Expenses for Apartment Owners Continue to Outpace Rents

Expenses for Apartment Owners Continue to Outpace Rents

There was an 8.6% spike in expenses in Q2.

Operational costs for apartment companies grew by 8.6 percent on average year-over-year in the second quarter of 2023, according to a new report from Marcus & Millichap.

Effective rents rose at nearly twice the pace of expenses during the yearlong period ending in June 2022, but those trends inverted over the following 12 months due to “persistent inflationary pressures,” the report said.

Expense growth began to taper after peaking at the end of last year. 

Nonetheless, this is all adding up to higher debt costs, coupled with rapid insurance hikes, leading to stalled project proposals and delays at build sites. 

“Some developers may shorten hold times upon completion to tap cash after unexpected cost adjustments strained budgets,” the report said.

The cost hikes in the past year were most visible in turnover, marketing, and especially insurance costs, with each rising by more than 10 percent year-over-year.

Also factoring negatively to their bottom lines were rising costs in administrative, taxes, management, and payroll, which each grew more than 7 percent. 

Last month, GlobeSt.com reported that operating expenses on average had risen 28%.

In some worst cases, property owners and developers in Florida are bracing for potential insurance increases of more than 200 percent.

Indeed, ballooning insurance rates have been the primary catalyst for expense growth, increasing by 33 percent year-over-year on average in Q2 2023.

Nowhere is this worse than in natural disaster-prone metros, which command costlier insurance premiums, and yet, continue to attract renters and homeowners.

The six major Florida metros each saw insurance costs rise at a faster pace than the national mean over the past 12 months. Insurance rates per unit in these Florida markets exceeded the overall US metric by $35 to $175 on average in Q2 this year, according to the report.

Other locations with notable insurance hikes over the past year include Kansas City, Oakland, Orange County, and Phoenix. Midwest and select Sun Belt markets enjoy lower premiums. 

Marcus & Millichap reported that insurance costs per unit rose by less than 10 percent year-over-year on average in just five major US markets as of Q2 2023, including Columbus, Detroit, Milwaukee, Pittsburgh, and St. Louis.

Other metros such as Charlotte, Las Vegas, Raleigh, and Reno, meanwhile, had relatively mild adjustments and remained among the 10 lowest major markets for insurance costs per unit. Some developers and investors may shift their attention to these locations, according to the report.

 

Source: Expenses for Apartment Owners Continue to Outpace Rents

https://www.creconsult.net/market-trends/expenses-for-apartment-owners-continue-to-outpace-rents/

Here’s Why Deals Will Increase in Q4

Here’s Why Deals Will Increase in Q4

There is more certainty around valuations from both buyer and seller.

There is less buyer/seller disconnect in the marketplace as the frequency of interest rate hikes and the size of those hikes have decreased, according to Marcus & Millichap.

Buyers and sellers are beginning to better understand the value of the real estate, John Sebree, Senior Vice President, Multifamily Housing Division, Marcus & Millichap, said in a recent news video.

 

“Buyers and sellers are getting much closer to the middle ground or that common place where they can agree on the value,” he said.

“And as a result, combined with the amount of fundamental activity that we’ve seen increase over the past 90 days, we are looking at the fourth quarter and feeling pretty confident that the amount of transaction velocity and the number of closings we’re going to see in the marketplace will increase substantially.”

 

Because the number of buyers is somewhat limited, they can do deals with little competition, according to Sebree.

“We also know there are a tremendous amount of funds on the sidelines waiting for the opportunity to jump back in, which will increase the competition for available assets,” he said.

There’s been substantial uncertainty on underwriting lately, such as in taxes, insurance, and utilities. But that has calmed down a bit lately, he said.

 

“Looking ahead, we know the number of properties that are going to be coming to market is going to increase,” according to Sebree. “We know that simply from our BOV activity and our conversations with owners. We also know, based on our conversations, that the number of buyers in the marketplace is increasing and will continue to increase.”

He said interest rates are one factor that must be monitored because of its uncertainty. 

“But overall, I’m very optimistic about what I see on the horizon,” Sebree said.

