of these things, you could open yourself up to a lawsuit or worse. There is a government agency called the SEC, the Security and Exchange Commission, and their purpose is to protect investors from dangerous or illegal financial practices or fraud by requiring full and accurate financial disclosures by you, the syndicator. This is something an attorney can handle for you.
A syndicator of real estate will receive compensation for finding the deal, doing the due diligence, and even structuring the deal. These fees can range anywhere from 1% to 5% of the project size. For example, if it was a 5 million dollar deal, 5% of that is $250,000 dollars. Or you can choose a flat fee, like 25 or 50,000 dollars. These fees are generally negotiable with the investors that you bring into the deal, but make sure your fees aren't too high, or the investors may be leery of investing with you.
The asset management fees are generally 1 to 5% of your gross monthly income on the property. To get an asset management fee, your role is to manage the partnership and deal syndication. You must send out notices with updates for investors, oversee property management, and help organize tax preparation. This role does not include property management, it is just asset management, so you are overseeing the property management and the entire structure of the partnership. When you take over all of these roles, you're entitled to a monthly asset management fee.
You can be compensated through equity participation in a project, which is basically your ownership stake or your equity stake in a project. It can range between 5% ownership to 50% ownership, depending on your experience and what you bring to the deal. Are you bringing money and experience, or just money, or just experience?
You can also participate in the equity splits on the back end. On the back-end means, when you sell the property, there's a split between you and the investors that decides how much you are going to give them and how much you are going to keep for yourself. For example, your deal might stipulate that 50% of the profits go to you and 50% go to the investor when the deal sells. This allows you to almost double or triple, an investor's rate of return on investment.
When you are talking to a potential investor, there are three things going through their mind.
1. They’re thinking about you "Can I trust you?"
2. They’re thinking about the deal. "Is it a good deal?
3. They’re thinking about the risk. "How risky is this deal?
If you are a beginner investor, your humble beginnings will probably be the same as mine. You have to start someplace, so start by going to real estate club meetings, like REIA meetings and meetup.com, or other get-togethers that are real estate meetings. You can also check out Chamber of Commerce meetings, but I suggest you start in your inner circles, such as your friends, family, coworkers, and former coworkers.
Now, I know some of you might be thinking, "Peter, I don't know anyone with money. All of my friends and family are broke, and I'm too embarrassed to ask my coworkers.” This is a lame excuse.
The truth is you do not know anyone with money YET. There is a lot more money out there today than there are deals. Deals are difficult to find, but money follows good deals.
Your job is to put together good deals, and the money will follow it.
I want you to make a list of 24 people you know that have money or might know people with money. Once you have this list, I want you to contact them and send them the executive summary. An executive summary is a one-page summary of the deal. If you go onto YouTube and look at this video called "The Basics of Real Estate Syndication," there is a link there that you can download, and it's the exact same copy our students use that we send out to potential investors, just to gauge their interest.
If you send this out to 24 people, out of those 24 people, 12 will look at it. That means the other 12 are not even going to read it. Out of the 12 that did read it, 6 are going to show some interest, and the other 6 are not going to be interested. Out of the 6 that show interest, 3 are going to want to talk to you, and out of those 3, 1 will invest. The ratio for beginners is a 24-to-1 ratio. There's no shortcut because no one is going to hand you, investors. You have to go out and find them yourself.
The short answer is you need double, but here's a long answer. If you need 250,000 dollars for a down payment, then your goal as a beginning syndicator is to raise 500,000 dollars.
Why?
It's because people will be people. Some will back out, some aren't ready, and some just don't want to do it. So to raise $250,000 dollars, you need commitments of double, $500,000 dollars.
If you are a beginner, find the investors first. If you are a seasoned investor, the deal comes first.
When you are sitting face to face with investors, or you have them on the phone, they are wondering, "Can I trust you?", "Is this a good deal?", and "Is this a risky deal?" I'm going to address you, the deal, and the risk in seven components that you must have to convince an investor to invest with you. These seven things will position you for the investor to say yes.
