The Dangers of Selling Commercial Property Too Late

The last downturn

cost those who chose to sell commercial property an average of

30.3% of their property value

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Reason #1

Why people sell commercial property too late:

Complacency

 

Complacency is the most dangerous state to ignore.

It’s the moment before the market corrects and values decline. When the market goes through this initial correction, our natural tendency is to be complacent because initial corrections actually look like a cool-off period.

Then we expect the market to pick up again and continue with its growth phase.

But, the market continues to deteriorate and worries creep in as we wonder what is going on. Next, it is normal to say to yourself that your investments are good ones that they’ll ultimately come back.

When the market continues to soften until it seems there is no hope in coming back, that’s the absolute bottom of the market and the worst time to sell.

 

This point of capitulation is one of surrender and of asking how the government could let something like this happen.

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Reason #2

Why people sell commercial property too late:

Ownership and Identity

 

In order to avoid loss, people will overvalue what they own.

That is what Richard Taylor, Daniel Kahneman, and Jack L. Knetsch identified with the Endowment Effect. In fact, Kahneman and Knetsch won the Nobel Peace Prize for their research in this area of behavioral economics.

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It’s normal for people to overvalue what they own.

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In a study with Cornell undergrads, broken into groups and given identical coffee cups, Kahneman and Knetsch told one group to value the cups they owned and the other group to value the cups they would purchase.

They found the undergrads with the coffee cups were unwilling to sell their coffee cups for less than $5.25 while their less fortunate peers were unwilling to pay more than $2.25 to $2.75.

But, it was Carey Morewedge’s research into the Endowment Effect that revealed that it’s not loss aversion that leads to overvaluation, it’s ownership and identity.

Morewedge found that it’s our sense of possession that creates the feeling of an object being mine, which then becomes a part of our identity.

 

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Reason #3

Why people sell commercial property too late:

Loss Aversion

 

Why is it so difficult to sell commercial property in a market decline?

According to Brafman and Brafman, authors of Sway: The Irresistible Pull of Irrational Behavior people will go to great lengths to avoid perceived losses.

What’s more, people also succumb to their will to recover what once was.  They will spend whatever it takes not to lose, be it time, money, or emotional resources.

Imagine watching someone playing craps in Las Vegas. When they are on a roll, taking in their winnings, they race through the growth phase, reaching the peak of the game.

They feel ecstatic.

But what happens when the tide turns and they start to lose?

They enter the complacency stage, call it a short turn of bad luck, and keep playing.  They believe they will return to the top. But their bad luck continues.

By waiting to avoid losses, people hold off and then sell at the wrong time — maximizing their losses.

 

They lose their winnings, keep playing and generate losses. They would rather hold onto the idea of getting back to where they were at almost any cost than realizing their loss and moving on to another opportunity.

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Reason #4

Why people sell commercial property too late:

Self Reliance Time Traps

Time Trap #1: Self-Education

 

People will self educate online because it is free and immediately available. A review of the search term on Google for “commercial real estate trends” returned 152 million results. A search for “commercial real estate trends YouTube” turned up 310 million results!

No doubt, an abundance of free information in the form of market data, blogs, market reports, and online opinions on what’s happening in the market is available.

Time Trap #2: Friends, Family, and Non-Commercial Advisors

 

When we aren’t sure what to do, we often consult friends, family, and non-commercial real estate advisors for input. Unfortunately, these people will not want to be the ones to say sell because it is easier to say no and risk being wrong than to say yes and risk not being right.

Plus, most of these folks will not have the data that you have seen here. These people are more likely to share anecdote based advice like “My friend made a killing in real estate. You should hold on, it will come back.” Remember, people who made this mistake lost in 2008-2010.

Time Trap #3: Hire a Traditional Broker

 

It is easy to find a traditional broker, given that 1 in 164 people in the United States today have a real estate license. According to the National Association of Realtors, there are about 2 million active real estate licensees in the United States.

The problem is that most traditional brokers do not specialize in Commercial Real Estate, Investment Sales and further specialization by property type. 

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eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.

We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.