 

Source: Here’s Why Deals Will Increase in Q4

https://www.creconsult.net/market-trends/heres-why-deals-will-increase-in-q4/

Multifamily Market Updates November 2023

Multifamily Market Updates November 2023
eXp Commercial Multifamily Division: Chicago

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/

Looking for signs of a sales boost in the multifamily sector

Like all commercial real estate sectors, the multifamily market has seen sales slow since the Federal Reserve Board started increasing its benchmark interest rate. But are there signs that sales activity might pick up next year? There might be.

Let’s start with the big question: How have higher interest rates impacted the multifamily sector?
Jeremy Morton: The interest rates have a direct effect on pricing and how buyers underwrite buildings. Sales activity has tightened. It’s more important than ever for buyers to have a good relationship with lenders, whether those lenders are local or national.

I did a handful of valuations in the spring in which interest rates were almost a point lower than where they are today. Those were brought to market and we slowly saw the interest rates tick up. Obviously, that has a correlation on pricing. There is a gap between buyer values and seller expectations. That’s why multifamily sales were slower in July and early August.

From what I understand, though, you have seen signs that we might see at least a small increase in sales activity in the coming months.
Morton: It is deal-specific. But in the last few weeks, we have seen an uptick in buyers interested in seeing buildings for sale and writing offers. That also has to do with sellers correcting their expectations. We have seen a few price reductions in listings in the last month. Buyers are active. It’s all about bridging the gap on the pricing.

We are still putting deals together. But things are moving a little slower. In terms of financing, it is taking more time to get everything lined up. No one is just slamming the financing together. Everyone is spending more time and due diligence on the front end, which is the key to getting deals done.

Activity is still solid, but there is a little more hesitation, a little more going over deals with a fine-tooth comb. Instead of touring a building and making an offer that afternoon, buyers might spend a solid week reviewing the deal with brokers and lenders, checking the numbers.

Are you seeing that gap between what buyers expect to pay and sellers want to sell for starting to tighten?
Morton: I definitely am. Previously as brokers, we could market these properties on future rental growth. We can still do that, but it has to check out on current cash flow. Six months ago, as long as buyers were breaking even on their current cash flow, that was fine. Now we need a little more cushion. Some lenders are requiring nine months of reserves to make sure there aren’t any delinquencies.

We are trying to be more transparent with everyone today, sellers in particular. Before sellers could shoot for a higher number and hope there would be a buyer who falls in love with the building. Today, you need to be more careful on how you underwrite buildings, otherwise you’ll be left with a stagnant building that won’t sell.

In the late spring and early summer, we had honest talks with sellers to help bridge that gap.

How strong is leasing activity in that sector? Interest rates haven’t slowed leasing demand, right?
Morton: Leasing is doing well. The new-construction multifamily buildings that I have been watching have been leasing out quickly with little to no concessions. The units with a greater number of bedrooms take a little longer to lease. There’s just a smaller number of renters looking for that size of a unit. But the one-bedroom and two-bedroom units are renting quickly while rental rates have gone up a little bit. Units are not staying vacant for long.

Back to sales activity. Are buyers and sellers waiting for some stability when it comes to interest rates? Are they waiting for the Fed to stop tweaking its benchmark rate?
Morton: That is the hope. I’ve talked to a good number of buyers. They want to buy right now. In their mind, they are confident that interest rates will go back down to some degree. When they go down, cap rates will follow. If they can buy at a higher interest rate and if they cover all their expenses and have some sort of return that they are comfortable with, they are happy. They are confident that in 12 months or so, if rates go down, the value of the property will go up. It is all about the relationship between interest rates and cap rates.

The multifamily sector has been one of the strongest commercial real estate performers for a long time. What are some of the reasons for this?
Morton: In Chicago, there is a great inventory of multifamily properties. But we still have not been able to keep up with rental demand. The higher interest rates have kept some people from buying single-family homes. There were people who planned to buy a home but instead are renting because rising interest rates makes buying a home too expensive. They are deciding to rent longer than they would have otherwise. Because there is less turnover with available rental units, there is a growing demand for apartments. Lenders are putting units up for rent and sometimes getting 20 or 30 people who want to rent that space.