It must be priced under market value, so people know it's a good deal.
There's a potential to get higher lease rates because in commercial real estate, as your income goes up, so does your property value, so if your deal has that attribute to it, it's a good one.
Your ROI must be better than what they're getting with their IRA or their 401(k), so make sure you have excellent cash and cash return. I would suggest a minimum of 8%.
This means that the investment must be in a good neighborhood with good job statistics. Basically, the area of the market must be capable of sustaining your investment for years to come.
If your exit strategy is too aggressive, they will see that as too risky, and they will not invest.
It doesn't have to be your track record. You can bring in someone else's track record and make them a partner in the deal.
As I mentioned before, you can go on to my blog "Basics of Real Estate Syndication," to view this executive summary.
If you have those seven things, you put yourself in the best position for the investor to say yes. I'm going to leave you with one word of wisdom on convincing your investor to invest with you. The word of wisdom is to start small. Don't start off by having to raise millions of dollars. Make it easy for yourself.
The answer is no. There is a risk in every investment on the planet, and it's not just the investment; it's everything. Investors lost a lot of money in 401(k) and stocks in the last market bust. Let them know that the investment is secured by the property, which is in an LLC. Property insurance will protect them against loss, fire loss, flood loss, vandalism, and things like that, so they'll have that security, but you can't guarantee them anything.
It depends on the exit strategy. When you meet your investor, have the exit strategy in terms of years already figured out. For example, you can tell them, "The deal goes on for five years, then I am planning on selling the property."" It’s deal-dependent, but most investors don't want to see their money tied up for more than five years, so typically, an exit strategy is three to five years.
The first answer out of your mouth should be, "Please contact your CPA to get advice on tax benefits because I am not a tax professional.” You can also let them know that the IRS will probably call them a passive investor; therefore, they would not qualify for tax write-offs directly from the property.
The cash flow they receive might be sheltered by the LLC's write-offs, such as property expenses and depreciation. This means that it's possible a good portion of their cashflow won't be taxed. It's going to be sheltered by the LLC's expenses, but each deal is different, so check with your CPA.
This example is from a student in our protégé program who purchased a 24-unit apartment for 925,000 dollars. The down payment was $200,000 dollars, and he was able to raise the down payment from two investors. The great thing about this deal is the rents can be raised by 150 dollars per unit. That's substantial because the seller lives in another state and has virtually no debt on the property, so there's no large mortgage. The seller has been getting steady cash flow but kept the rents low, so he has not optimized the rents. If you do the math, $150 per unit x 24 units is $3,600 income per month, or multiply that by 12 months, that's $43,200 more per year.
In this case, if I divide my additional income of $43,200 by 8%, my 8 cap property value increase is $540,000. If I were to take that $540,000 increase in value and add it to the purchase price of $925,000, the apartment building is now worth $1,465,000. The question is, "How did he structure the deal with his investors?"
He agreed to pay his investors an 8% return per year for the use of their money for 5 years, and then at the end of 5 years, he's going to sell the property and do an equity split with them. He's going to give them 25% of the profits when he sells the property.
His exit strategy is to complete the rent increases over the next 18 months and then do a cash-out refi and pull out all of the investor money to pay back the investors. In that case, investors would have their money back, but he wants the investors to maintain a small piece of ownership, so they'll get checks every quarter. The investors would have no money in, but they'll still be getting money from the property. This increases the chances that the investors would be willing to invest in him again. So that's how he structured his deal, kept it nice and short and simple.
Source: Basics of Real Estate Syndication
https://www.creconsult.net/market-trends/basics-of-real-estate-syndication/
The Midwest offers several advantages compared to other U.S. regions, including its diverse economy, growing population, and stable housing market. All of which makes the region an excellent place for investors looking to expand their portfolios.
Why Invest in the Midwest?
The level of transaction activity in the multifamily market can be influenced by factors such as population growth, government regulations, property taxes, income levels, supply trends, real estate regulations, and more. In the past, larger metros like Chicago and Minneapolis attracted more capital to the Midwest because they offered high levels of the listed market drivers. However, recently, secondary markets have become popular as well, indicating that there is a strong demand for multifamily properties that are well-located.
