Insurance prices per apartment unit rise 33% YoY

Insurance costs are rising at an accelerated rate for commercial real estate, up 33% year-over-year, per apartment unit to $180, according to Marcus & Millichap’s new report.

Insurance now accounts for more than 8% of an owner’s quarterly per-unit operating expenses, nearly double the share from five years ago.

Property tax and payroll costs combined rose 9% in the past year and the national average effective rent rose 4%.

If that’s not difficult enough, providers are concurrently implementing new policy limitations to decrease their exposure, especially for multifamily hotbeds in Florida, California, and Texas.

In Houston and Fort Worth, the average cost to insure a unit rose more than 40% year-over-year in the second quarter, according to the report.

“This disparity and expectations for further operating cost increases and rent growth moderation will broadly influence development proposals, property valuations, and investors’ acquisition criteria moving forward,” Marcus & Millichap said.

“Developers react by paring back project starts. Spiking insurance premiums, along with elevated labor, materials and financing costs, are making it more difficult for developers to underwrite ground-up developments.

“This dynamic has the potential to facilitate a broad pullback in U.S. project starts, a trend that already appears to be taking shape” given that the value of all commercial starts fell 11%, while the number of permits issued for new multifamily projects in June represented the lowest level since late 2020.

Providers leaving key markets is the next shoe to drop.

In Florida, customers’ average rate hike could rise by 12%, given that Farmers Insurance’s departure will pressure the state-run Citizens Property Insurance Corporation. Citizens expects to have up to 1.7 million policies by year-end and in June, it requested the maximum premium increase allowed.

In California, State Farm and Allstate’s exodus may impact renewals in addition to new policies, a potential concern for owners of older buildings requiring seismic upgrades and assets in wildfire zones.

Multiple severe thunderstorms threw a vicious punch at the commercial real estate industry in the first half of 2023, leaving it with the highest spike in premiums at 18.3%.

All commercial real estate asset classes are seeing rising premiums, according to a recent report from The Council of Insurance Agents & Brokers, as reported by GlobeSt.com.

Repeated severe weather the past half-year left CRE with the highest spike in premiums at 18.3%, tops of any industry category.

 

Source: Insurance prices per apartment unit rise 33% YoY

https://www.creconsult.net/market-trends/insurance-prices-per-apartment-unit-rise-33-yoy/

Commercial Real Estate Loan Modifications Quadruple, With Multifamily Leading The Way

Modifications on commercial real estate-related collateralized loan obligations spiked in the second quarter to $4B as more property owners sought refuge from encroaching maturity dates and rising interest rates.

That figure is a 300% increase from the first quarter, when $1B in CLOs were modified, according to DBRS Morningstar.

The modifications represent a number of different strategies to buy time for landlords, Morningstar said in its quarterly CRE CLO report. Those include increasing a loan balance, changing an interest rate, deferring contractual payments, extending a maturity date or allowing a borrower to access existing reserves.

“In most cases, lenders appear to employ modification strategies to assist borrowers in achieving business plans that are behind schedule,” the Morningstar report says.

Modifications on CLOs backing apartment properties grew to 10.6% quarter-over-quarter with an unpaid loan balance of $5B, according to the report.

Apartment owners in the Sun Belt in particular are feeling the pinch, Bloomberg reported, as a glut of new supply hits the market, denting rent growth as loans approach renewal.

Office and retail modifications grew at a slower pace, but office still has a higher share than multifamily, with 14.5% of office-backed CLOs modified in Q2.

The surge in modifications doesn't point to immediate collapse, according to DBRS Morningstar Vice President Stephen Koehler, who oversees CRE CLOs.

“It’s kind of a ‘Keep your eyes on this. Don’t forget about this,’ but not like a siren going off,” Koehler told Bloomberg.

CLO delinquencies edged up, according to Morningstar. In June 2023, the overall delinquency rate for CRE CLOs came in at 3.14%, a 15-basis-point increase from 2.99% in March but up 2.25% from a year earlier.

Special servicing on CLOs, however, dipped by 27 basis points from Q1, the first quarterly decrease in more than a year, Morningstar said.

Source: Commercial Real Estate Loan Modifications Quadruple, With Multifamily Leading The Way

https://www.creconsult.net/market-trends/commercial-real-estate-loan-modifications-quadruple-with-multifamily-leading-the-way/

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/

Mastering the Art of Expensing & Accelerating Depreciation Course

Join eXp Commercial's Cost Segregation Partner CSSI for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your taxable income.