As we saw through COVID, people put a focus on where they live. They pay their rent on time. More people are working remotely. They are in their homes longer during the day and they are prioritizing where they live. If they are struggling financially, they do everything they can to pay their rent first.  Collections are high. Lenders are friendly when it comes to multifamily. They like the sector, too.

 

Source: Looking for signs of a sales boost in the multifamily sector

https://www.creconsult.net/market-trends/looking-for-signs-of-a-sales-boost-in-the-multifamily-sector/

1120 E Ogden Ave

New Listing | Retail-Office For Sale Naperville IL
eXp Commercial is pleased to present to market 1120 E Ogden Avenue, a highly visible 10,860 square foot retail-office property on 1.26 acres in desirable affluent Naperville, Illinois, along the I-88 E-W corridor approximately 28 miles west of Chicago. The property is currently owner-occupied and will be fully vacated shortly after closing, with the seller seeking approximately 60 days of post-closing possession. Flexible B3 zoning allows for a number of retail and office uses, ideal for an investor, owner-user, or redevelopment of the property.
Listing Broker: Randolph Taylor | rtaylor@creconsult.net

https://www.creconsult.net/retail-office-for-sale-1120-e-ogden-ave-naperville-il-60563/

New Listing Indian Creek Apartments 1015-1025 N Farnsworth Ave Aurora IL 60505

[section bg_color="rgb(255,255,255)" dark="true" padding="0px" video_visibility="visible"] [divider align="center" width="1440px" height="0.5px"] [row padding="0px 0px 0px 0px"] [col span="9" span__sm="12" divider="0" padding="0px 0px 0px 0px" margin="0px 0px 0px 0px"] [ux_text text_color="rgb(0,0,0)"]

For Sale Multifamily

1015-1025 N Farnsworth Ave | Aurora, IL 60505

[/ux_text] [/col] [col span="3" span__sm="12" padding="0px 0px 0px 0px" margin="0px 0px 0px 0px"] [ux_text text_align="left" text_color="rgb(0,0,0)"]

$3,000,000

Sale Price

[/ux_text] [ux_text text_align="left"] [/ux_text] [/col] [/row] [/section] [section padding="0px" margin="0px" border="0px 0px 1px 0px" border_margin="0px 0px 0px 0px"] [row style="small" col_bg_radius="93" padding="0px 10px 0px 10px"] [col span="8" span__sm="12" divider="0" padding="0px 0px 0px 0px" margin="20px 0px 0px 0px"] [ux_slider type="fade" freescroll="true" hide_nav="true" nav_style="simple" bullets="false" bullet_style="square" timer="4500"] [ux_image id="130123" height="50%" margin="0px 0px 0px 0px"] [ux_image id="130122" height="50%" margin="0px 0px 0px 0px"] [ux_image id="130115" height="50%" margin="0px 0px 0px 0px"] [ux_image id="130114" height="50%" margin="0px 0px 0px 0px"] [ux_image id="130118" height="50%" margin="0px 0px 0px 0px"] [ux_image id="130119" height="50%"] [ux_image id="130116" height="50%"] [ux_image id="130117" height="50%"] [ux_image id="130120" height="50%"] [ux_image id="130121" height="50%"] [/ux_slider] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

 

Property Details

[/ux_text] [row_inner style="collapse" width="full-width" padding="0px 0px 0px 0px"] [col_inner span="3" span__sm="6"]

Price

Total SF

Built

Units

Occupancy

[/col_inner] [col_inner span="3" span__sm="6"]

$3,000,000

23,652

1973

24

100%

[/col_inner] [col_inner span="3" span__sm="6" padding="0px 0px 0px 0px" margin="0px 0px 0px 0px"]

Price / SF

Price / Unit

Cap Rate
(Current)

Cap Rate
(Proforma)

 

[/col_inner] [col_inner span="3" span__sm="6"]

$127

$125,000

5.73%

8.66%

[/col_inner] [/row_inner] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

 

Description

[/ux_text]

eXp Commercial is pleased to present to market Indian Creek Apartments, a fully occupied 24-unit multifamily complex on the northeast side of Aurora, Illinois, bordering affluent Naperville, Illinois, just to the east. The property is in good condition, with considerable upside in rents with modest unit updates. All units have separately metered tenant-paid water, sewer, electricity, heat, and hot water. Also offered is an attractive low-interest assumable debt of $1.453 million at a 3.32 percent interest rate not due until December 2028. Note that additional debt is not allowed with Freddie Mac debt; therefore, this provides for an approximately 50% LTV. Assumable and new debt assumption scenarios are outlined in this offering memo as well.