The region has experienced steady economic growth and low unemployment rates, which provide a stable market for commercial real estate services. The cost of living and doing business is lower in the Midwest than in other parts of the country, leading to lower property prices and higher rental yields.
Additionally, developers are finding it easier to acquire land in the Midwest’s secondary markets and receive the necessary permits to build in a timely manner due to lower barriers to entry compared to other regions.
The region’s transportation infrastructure, including highways, airports, and railways, makes the Midwest a strategic location for businesses and residents. Finally, the region’s diverse economy, with a mix of manufacturing, agriculture, and healthcare industries, ensures a stable demand for commercial real estate.
The Midwest’s growing population, with approximately 68 million residents, creates strong rental housing demand. The median household income for the Midwest was $66,143, according to the 2021 Census Report. The demand for rentals is further boosted by the fact that many people prefer renting to owning due to financial or lifestyle reasons. In fact, homeownership has declined nationwide, with 36 percent of American households now renting instead of owning.
The Midwest generally has more tax-friendly regulations for investors, making the region more attractive. South Dakota is income tax-free, while other Midwest states boast some of the lowest state income tax rates, such as Indiana at 3.16 percent and Michigan at 4.25 percent. Capital gains taxes are also lower in the Midwest compared to coastal markets. North Dakota, with a capital gains rate of 2.90 percent compared to California’s 13.30 percent, is one Midwest state worth highlighting.
Key Midwest Players
Multifamily real estate has been booming in the Midwest in recent years, with several states experiencing strong growth in the rental property market. Chicago has been the epicenter of multifamily investment in Illinois and is currently one of the leading markets for new deliveries. Smaller cities such as Rockford and Aurora have begun providing more affordable rental options. Ohio has seen investment in the cities of Cleveland and Columbus, focusing on redeveloping historic buildings. Columbus, in particular, experienced substantial growth with an expanding downtown to attract young professionals to the area.
In Minnesota, the Twin Cities of Minneapolis and St. Paul have been a hotbed of multifamily investment, with a high demand for rental properties and substantial capital investment. Meanwhile, in Missouri, St. Louis has experienced significant investment in the downtown area and surrounding neighborhoods due to the revitalization brought by the growing tech industry and talent pool. On the other hand, Kansas City has been focusing on suburban construction.
Overall, the Midwest has experienced substantial growth in the multifamily real estate market, driven by a growing population, a robust economy, and a focus on urban revitalization. With a mix of large and small cities experiencing significant development, the region offers a range of opportunities for investors and renters alike.
Illinois – Chicago, Rockford, and Peoria
From Q1 2022 to Q1 2023, around 5,600 units were absorbed in Chicago, which exceeds the average annual net absorption of 4,100 units for the market. Strong demand has led to a decrease in vacancies, further contributing to rent growth in the market. Year-over-year rent gains posted a 4.1 percent increase. The area experienced $5 billion in annual sales volume with an average cap rate of 5.7 percent from Q1 2022 to Q1 2023. Chicago’s two largest submarkets, Downtown and North Lakefront, experienced a high percentage of sales from Q1 2022 to Q1 2023.
In Q1 2023, apartment rents in the Rockford market increased by an annual rate of 5.3 percent. There are 33 units under construction in Rockford, the largest under-construction pipeline in over three years. As of Q1 2023, vacancies in the metro area were slightly below the 10-year average but have remained relatively stable from Q1 2022 to Q4 2022; currently, the vacancy rate is 3.5 percent.
Apartment rents in the Peoria market increased by an annual rate of 9.2 percent in Q1 2023. The current market cap rate decreased since last year to seven percent. This is the lowest rate observed in Peoria in the previous five years, although the city’s cap rate is typically higher than in other regions. The area has had an annual sales volume of $118 million within the last 12 months. Within the past three years, 390 units have been delivered, a cumulative inventory expansion of 3.4 percent, and 160 units are currently under construction.
