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/

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/

Cooling Future Deliveries Set the Stage for a Rent Growth Comeback

Cooling Future Deliveries Set the Stage for a Rent Growth Comeback

CALABASAS, Calif.--(BUSINESS WIRE)--Institutional Property Advisors (IPA), a division of Marcus & Millichap (NYSE:MMI), published a new national report, Pullback in Multifamily Construction Starts.

“As access to development capital across the country diminishes and rent growth slows, multifamily starts are cooling,” stated Greg Willett, first vice president and national director, research services, IPA. “Among the 15 markets that account for over half of the nation’s ongoing apartment construction, building starts in the second quarter of 2023 totaled just under half the average volume recorded during the previous two years.”

Pullback in Multifamily Construction Starts research report provides investors with the latest apartment construction research and analysis, including key findings such as:

• The largest declines are in Texas, with second quarter 2023 project initiations in Houston, Austin and Dallas-Fort Worth at less than one-third the earlier volume. Slowdowns are also pronounced in Philadelphia, Denver, and Washington, D.C.
• Pullbacks in new construction that mirror the average for the 15 markets under study are in Los Angeles at 52%, Seattle at 51% and Atlanta at 50%.
• Markets where the pullback in construction is somewhat slower to materialize are in Florida and the Carolinas. Raleigh-Durham is the single location in the analysis where apartment construction starts in Q2 2023 remained in line with the volume recorded in early 2021 through early 2023.
• Given that the typical apartment property takes 18 to 24 months to complete, delivery volumes should begin to wane in early 2025 and then drop notably during the last half of the year.

“Rent growth is likely to regain momentum as early as spring 2024, when the normal seasonal upturn in leasing velocity should coincide with obvious signs that today’s new supply excess is temporary,” added John Sebree, senior vice president and national director of the firm’s Multi Housing Division. “Price increases should prove robust during 2025.”

Just over one million apartment units are now under construction across the U.S. However, building is not booming everywhere. About half the total construction pipeline is in 15 markets, where a slowdown in local starts will impact overall statistics. Most of the primary building centers are in the Sun Belt, but there’s also notable activity in Washington, D.C., Los Angeles, Seattle and Philadelphia.

Apartment construction starts in the 15-market core building locations skidded to 30,800 units in the second quarter of 2023. That start volume is off 52 percent from the quarterly norm of 64,200 that was sustained for nine quarters from early 2021 through early 2023. Absolute peak quarterly starts totaled 81,500 units from April through June 2022.

Given that the typical apartment community takes 18 to 24 months to complete, delivery volumes should begin to wane in early 2025 and then drop notably during the last half of the year. Rent growth seems likely to regain momentum as early as spring 2024, when the normal seasonal upturn in leasing velocity should coincide with obvious signs that today’s new supply excess is temporary. Price increases should then prove robust during 2025.

https://www.creconsult.net/market-trends/institutional-property-advisors-releases-national-multifamily-construction-report/

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/

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Midwest spotlight: A look at multifamily performance

The multifamily market saw record-breaking rent growth that was backed by high demand in 2022, but that is no longer the case for several regions in 2023. While the volatility in the current market has taken its toll on the sector’s high-paced expansion, not every region in the U.S. is experiencing setbacks. In fact, the Midwest has recently emerged as a thriving area for multifamily investment.

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/