COURSE DESCRIPTION

Prepare for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your taxable income.

Unlock the artistry behind these regulations to maximize their advantages. We will dissect the most prevalent depreciation and expensing opportunities for clients who own and develop commercial real estate and short-term rentals.

Whether it's Commercial Buildings, Apartment Complexes, Long-Term or Short- Term Rentals, Disposition of Materials, or Interior Renovations, each presents unique opportunities for expensing and accelerating depreciation, provided you have a foundational grasp of the regulations and access to the requisite cost data.

Rather than drowning in the complexities of regulations as is often the case in presentations, we will utilize real-world scenarios encountered by building and short-term rental owners to assist you in crafting a strategy for expensing and accelerating depreciation, including leveraging Bonus Depreciation.

An integral aspect of our sessions is addressing your specific queries to empower you in confidently applying these regulations to meet your client's precise requirements.

Hundreds of Tax Professionals have consistently rated CSSI's team of presenters and content as excellent. We cordially invite you to join us for an engaging 1.5- hour discussion filled with strategic insights and ample time for addressing your inquiries. CPE credits are available for CPAs through our NASBA certified provider.

LEARNING OBJECTIVES

By the end of this lesson, attendees will be able to discuss advanced depreciation and expensing strategies related to cost segregation, including:

·     Common scenarios for expensing and accelerating depreciation using the Tangible Property Regulations and Cost Segregation
·     Advantages of Short-Term Rentals
·     When to use Bonus Depreciation vs Section 179a
·     Renovation Depreciation -- When to use Partial Asset Disposition (PAD) and Qualified Improvement Property (QIP)
·     Grouping Opportunities

REGISTRATION INSTRUCTIONS

·     You must register for and attend the entire session to receive CPE credit.
·     A course evaluation must be completed to receive CPE credit.
·     Group attendance will not be recognized. Each attendee must be logged in individually to receive credit.

Cost:
None

Subject Area:
Tax

CPE Credits:
1.5 Hours

Who Should Attend:
CPA - small firm
CPA - medium firm
CPA - large firm

Instruction Method:
Live Webinar

Time:
10:00 am Central time

Instructors:
David Deshotels
Robert Taylor

Webinar Date:
December 5, 2023 | 10:00 am Central

Register Here

 

https://www.creconsult.net/events/mastering-the-art-of-expensing-accelerating-depreciation-course/

Multifamily Permits Down 32.2% From a Year Ago

The pipeline for multifamily development has slowed due to continued challenges of higher interest rates and difficulty securing funding, and that includes filings of permits, according to RealPage.

Specifically, the seasonally adjusted annual rate for multifamily permitting in July of this year fell 32.2% from a year ago, according to the latest release from the Census Bureau. July’s annual rate was almost unchanged from June and represents the lowest since October of 2020.

What’s more, the more volatile multifamily starts rate almost matched that of permitting with July’s SAAR of 460,000 units equaling June’s starts rate. The annual rate of multifamily starts was about the same as a year ago.

Multifamily completions, meanwhile, plunged 38.8% from June to 297,000 units, down 23.3% from last July’s completion rate. The number of multifamily units authorized but not started decreased only 0.7% for the month to 133,000 units, down 10.7% from a year ago.

When looked at in different regions of the country, all four saw declines, with the biggest in the Northeast, which fell 42.7% to 47,0000 units. The South saw permitting slow 34.6% to 233,000 units; the Midwest was down 29.9% to 54,000 units and the West dropped 23.1% to 130,000 units. Starts were up only in the South from last year. Digging deeper, New York led the country in multifamily permitting, totaling 24,818 units through July or down by more than 16,000 units from a year ago. Houston followed in second place with 23,325 units permitted, an increase of 914 units from last year but 1,856 fewer than last month.

Single-family permitting and starts, by contrast, are inching up after bottoming at the beginning of this year. The SSAR for single-family permitting hit 930,000 units and increased slightly at 0.6% from June and 1.3% greater than a year ago. It was also a significant 24.3% higher than in January.

Single-family starts were also up to 983,000 units in July, up 6.7% from June and 9.5% up from last July. The starts rate improved almost 20% from its low point earlier in the year.

Single-family completions were up, too, 1.3% in July with the annual rate reaching 1.018 million units, up 1.4% for the year. And single-family units authorized but not started remained unchanged at 140,000 units from 141,000 units in June, down 5.4% from last year.