Ohio – Cleveland and Columbus
The Cleveland market experienced its most active year for deliveries since 2015, adding over 2,000 units in 2022. From Q1 2022 to Q1 2023, total multifamily sales in Cleveland amounted to $159 million, approximately 16 percent higher than the annual average, with a market cap rate of 7.5 percent. The average monthly asking rent in Cleveland is $1,100 per unit, making it a cost-effective market for renters.
From Q1 2022 to Q1 2023, multifamily sales in Columbus amounted to $2.0 billion, which is almost twice the prior three-year average. The majority of development and delivery activity within the submarket occurs in neighborhoods that are adjacent to downtown Columbus and surrounding Ohio State University, playing a significant role in contributing to the submarket’s strong overall performance. In the second half of 2022, quarterly volume reached record levels, with more than $650 million worth of transactions occurring in the third and fourth quarters combined. The market’s affordability and potential for higher yields likely contribute to the substantial sales volume in recent months. ¬¬¬
Minnesota – Minneapolis, Rochester, St. Cloud
Minneapolis achieved an all-time high in annual net deliveries for the fifth consecutive year, with 11,000 units added in 2022. This number is approximately 15 percent higher than the previous record set in 2021. In 2022, the annual sales volume in Minneapolis reached the second-highest level on record, totaling $2.1 billion. Minneapolis’ multifamily investment market has remained strong and durable, thanks to investments made by all types of buyers, including private and institutional capital. These investors are focusing on areas with lower volatility and higher yields that are less vulnerable to the potential impact of rising interest rates and a potential recession in 2023.
In Q1 2023, apartment rental rates in the Rochester market increased at an annual rate of 2.4 percent, and over the past three years, they have increased by an average annual rate of 3.6 percent. There are 940 units under construction, the highest under-construction pipeline in more than three years.
The St. Cloud rental market saw a 3.3 percent rise in apartment rents in Q1 2023, with an average yearly increase of 3.8 percent in the past three years. Home to a state university, the area experienced a 12 month sales volume of $92 million and a market cap rate of 6.7 percent. Additionally, there are currently 210 units being constructed in addition to the 670 units completed in the past three years.
Missouri – St. Louis, Kansas City, Springfield
Over the past year, the St. Louis area has delivered 3,700 units, significantly higher than the annual average of 2,300 units over the past five years. The price per unit is $140,000, representing a 48 percent rise in the past five years. The region’s multifamily market is still considered affordable, with rental rates 30 percent lower than the national average, at $1,140 per month.
The number of units in the Kansas City construction pipeline is 7,900, which accounts for 4.6 percent of the total inventory, one of the highest levels in the Midwest. The 12-month total sales volume is $1.1 billion, with more than half contributed by the sale of Class A properties.
Springfield’s population has increased by 19,000 individuals in the last five years, representing a four percent growth rate. During this time, the number of households in Springfield has grown by 9.7 percent. The yearly sales volume has averaged $49.0 million in the past five years, with a peak investment volume of $160 million during that period. From Q1 2022 to Q1 2023, $1.9 million of multifamily assets have been sold.
Takeaways
Overall, investing in multifamily properties in the Midwest can be a good option for those looking for a stable, income-producing investment with the potential for long-term growth. Many units are currently underway throughout the region, posing additional opportunities for years to come. As more investors move to this area to take advantage of the low cost of living, high demand, and steady economic growth, the region is set to thrive. Multifamily remains resilient despite economic volatility, and Midwest markets are excellent examples of adaptability in times of high-interest rates and slowing rent growth.
Source: Midwest spotlight: A look at multifamily performance
https://www.creconsult.net/market-trends/midwest-spotlight-a-look-at-multifamily-performance/
Many in the commercial real estate world started the year with the global ripple effects of the omicron variant top of mind. But as pandemic restrictions in much of the world have lifted – with the notable exception of China – new concerns have come to dominate conversations about CRE.
While some in the world of commercial real estate predicted economic headwinds after 2021's surprisingly strong year, few were prepared for the volatility of 2022.
