Consumers Feeling More Confident, Inspiring Apartment Demand

Consumers Feeling More Confident, Inspiring Apartment Demand

Over the last decade, U.S. consumer confidence and apartment demand have varied considerably. With the economy improving, consumer sentiment has recently increased, boosting apartment demand.

By the numbers: Consumer confidence is closely linked to apartment demand. When consumers are optimistic about the economy, apartment demand increases, as seen in recent trends. Conversely, in times of economic uncertainty or perceived trouble, people tend to limit their spending and mobility, leading to decreased demand for apartments. This pattern was evident during the COVID-19 pandemic and the periods of economic fluctuation that followed.

Apartment demand: The U.S. apartment market absorbed over 90,800 units in the 3rd quarter, a significant number but lower than the pre-pandemic averages. This uptake marks a recovery from the net move-outs in 2022, coinciding with a record low in consumer sentiment. The University of Michigan's Consumer Sentiment Index, which tracks American spending confidence, had fluctuated dramatically from 2011 to 2023, with a notable dip during the pandemic and a partial recovery thereafter.

➥ THE TAKEAWAY

Why it matters: Despite a stable economy, consumer sentiment in 2022 fell to near 30-year lows due to rising inflation and interest rates. However, 2023 witnessed a positive shift in consumer confidence as inflation eased and economic stability seemed more assured. This improvement in sentiment is not yet at pre-pandemic levels but is on an upward trajectory, leading to increased household formation and, consequently, a boost in apartment demand.

https://www.creconsult.net/market-trends/consumers-feeling-more-confident-inspiring-apartment-demand/

2024 Trends to Watch in Real Assets

5 Trends to Watch in Real Assets for 2024

2023 was a challenging year for real estate, with widespread declines in asset values and reduced transaction volumes. Looking ahead, investors are hopeful for stabilized prices and a return to normal market activity. Here are five key trends to watch, according to the MSCI research team.

1) Anticipating distressed sales: In 2023, distressed sales in the U.S. real estate market were only 1.7% of investments, despite growing distress since 2022. With many loans from 2021 and 2022 nearing maturity and facing higher interest rates and lower valuations, more forced sales are expected. The current lending environment is more conservative, with declining loan-to-value ratios. Over USD 2 trillion in loans will mature by 2027, creating opportunities for investors. This downturn differs from post-2008, offering more flexibility for lenders and borrowers due to new investment strategies.

Looming US loan maturities

Loan maturities by origination vintage. Loans outstanding at Q4 2023. Data as of December 5, 2023. Source: MSCI Mortgage Debt Intelligence

2) Mind the gap: Global real estate transactions are currently stalled due to a significant gap between buyer and seller price expectations, exacerbated by rising interest rates. This gap, particularly notable in European and North American office markets, has widened significantly, as shown by the MSCI Price Expectations Gap. Market liquidity will only improve with more consensus on property pricing, likely dependent on clearer expectations about future interest rates. Until then, caution is advised in this uncertain market.

Gap in buyers’ and sellers’ pricing has widened

Office properties only. Source: MSCI Price Expectations Gap, RCA Hedonic Series

3) Expect a double dip: The recent volatility in commercial real estate makes predicting market trends difficult. A potential second downturn, influenced by high interest rates and global economic slowdown, is particularly evident in the office sector. The MSCI Price Expectations Gap indicates that many market segments, especially offices, may need further price reductions to regain liquidity. This could lead to additional valuation declines. Markets like Australia and Ireland, heavily invested in offices, might see significant impacts on capital growth if these adjustments occur and transactions increase.

First dips in property performance already experienced

Capital value weights as of Q3 2023. Source: MSCI UK Quarterly Property Index

4) Shifting risk/return landscape: In the last 18 months, global real estate investment has shifted, with economic and financing changes affecting values across asset classes. These shifts, influenced by debt financing, interest rates, and rising risk-free-rate benchmarks, have led investors to reassess their capital allocations. There's a focus on the varied impact on different market segments and the risk spectrum from core to opportunistic strategies.