 

 

https://www.creconsult.net/market-trends/the-dangers-of-selling-commercial-property-too-late/

Rent prices feeling higher than ever? It’s nothing compared to last year

For prospective tenants, rent prices feel higher than ever before. But if you compare the numbers to this time last year? They’re reportedly lower, based on new data from Rentometer.

In fact, based on a recent rent report by Rentometer, Chicago rent prices for all three bedroom counts (one bedroom, two bedroom and three bedroom) have decreased since this period last year.

The average rent in Q1 2023 for a three-bedroom unit was $2,287, compared to $2,252 in Q1 2022 (-2% YOY) while the average rent in Q1 2023 for a two-bedroom unit was $1,849, compared to $1,829 in Q1 2022 (-2% YOY).

And the bedroom count that reflected the most change year over year? One-bedroom. Rentometer reported a -9% decrease, with the average rent for a unit of this type being $1,392 in Q1 2023, compared to $1,528 in Q1 2022.

Source: Rent prices feeling higher than ever? It’s nothing compared to last year

https://www.creconsult.net/market-trends/rent-prices-feeling-higher-than-ever-its-nothing-compared-to-last-year/

How inflation is measured: 3 examples

1. Housing

Housing is perhaps the most consequential category in the consumer price index, a key inflation barometer.

Housing is the largest expense for an average U.S. household. The "shelter" category — which measures costs for renters and homeowners — therefore accounts for more than a third of the CPI weighting, the most of any category.

"Every single component [of the CPI] has some idiosyncratic measurement issue," Zandi said. "But housing is particularly important. It drives a lot of the inflation train."

Price changes in "shelter" were generally muted before the pandemic, economists said. But Covid-19 warped that dynamic: Housing costs shot up but have slowed and even started to fall in some areas, economists said.

Nationally, Americans saw rents grow by 5% in April from a year earlier, to about $2,018 a month on average nationally, according to Zillow Observed Rent Index data. That's a significant slowdown from 17% growth during the prior year, from April 2021 to April 2022.

Here's the problem: The CPI doesn't capture those price trends in real time.

It operates with a substantial lag, meaning it can take six months to a year for a decline (or increase) in current housing prices to fully feed through to inflation data, economists said.

"It's not necessarily a particularly accurate gauge of what's going on in the housing market right now," said Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Here's the reason for the lag: The U.S. Bureau of Labor Statistics collects rent data from sample households every six months. The BLS also divides these sample households into six different subgroups (called "panels") and staggers when it collects data for each. Per the BLS, rents for Panel 1 are collected in January and July; Panel 2, in February and August, and so on.

 

That means it can take a year or so to collect data from all the subgroups.

Overall inflation is expected to slow sharply during the second half of the year as the CPI incorporates the housing price cooldown, economists said.

"It's almost as much of a certainty as you can get, really," Hunter said.

There's an additional housing measurement quirk: The BLS tries to assess price changes for homeowners as well as renters, in a subcategory called "owners' equivalent rent."

The measure is essentially a survey that reflects the price homeowners believe they could get if they were to rent their home. While somewhat tied to market rents, homeowners aren't necessarily feeling those inflationary pressures — especially those who own their homes or have a fixed mortgage, Zandi said.

2. Health insurance

Health insurance prices have been falling by about 4% a month since October, according to CPI data.

Consumers' out-of-pocket costs haven't necessarily dropped, though.

For example, the average person with family insurance coverage through an employer-sponsored health plan saw premiums rise to $509 a month in 2022 from $497 in 2021, according to the Kaiser Family Foundation.

Why the discrepancy?

The government doesn't calculate health insurance inflation by measuring consumers' direct costs, such as monthly premiums. It's hard to assess the value consumers get for those premiums; costs may go up, but consumers don't necessarily get more bang for their buck. An increase in premiums might more reflect poorer underlying health of the insured population than better policy benefits, for example.

So, the government instead measures costs indirectly, based partly on health insurers' profits. Profit margins serve as a proxy of consumer prices.

Early in the Covid-19 pandemic, health insurers' profits jumped. Consumers were still paying premiums but were generally disallowed from visiting doctors or hospitals for elective procedures.

Now, consumers are using their insurance more often. Insurers' aggregate profits shrank in 2021 relative to 2020 since they paid out more insurance benefits — and hence the monthly inflation readings flipped negative.