Chief among them is the Federal Reserve's rapid pace of interest rate hikes in response to historic inflation, which appears to be finally cooling from this year's record highs.
The factors leading to runaway inflation, including Russia’s invasion of Ukraine, continue to play a role in the real estate sector in ways that weren’t foreseen in January.
Some early predictions proved incorrect: Despite the seemingly mounting political consensus, 1031 exchanges and the carried interest tax loophole were not ended by President Joe Biden’s marquee infrastructure bill. And despite continued industrial demand and the mushiness of today’s office market, developers have yet to trade suburban office parks for warehouses.
In January, Bisnow polled CRE experts for their takes on what would be the dominant trends of 2022. Below, we break down what they got right and what they missed.
Correct prediction No. 1: Rising inflation will compound rising construction costs, resulting in a slowdown or cancellation of some developments.
One of the most dominant storylines this year was inflation reaching the highest levels in decades, fueled in part by rising housing prices. The rapid increase in the cost of goods this year forced construction projects with tight budgets back to the drawing board.
In January, Behring Co. founder and CEO Colin Behring correctly predicted that inflation would mix with already rising costs for materials and labor to create bracing construction headwinds, adding: “Projects that were already struggling will be shelved for the time being.”
But Behring also predicted that “only certain areas and asset types will be affected materially,” which proved too optimistic of an outlook. Even the “darlings of real estate,” industrial and multifamily properties, saw their outlooks dim this year due to persistent inflation, Moody’s Senior Economist and Director of Economic Research Thomas LaSalvia told Bisnow in September.
The true effects of today’s difficult economic environment are expected to ripple into 2023. Dodge Construction Network expects the number of multifamily units under construction to be up 16% in 2022 compared to the previous year, but it expects a 9% decline in 2023 due to the effects of rising costs and turbulence.
Correct prediction No. 2: The hotel market will hit new records in 2022.
Revenue per available room and average daily rates for hotels nationwide have surpassed pre-pandemic records, propelling the sector to an improbably strong year. Between 2020 and 2021, transaction volume rose from $8B to roughly $40B, and the sector appears poised to come close to $40B again this year, if not a bit below it, said Wei Xie, the East Region research lead for JLL.
That recovery, which Xie called “remarkable,” emphatically outpaced the hotel sector’s recovery following 9/11 and the Great Financial Crisis, despite the choppy credit markets in the latter half of this year.
“It took a substantially longer time period to go from the bottom to the peak” in previous crises, Xie said. “I think it's the remarkable speed in terms of recovery, which is driven by the fundamentals.”
The hotel investment sales market appears to be cooling. Despite the sheer volume of trades this year surpassing 2019 levels, the third quarter began to see properties selling at discounts compared to high points set earlier this year, according to a report from LW Hospitality Advisors. The firm predicted a near-term downward pressure on values, though it noted the cost of borrowed funds remained relatively low.
“A tremendous amount of equity earmarked towards the lodging sector remains available, and asset sales are anticipated to continue at a robust albeit reduced pace,” the report found.
Whiff No. 1: Industrial developers will target large office campuses as new sources of industrial development opportunities.
151 and 153 Taylor St. in Littleton, Massachusetts, where an office building was demolished and replaced with an Amazon distribution center.
Despite rising distress in gateway office markets around the country, industrial developers have yet to target such properties for redevelopment in a concerted way. In fact, the industrial market faced headwinds of its own, in part because e-commerce giant Amazon acknowledged it had overbuilt capacity by late summer. The subsequent pullback impacted dozens of properties and led to anger in cities like Philadelphia that had bet on Amazon as a job creator.
Even in the mid-Atlantic region centered around Washington, D.C., which is facing some of the most dire warnings about its central business district of any major market in the country, there were zero industrial adaptive reuse projects of large office campuses, according to CBRE Mid-Atlantic Research Director Stephanie Jennings. Jennings said developers are instead targeting struggling retail properties, which are more plentiful along the Baltimore-Washington corridor and elsewhere.