Core investments have lagged so far in the current downturn

Fund returns. Source: Burgiss Global Real Estate Funds Index, MSCI Global Property Fund Index (Core Funds)

5) Rising insurance costs: Climate change is increasingly affecting real estate investments, with 2023 poised to be the warmest year on record. The MSCI Climate Value-at-Risk Model indicates that up to 5.5% of the MSCI Global Annual Property Index faces transition risk, and 3.0% is at risk from physical impacts in the coming years. A direct consequence for investors is rising insurance costs due to more frequent and severe weather events. Data from the MSCI U.S. Quarterly Property Index shows insurance costs more than doubling in five years to September 2023, particularly in high-risk states like Florida and California.

US insurance costs have increased, particularly in high-risk states

Insurance costs as share of income receivable. Source: MSCI U.S. Quarterly Property Index

➥ THE TAKEAWAY

The big picture: The 2024 commercial real estate market is navigating a mix of challenges and opportunities. Expectations of increased distressed sales due to maturing high-risk loans and a notable pricing gap, especially in office markets, are key issues. The office sector might see further declines, influencing the broader market. Shifting investment dynamics are altering risk-return profiles, compounded by escalating insurance costs impacting property values and expenses. Despite these hurdles, clearer interest rate trends offer hope for renewed market liquidity and balanced property pricing.

Source: 2024 Trends to Watch in Real Assets

https://www.creconsult.net/market-trends/2024-trends-to-watch-in-real-assets/

America's housing shortage explained in one chart

Data: Hines analysis of Census Bureau and Moody's data; Note: Population demand is a theoretical housing demand metric based on long-term household formation and homeownership rates by age cohort; Chart: Axios Visuals

America’s housing shortage explained in one chart The United States faces a significant housing shortage, with a deficit of approximately 3.2 million homes. This shortfall, which represents about 2.5% of the total U.S. housing inventory as of 2022, is a major contributing factor to the sustained high prices in the housing market. This chart underscores a critical issue: the supply of homes is not keeping pace with the growing number of households, impacting affordability and availability in the housing market.

Source: America’s housing shortage explained in one chart

https://www.creconsult.net/market-trends/americas-housing-shortage-explained-in-one-chart/

Freddie Mac Investment Index Falls Across All Markets

The decline follows two previous quarters when the index rose

Freddie Mac’s Multifamily Apartment Investment Market Index (AIMI) fell in all markets in 3Q2023—a sign that the relative value of investing is lower now.

The AIMI measures how the relative value of investing in multifamily properties changes over time, based on current mortgage rates, property prices, and rental rates. In the third quarter, it fell to 107.1 throughout the nation, impacting all 25 regional markets tracked. The decline follows two previous quarters when the index rose, indicating that the relative value of investing at that time was higher.

Freddie Mac attributed the 2.1% drop in the index in 3Q to higher interest rates. Taking the prior 12 months into account, however, the index was up 0.3%—a “notable” increase. The company attributed it to a significant drop in property prices that offset the effect of markedly higher mortgage rates.

One component of the AIMI, net operating income (NOI), rose nationally and in 16 markets. But six of these markets saw gains of 0.5% or less. Boston enjoyed the fastest growth in NOI at 3.9%, while Las Vegas and Phoenix saw the worst falls—down 5.5%.

In the third quarter, property prices dropped nationwide by more than 10%, except in Charlotte and San Diego. Mortgage rates rose 41 basis points, the first time since 4Q 2022. For the year, mortgage rates rose 114 basis points, property prices fell 11.9%, and NOI grew 0.3%.

“Based on these changes, the index suggests that investors are paying slightly less per dollar of property income compared with one year ago,” Freddie Mac noted.