 

Source: Multifamily Permits Down 32.2% From a Year Ago

https://www.creconsult.net/market-trends/multifamily-permits-down-32-2-from-a-year-ago/

Multifamily demand is returning slowly leading to market stabilization

Multifamily demand is returning slowly leading to market stabilization; however, origination volumes will be below-average this year, reports Freddie Mac.

Multifamily investors are learning how to navigate a new reality. The market is returning to standard seasonal patterns, thanks largely to the strong labor market and increased household formations, which is supporting positive rent growth and stabilizing occupancy rates. Even better, the Federal Reserve has downgraded its expectation of a recession, a sign of broader economic optimism.

Healthy market fundamentals should help support multifamily investment in the second half of the year, though a high interest-rate environment continues to slow transaction activity. Freddie Mac’s Midyear Multifamily Outlook explains how despite macroeconomic headwinds impacting volume, positive momentum in the economy is helping to maintain multifamily market fundamentals.

Economic Optimism Encourages Multifamily Demand

Moody’s Analytics has downgraded its probability of a recession from 50% to 33% by the end of the year, and at the close of the July meeting, Federal Reserve chair Jerome Powell said that the staff is no longer expecting a recession this year. This renewed economic optimism, much of which has stemmed from a strong labor market and resilient consumer spending in the face of inflation, has supported a strong rental market.

“The idea that we can see some stability in the overall economy helps to lift expectations throughout the market, and we are seeing that with positive multifamily demand so far this year,” Sara Hoffmann, director of Multifamily Research at Freddie Mac, tells GlobeSt.com.

The strong labor market is driving household formation, which Hoffmann says is a key ingredient in supporting multifamily demand this year, despite broader market challenges. Low single-family housing inventory and high mortgage rates may also benefit multifamily demand this year.

Transaction and Origination Volumes May Continue to Lag

 

Although demand fundamentals may be enough to stimulate some investment activity, the high interest-rate environment will likely lower transaction volumes, and therefore loan origination volume, through the end of the year. Freddie Mac’s Midyear Multifamily Outlook expects origination volumes will fall 17% this year compared with 2022.

Origination volumes have been stymied by property valuations, which were down roughly 12% for the year. “Typically, we see property prices and origination volume move in tandem. When property prices are up, origination volume is up, and vice versa,” explains Hoffmann.

Freddie Mac’s report explains that national multifamily rents and occupancy levels will remain stable this year, but there is some concern regarding the high level of new supply entering the market.

However, Hoffmann explains that while multifamily fundamentals are expected to perform slightly below long-term averages this year, multifamily demand is slowly coming back. “The return of positive demand and modest rent growth indicate the multifamily market is stabilizing,” says Hoffmann.

Source: Multifamily demand is returning slowly leading to market stabilization

https://www.creconsult.net/market-trends/multifamily-demand-is-returning-slowly-leading-to-market-stabilization/

Office pain, multifamily gain: One million units built in three years, another million before 2025

The largest construction boom since the ‘70s. That’s right.

Considering the rental frenzy that ensued post pandemic, it’s no surprise apartment construction in the U.S. has seen groundbreaking numbers in the last few years. Since 2020, 1.2 million apartments were delivered, with over 460,000 more to be opened by the end of December, based on a new report by RentCafe.

Where does Chicago stand?

While New York City might have taken the lead this year, followed by Dallas and Austin, Texas, following close behind, Chicago had the 13th-highest number of new apartments completed in the last few years, adding 25,323 new apartments between 2020 and 2022.

Here’s where the largest number of apartments were opened during these years:

• Chicago: 15,356 units
• Warrenville: 865 units
• Kenosha: 585 units

But the momentum continues. Despite companies’ doubling down on in-office models, many employees aren’t ready to let go of the luxuries of working from home and still need the perfect place to do so. Luckily, there will soon be even more options. Here are the cities that will see the most apartments completed in 2023:

• Chicago: 1,857 units
• Vernon Hills: 748 units

Across the U.S., it’s been reported that the number of deliveries is expected to remain high until 2025 when the current economic headwinds will begin affecting construction, as wel

Source: Office pain, multifamily gain: One million units built in three years, another million before 2025

https://www.creconsult.net/market-trends/office-pain-multifamily-gain-one-million-units-built-in-three-years-another-million-before-2025/