In many places, an office-to-industrial conversion would likely require a zoning change. That is something Xie said municipalities aren't incentivized to do, given the economic benefits of office workers.
Whiff No. 2: The end of 1031 exchanges and the carried interest tax loophole will cause headwinds for CRE.
In the end, it was the great threat that wasn’t — despite early drafts of the Inflation Reduction Act of 2022 removing the carried interest tax loophole often used by some of the largest CRE investors, a proposal that would have closed the loophole was carved out of the final version of the bill thanks to an agreement with Arizona Sen. Kyrsten Sinema.
1031 exchanges were also safe after the world of commercial real estate rallied in favor of the longtime program, ensuring firms can continue to avoid capital gains taxes on certain sales.
And despite a prediction that new spending from the infrastructure and Covid relief bills would have little effect on commercial real estate, there may be some positive knock-on effects as federal dollars are disbursed, said Collete English Dixon, executive director of the Marshall Bennett Institute of Real Estate at Roosevelt University.
“Infrastructure that is used to improve transit systems and water systems and things like that, those are ... improving the environment in which the real estate industry operates,” Dixon said.
Surprise No. 1: The Russia-Ukraine War impacted energy prices, supply chains, and commercial real estate writ large.
CRE professionals could be forgiven for failing to predict Russia’s invasion of Ukraine early this year, but pricing in the war’s costs as it drags on has become unavoidable. Impacts on the supply chain and energy, in particular, have helped fuel inflation and negatively impacted property types like data centers.
Many countries around the world moved quickly after the invasion to impose sanctions on Russian billionaires, seizing properties in places as disparate as Baton Rouge, Louisiana, and London. The war also forced companies to make decisions about doing business in Russia, with several firms, including CBRE, Savills, and Knight Frank, shutting down their Russian offices.
The flight of millions of Ukrainian refugees has also put a strain on local housing markets. In Ireland, the influx of roughly 200,000 Ukrainians put pressure on lawmakers to consider a vacant homes tax and temporarily house refugees in camps. In the United States, a nonprofit network that formed first to handle an influx of Afghan refugees broadened its embrace to welcome Ukrainian refugees, sometimes bending the rules for the sake of accommodation.
Surprise No. 2: The Federal Reserve went on an aggressive interest rate hiking campaign.
Though some saw rising inflation on the horizon, few predicted how forcefully the Federal Reserve has responded. The streak of four consecutive increases of the federal funds rate by 75 basis points is the most aggressive campaign of rate hikes since the stagflation era of the 1970s and 1980s. It has already contributed to a 13% decline in values across U.S. commercial real estate.
Roosevelt University's English Dixon said the market had already begun pricing some level of inflation and interest rate hikes into deals, acknowledging the hypercharged market in 2021 was at least in part a pandemic-era fluke. But she said the Fed caught the industry off guard.
“The extent of that increase, how big it was, how consistent it was, it was like, ‘Whoa, give me a second here, I've got to catch my breath,’” English Dixon said. “It hit everybody.”
There are some signs the campaign may be easing as the year winds down. The year-over-year increase in the consumer price index was 7.7% in October, down from 8.2% the month prior, a sign that the higher interest rates may be starting to have the Fed’s desired effect on inflation. That has led some to predict that the Fed may not institute another 75 basis point hike at its next meeting on Dec. 13 and 14.
There are also some signs that Federal Reserve Chairman Jerome Powell may be willing to back off his aggressive interest rate campaign soon as the market adjusts, English Dixon said. If so, that would make the aggressive campaign that began in March a defining but unique characteristic of 2022.
“I think a lot of times, you just consider how many levers you have and if that was the only one you think is effective. But it was just too harsh,” English Dixon said. “I think it will be unique this year. At least, God, I hope so.”
Source: From Inflation To War Here’s What CRE Experts Saw Coming (And Didn’t) In 2022
https://www.creconsult.net/market-trends/from-inflation-to-war-heres-what-cre-experts-saw-coming-and-didnt-in-2022/