 

Source: Freddie Mac Investment Index Falls Across All Markets

https://www.creconsult.net/listings/freddie-mac-investment-index-falls-across-all-markets/

Grand Prairie 2nd

NEW LISTING: 4,408 SF Medical-Dental | Dallas-Fort Worth Market
eXp Commercial is pleased to present to the market a fully built-out, free-standing 4,408-square-foot medical/dental office building in Grand Prairie, Texas, centrally located 22 miles southwest of downtown Dallas and 26 miles southeast of downtown Fort Worth. Though the current use is for a dental office, the property is zoned PD267A (commercial development), allowing for a variety of medical and dental uses. The property is owner-occupied and will be vacated at closing, providing an ideal opportunity for another dental practice or any number of medical office users to utilize the property for their practice or an investor who works with medical office tenants to take advantage of an investment opportunity.
Listing Brokers:
Tyson Grona | tyson@tysongronagroup.com | 936.444.3635
Randolph Taylor | rtaylor@creconsult.net | 630.474.6441
https://properties.expcommercial.com/1253332-sale

Just Sold Net Leased Industrial Akhan Semiconductor Gurnee IL

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Gurnee, IL, November 2nd, 2023 eXp Commercial (NASDAQ: EXPI), the fastest-growing national commercial real estate brokerage firm, announced today the sale of an 18,504 SF net-leased industrial property in Gurnee, IL.

The property is located at 940 Lakeside Drive in Gurnee, IL The property is a single-tenant net-leased industrial property occupied by Akhan Semiconductor.

The property was exclusively listed and sold by Randolph Taylor CCIM Senior Associate and Commercial Real Estate Broker with the eXp Commercial Chicago office.

Randolph can be contacted at rtaylor@creconsult.net or (630) 474-6441

[/col] [/row] https://www.creconsult.net/company-news/just-sold-net-leased-industrial-akhan-semiconductor-gurnee-il/

Bonus Depreciation – Overview & FAQs

Bonus depreciation

Bonus depreciation is a tax incentive designed to stimulate business investment by allowing companies to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability.

What is bonus depreciation?

Bonus depreciation — also known as the additional first-year depreciation deduction or the 168(k) allowance — accelerates by allowing businesses to write off a large percentage of an eligible asset's cost in the first year it was purchased. The remaining cost can be deducted over multiple years using regular depreciation methods until it phases out.

The passage of the Tax Cuts and Jobs Act (TCJA) in 2017 significantly changed the rules for bonus depreciation by allowing businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after September 27, 2017, and before January 1, 2023. Prior to TCJA, it was 50%.

The 100% write-off of eligible property expired December 31, 2022. Unless the law changes, the bonus percentage will decrease by 20 points each year for property placed in service after December 31, 2022, and before January 1, 2027. The phase-out schedule is as follows:

• 2022: 100%
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

How does bonus depreciation work?

Bonus depreciation works by first purchasing qualified business property and then putting that asset into service before year-end.

Bonus depreciation is then reported to the IRS.

For example, if a business purchased new computer software in December 2023 but didn’t put it into service until January 2024, it would be required to wait until it filed its 2024 tax return to claim bonus depreciation on the software. Since the bonus depreciation phase-out begins in January 2024, the business would then be eligible for 60% bonus depreciation — not 100%.

For more information, check out the accountants’ guide to calculating depreciation for different property types.

What are the tax benefits of bonus depreciation?

Bonus depreciation is an important tax-saving tool for businesses, allowing them to take an immediate deduction on the cost of eligible business property in the first year. This lowers a company’s tax liability because it reduces its taxable income.

What qualifies for bonus depreciation?