The BLS updates its profit-related calculations once a year, in October.

Health insurance inflation readings may flip positive in fall 2023 and persist into 2024 due to this dynamic, Zandi said. Health care may be among the few consumer categories notching higher inflation toward year's end when most other categories have been slowing, he said.

3. Consumer electronics

Consumer electronics — like those for smartphones, TVs and computers — were among the few categories that saw deflated prices in 2022.

That trend has continued into 2023: Smartphone prices have declined by 20% in the year through April, for example, according to the CPI.

However, phone prices haven't exactly fallen at the store.

"The consumer isn't necessarily seeing that," said Kenneth Kim, senior economist at KPMG. "To them, it just seems the price has gone up and up and up each year."

The duality is due to a "hedonic quality adjustment."

The BLS adjusts the prices of consumer electronics for quality — improvements in microchips, software and screen resolution, for example — which gives the illusion of a falling price on paper. The agency does the same for other categories like consumer appliances and apparel.

In other words, consumers are getting better-quality electronics for the price they pay. With the adjustment, prices appear to deflate.

"In that sense, it is a lower price because you're getting a lot more value," Kim said.

 

Source: How inflation is measured: 3 examples

https://www.creconsult.net/market-trends/how-inflation-is-measured-3-examples/

Slowing inflation on rental prices still leaves affordability issues for tenants

WASHINGTON (TND) — Finding an affordable place to live has been a challenge for Americans in numerous parts of the country over the last several years after the pandemic supercharged competition for properties and a longstanding supply shortage sent prices upward.

Rapid growth in prices for homes and rents during the pandemic have slowed this year as high mortgage rates have cooled competition in the real estate market, while more new multifamily buildings like apartments and condos have come onto the rental market.

Realtor.com’s latest monthly rent report for April found rent growth slowed to its lowest rate since February 2020, when the pandemic shut down the world. Median rent in the top 50 metros was 0.3% higher year-over-year with a median asking rent of $1,734 in the report.

“This is promising news for renters, suggesting that the pandemic peaks are behind us, and that the challenging affordability picture may begin to improve," said Realtor.com chief economist Danielle Hale. "We've seen record-high new construction occurring in the multi-family space, which is creating more units, helping to reduce competition and in turn helping to ease prices."

Redfin said that growth in median asking prices has slowed in 11 consecutive months, and April was particularly notable because rents typically rise at this time of year but instead had a modest decline of 0.2%.

How rent prices are changing is highly dependent on location and is mirroring the housing market in some aspects. Areas that went through huge booms during the pandemic are experiencing the biggest declines, while parts of the country that remained affordable are still having stable increases.

A boom in multifamily construction has helped provide more options for people looking for a place to live, with more units expected to come online later this year and in 2024. New construction for multifamily buildings is at the highest levels since the 1970s.

April’s consumer price index said shelter costs increased 0.4% and rent went up 0.6%, which was the slowest rate of increases in two years. Industry analysts say that data is lagging behind what they are seeing in asking rents and new builds coming to market, which would point to further softening coming.

“The data suggest that easing in the cost of shelter is ahead in future CPI reports. While this could take until 2024 to play out significantly, it will be welcome news for renters and for overall inflation," Hale said.

Builders are facing some potential headwinds keeping up the pace moving forward as high interest rates and turmoil in the banking sector is making it more difficult for them to secure a loan, and some industry experts are expecting new starts to decline this year.

The National Association of Home Builders is expecting a 10% drop-off in multifamily starts this year.

“Commentary from multifamily builders indicates that it has become more difficult to obtain loans for multifamily development as a result of tightening financial conditions due to actions of the Federal Reserve, which reduce future apartment construction,” NAHB chief economist Robert Dietz said.

The vacancy rate has also increased as more units come on the market, which helps loosen conditions for tenants looking for a place to live. Realtor.com said in its April report that vacancy rates reached the highest level in two years during the first quarter of 2023 at 6.4%. From 2013 to 2019, the average vacancy rate sat around 7.2%.

Another indication the rental market is shifting toward renters is the number of sweeteners that owners are offering to get people to sign a lease.

Zillow said 27% of rentals listed on the site as of mid-May offered at least one concession, like a free month of rent or parking, to attract new tenants. At the same time last year, the number of listings with concessions was 21%.