 

The property is comprised of two adjacent three-story, 12-unit apartment buildings on three parcels with frontage along busy Farnsworth Ave., proving no-cost marketing. The central parcel is a buildable lot offering expansion opportunities for a third 12-unit multifamily building. The unit mix consists of 22 spacious two-bedroom, one-bath units and two one-bedroom, one-bath units, each with an eat-in kitchen, pantry, and large living room. Each building has an on-site laundry room with two sets of owned washers and dryers as an added amenity for tenant attraction and retention and added income.

 

The property has recently completed its City of Aurora Building Inspection and is clear of all building code violations except for windows. A Buyer will be responsible post closing to be in compliance with this building code that every window, other than a fixed window, shall be easily openable and capable of being held in position by window hardware and all windows have insect screens.

 

The property is ideally situated minutes south of the Interstate 88 East-West Tollway near the intersection of North Farnsworth and East Indian Trail on the northeast side of Aurora, Illinois. Located 35 miles west of Chicago, Aurora is the second-largest city in Illinois and home to a number of major employers, including Farmers Insurance Group, Rush-Copley Medical Center, Waubonsee Community College, and Provena Medical Center.

[ux_text line_height="0.75" text_color="rgb(0,0,0)"]

 

Highlights

[/ux_text] [row_inner] [col_inner span="6" span__sm="12"]

• Fully Occupied 24-Unit Multifamily Property

• Considerable Upside in Rents

• Assumable Low-Interest Debt

• All separate tenant-paid utilities

• Additional central buildable lot Included

[/col_inner] [col_inner span="6" span__sm="12"]

• Low-Maintenance Tenant-Paid Electric Baseboard Heating

• On-site Owned laundry facilities

• High-visibility site on a busy road for marketing

• Good condition with newer roofs and copper plumbing

• Desirable Northeast Side of Aurora, Near Affluent Naperville

[/col_inner] [/row_inner] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

Map

[/ux_text] [map lat="41.7785423432" long="-88.2813745595" zoom="16" content_enable="0" content_width__sm="100" content_width__md="40" position_x__sm="100" position_y__sm="100" controls="true"]

924 E Willow St Kankakee, IL 60901

[/map] [/col] [col span="4" span__sm="12" divider="0" padding="0px 0px 0px 0px" margin="0px 0px 0px 0px" border="0px 0px 0px 0px"] [divider align="center" width="300px" height="1px"] [button text="Offering memo" padding="0px 10px 0px 10px" expand="true" link="https://www.creconsult.net/indian-creek-offering-memo-2/" target="_blank"] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

Broker

---

 

[/ux_text] [row_inner] [col_inner span="3" span__sm="12" divider="0" align="right"] [ux_image id="127646" image_size="thumbnail" width="90" margin="0px 0px 0px 0px"] [/col_inner] [col_inner span="8" span__sm="12" divider="0"] [ux_text line_height="0.75"]

Randolph Taylor

Senior Associate
eXp Commercial
C: 630.474.6441
E: rtaylor@creconsult.net

[/ux_text] [/col_inner] [/row_inner] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

Share to Social

---

 

[/ux_text] [share style="outline" align="left"] [ux_text line_height="0.75" text_color="rgb(0,0,0)"]

 

Request More Info

---

 

[/ux_text] [ux_html] [/ux_html] [/col] [/row] [/section] https://www.creconsult.net/market-trends/new-listing-indian-creek-apartments-1015-1025-n-farnsworth-ave-aurora-il-60505/