In order to qualify for bonus depreciation deduction, certain criteria must be met. Qualifying assets can include:

• Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less. This includes such property as computer equipment and office furniture.
• Depreciable computer software.
• Water utility property.
• Qualified leasehold improvement property, like any improvement to the interior portion of a nonresidential building. The improvement must be placed in service more than three years after the date the building was first placed in service.
• Costs of certain film, television, and live theatrical productions.
• Vacation property if a taxpayer uses the vacation property as a short-term rental, such as an Airbnb, etc. The passage of the TCJA created the property class known as Qualified Leasehold Improvement Property. If the short-term rental is a commercial property and the taxpayer improves the interior of the building, it may qualify for bonus depreciation.
• Residential rental estate if the taxpayer conducts a cost-segregation study.
• Vehicles which have a useful life of 20 years or less.
• Used equipment if it was not used by the taxpayer at any time prior to the acquisition.

Additional information about eligibility requirements can be found at Proposed Treas. Reg. § 1.168(k)-2(b)) and on the IRS’ additional first-year depreciation deduction FAQ page.

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What is the difference between bonus depreciation and section 179?

While bonus depreciation and Section 179 are both immediate expense deductions, bonus depreciation allows taxpayers to deduct a percentage of an asset’s cost upfront. In contrast, Section 179 allows taxpayers to deduct a set dollar amount. There are additional notable differences.

• Section 179 has a limit on the annual deduction. In 2022, the maximum Section 179 expense deduction was $1,080,000. To take the full deduction, the purchase price of the eligible property cannot exceed $2,700,000. For tax years beginning in 2023, the maximum Section 179 expense deduction is $1,160,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,890,000. Bonus depreciation has no annual limit on the deduction.
• Section 179 deductions are also limited to annual taxable business income, meaning that a business cannot deduct more money than it made. Bonus depreciation does not have this limit and can be used to create a net loss.

Businesses may be able to combine bonus depreciation and Section 179 deductions to claim both deductions in the same tax year. As bonus depreciation phases out in the coming years, some taxpayers may be able to maintain some initial-year expensing through Section 179 rules.

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How do you calculate bonus depreciation?

To calculate the bonus depreciation, you need to multiply the bonus depreciation rate — which is prevailing in the market — by the cost of the business asset. Then, deduct the tax of the property from the cost of the asset.

For example:

• Amount of bonus depreciation: Cost of asset $1,000,000 x 21% tax rate = $210,000 bonus depreciation can be claimed
• Cost of asset $1,000,000 - $210,000 bonus depreciation = $790,000 depreciated value of the asset

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How do you report bonus depreciation?

To report a bonus depreciation, the election must be made by filing a statement with IRS Form 4562, “Depreciation and Amortization,” by the due date — including extensions — of the Federal tax return for the taxable year in which the qualified property is placed in service by the taxpayer.

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Can bonus depreciation create a loss?

Yes, bonus depreciation can be used to create a net loss. If the bonus depreciation deduction creates a net operating loss for the year, the company can carry forward the net operating loss to offset future income.

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Is bonus depreciation subject to recapture?

Yes, when the property for which bonus depreciation was claimed is sold, that depreciation is recaptured and taxed as regular income. However, there’s a cap on the tax rate of 25%.

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When does bonus depreciation expire?

Unless the law changes, the bonus depreciation percentage will decrease by 20 points each year over the next several years until it phases out entirely for property placed in service after December 31, 2026. Bonus depreciation will be 0% for property placed in service on January 1, 2027, and later.

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Which states allow bonus depreciation?

The state tax treatment of bonus depreciation provisions depends on the state’s conformity to the Internal Revenue Code (IRC) and each state’s decoupling provisions.

States follow different approaches in adopting conformity to the IRC, resulting in inconsistent state tax treatment of federal expensing and bonus depreciation rules. Some states conform to the current IRC, for example, Colorado, Kansas, and Louisiana; other states have decoupled from the IRC provisions, for example, Illinois, New Jersey, New York, and Pennsylvania; and others have enacted legislation that allows partial conformity or conformity in some but not all tax years covered by the federal rule, for example, Arkansas, Connecticut, and Kentucky.

https://www.creconsult.net/market-trends/bonus-depreciation-overview-faqs/