More renters are also opting to stay put rather than sign a new lease or buy a home as they are finding it to be the cheapest option along with economic uncertainty and inflation for other necessary items like gas and groceries.

 

Source: Slowing inflation on rental prices still leaves affordability issues for tenants

https://www.creconsult.net/market-trends/slowing-inflation-on-rental-prices-still-leaves-affordability-issues-for-tenants/

163 E Lincolnway

Just Listed - 23 Unit Multifamily For Sale
$425,000 | Heavy Value-Add | 20.5% Cap Rate (Proforma)
631 E Lincolnway | Morrison, IL 61270
https://www.creconsult.net/for-sale-heavy-value-add-23-unit-multifamily-property-morrison-il/

Chicago's Multifamily Sector Boasts Healthy Occupancy Rates, Strong Rent Growth

Chicago’s multifamily sector currently enjoys strong market fundamentals highlighted by healthy occupancy rates and continued rental rate growth. The current core apartment rents average over $4 per square foot, which is higher than previous peak pricing.

After the pandemic, rental rates between late 2021 to 2022 recorded 10 to 15 percent growth, which is substantially ahead of the historical norms. Currently, the Chicago rental market is experiencing more stable rent growth in the 3 to 4 percent range.

Chicago remains one of the most affordable major markets to rent an apartment when looking at the current average effective rents as a percentage of median household income. This affordability will allow owners to continue to push rental rates in the future.

One of the major factors leading to strong operating fundamentals in the Chicago market is the lack of new supply. The supply in Chicago is currently 1 percent of the inventory, which is quite low in comparison to other markets where there could be as much as 10 to 12 percent of the inventory under construction.

In the city, there are just over 7,000 units under construction slated for delivery between 2023 and 2024. The majority of new development is located in two submarkets, which are Fulton Market and Gold Coast/Near North. In the suburbs, there are nearly 6,000 units slated for delivery through 2024. Suburban deliveries have remained consistent in recent years as investors continue to believe in the fundamentals outside of the urban core.

Spring and summer are typically the strongest leasing seasons in the Windy City and with a very limited supply of new construction in the pipeline, the market is well-positioned for continued strong rent rate growth as well as high absorption.

Investment sales activity in 2022 was $3.2 billion, with the majority occurring during the first half of the year, before the Federal Reserve’s rate increases really took hold and caused a lack of stability in the capital markets.

Among the key transactions to take place last year include the sale of The Elle, formerly known as Alta Roosevelt, in the South Loop to Waterton Associates. The property sold for $170 million, which is approximately $343 per unit or $341 per square foot. The transaction closed in November 2022 and was the largest transaction to take place in the downtown market.

In the suburbs, Ellyn Crossing in Glendale Heights sold to Turner Impact Capital. This 1,155-unit residence sold for $137 million, which is $118,615 per unit and $193 per square foot, and was among the largest transactions to occur in the suburbs last year.

In terms of investment activity, many of the large institutions remain on the sidelines thereby creating a great opportunity for the private capital to acquire assets in the Chicago market. In fact, downtown acquisitions by private investors have continued to increase year-over-year demonstrating their desire to transact with yield premiums and significant discount to replacement cost.

Looking forward

There is plenty of liquidity in the financing markets for multifamily. Agencies continue to provide liquidity during this choppiness in the capital markets, committing $150 billion in dry powder for 2023 volumes. Buyers today are actively seeking neutral leverage and will not settle for negative leverage. Therefore, they are very focused on their going-in cap rate.

Based on what is currently on the market, 2023 is on par with or well-positioned to exceed the activity recorded in 2022. Buyers and sellers are both capitulating, and as both move toward a middle ground, we expect the second half of the year to have even more transactions.

Today is a great time to be an investor and an operator in the Chicago market as the fundamentals have never been better, and pricing is at an above-average yield today with a significant discount to replacement costs.

 

Source: Chicago’s Multifamily Sector Boasts Healthy Occupancy Rates, Strong Rent Growth

https://www.creconsult.net/market-trends/chicagos-multifamily-sector-boasts-healthy-occupancy-rates-strong-rent-growth/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1