Expect still more uncertainty in commercial real estate this year

PHOTO BY DEBBY HUDSON ON UNSPLASH

While it’s true that real estate is generally one of the most reliable markets for investment, it’s also a fact that the industry runs on cycles. The COVID-19 pandemic accelerated and even upended many of those cycles. Even now, nearly two years after it took hold in the United States, the pandemic continues to have a see-saw effect on markets.

Consider the industrial sector’s upward trajectory in relation to retail’s brick-and-mortar downturn. This inverse relationship resulted from the accelerated adoption of e-commerce, which was accelerated by the pandemic. The commercial office market has taken a hit in urban centers, but suburban office leases are on an upward swing. Hospitality is beginning to come back to life after a prolonged slowdown. But now the industry is reeling from a labor shortage.

The pandemic is not the only factor that is driving rapid change, of course. Multifamily housing continues to surge, thanks in part to a lack of single-family housing stock. The cost of living and discontent are also prompting people to rethink where they live and work. Population shifts are disrupting long-standing real estate investment strategies across geographical boundaries.

In short, 2021 was a year of flux, and 2022 looks to promise more of the same. So how can investors, developers, owners, and buyers prepare? Here are the trends to watch in the coming year:

A return to the ‘burbs: Generous work-from-home policies, cost-of-living considerations, and social unrest are fueling a shift from urban centers to the suburbs. Likewise, the success of remote-work arrangements has many commercial office occupiers rethinking just how much space they really need – and where it’s located. For now, suburban rings and smaller cities are the best bet for stability and investment opportunity.

The great migration: The migration of people isn’t limited to the urban/suburban divide. People are also moving away from the coasts and across state lines in search of lower-tax communities where their dollars will go farther. This movement will have far-reaching implications across all real-estate sectors, from housing to industrial to hospitality.

Housing demand: A lack of housing stock, soaring housing prices and the movement away from the urban core means multifamily housing should remain strong in 2022, particularly in suburban and rural communities. However, a buyer’s market may be around the corner. As housing inventory increases, prices should come down and the demand for multifamily housing may likely level off over time. Expect to see a shift occur in late 2022 or early 2023.

Evolving consumer behaviors: Even as people talk about a return to pre-pandemic normal, some things may never be the same – including retail shopping. E-commerce adoption by U.S. households skyrocketed during the early months of the pandemic. Now consumers have become accustomed to the convenience of on-demand delivery. It’s no surprise, then, that retail will probably see anemic growth while the industrial and logistics sector will flourish in the coming year.

Workforce challenges: The COVID-19 pandemic has reshuffled the workforce in ways that could not be anticipated last year. The hospitality sector was particularly hard hit as millions dropped out of the workforce or found work in other sectors that offered more stability. Now, as people return to traveling, the industry is scrambling to find enough help. This staffing shortage may depress growth until more people re-enter the workforce.

Tax changes: Tax hikes appear to be on the horizon in the form of the Build Back Better Act. Owners, developers and investors will need to wait until a final bill is voted on before making long-term investment decisions. The good news? Many of the strategies that have been used in the past to defer tax liabilities will likely be available going forward.

Accelerated technology adoption: Technology services and solutions are rewriting how the real estate industry does business – and not just in terms of bridging the home and office environments. The ease of working with and for a company is emerging as a deciding factor in winning over clients and talent. Stakeholders will need to invest in a strategic digital transformation plan if they want to keep pace with stakeholder expectations. Digital capabilities will also be key to managing data and predicting outcomes – both of which will be necessary in this dynamic landscape.

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Source: Expect still more uncertainty in commercial real estate this year

https://www.creconsult.net/market-trends/expect-still-more-uncertainty-in-commercial-real-estate-this-year/

Pair of Chicago’s Western Suburb and South Side’s Apartments Sell for $30M

229 Park Avenue and 5736 South Stony Island Avenue

A pair of multifamily sales totaling $30 million on Chic ago’s South Side and its western suburb of Clarendon Hills reflect investors’ growing appetite for apartments, a stark contrast to the city’s pandemic-battered office market.

Local real estate development and investment firms Hubbard Street Group, Centrum Realty & Development, and Pine Grove Partners sold 229 Park, a 43-unit apartment building at 229 Park Avenue in Clarendon Hills, 22 miles southwest of downtown Chicago. Local real estate developer HP Ventures Group paid $19.4 million for the fully occupied building.

“With its excellent location in an upscale suburb walkable to transportation, 229 Park is a great example of our niche strategy to serve tenants who prefer to rent high-quality units in excellent locations,” said Steve Cook, HP’s managing partner.

The property is a two-minute walk to the Clarendon Hills Metra Station and about 10 miles from Chicago Midway International Airport.

While office buildings are still reeling from the pandemic, both Chicago’s suburban and downtown multifamily market gained strength last year. Owners of multifamily properties sought to capitalize on higher rents and increased occupancy in suburban Chicago after the pandemic. In downtown Chicago, tenants signed about 9,000 new leases in the second quarter of last year, the strongest multifamily rental market in more than 10 years. Local real estate investment firm 29th Street Capital also sold a 75-unit apartment at 5736 South Stony Island Avenue in Chicago’s Hyde Park neighborhood to an undisclosed buyer for $10.62 million.

After buying the property in 2017, 29th Street Capital renovated more than half of the units, refinishing hardwood floors and adding stone counters. The building, which was 96 percent occupied, went under contract in two weeks after hitting the market.

The rental property is less than a mile from the Obama Presidential Center and offers multiple bus routes to downtown including the Number 6 Jackson Park Express and Number 15 Jeffery Local.

“It is walking distance to the University of Chicago, a stone’s throw from a world-class museum, the Museum of Science and Industry, and a short distance to the lakefront and multiple modes of transportation,” said Interra Realty’s Lucas Fryman, who represented both the buyer and seller. The firm 29th Street Capital, which acquired $3.1 billion of multifamily assets across the country, also sold a 42-unit rental building in suburban Mount Prospect for $5.5 million in November.

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Source: Pair of Chicago’s Western Suburb and South Side’s Apartments Sell for $30M

https://www.creconsult.net/market-trends/pair-of-chicagos-western-suburb-and-south-sides-apartments-sell-for-30m/

Property Investors Spent More Than $1 in Every $3 on Apartments in Fourth Quarter

Rent Increases Boosted Investor Demand, According to CoStar Analysis

Multifamily property sales surged in the second half of 2021 and accounted for more than $1 out of every $3 spent in the fourth quarter, according to preliminary CoStar data.

The multifamily sector made up 34% of all property sales in the last three months of 2021, the highest percentage in five years. The surge comes at the expense of industrial assets, which, following a brief second-quarter spike in retail property sales, remain the second choice among investors.

In 2020, landlords were wondering whether apartment dwellers would pay rent. Now they’re wondering how long record-setting rent growth can last, according to CoStar analysts. After passing out big concessions for several months at the start of the pandemic, landlords increased rents at an annual average pace of 11% thanks to soaring demand, strong demographics, and a broader economic recovery.

With demand and rent growth surging, investment capital poured into multifamily properties. Investment sales have been occurring at a historically high pace. Dallas, Phoenix, and Atlanta sit as top markets by sales volume, as investors have shifted capital away from core coastal markets and into the Sun Belt.

Demand for apartments, however, is expected to slow in 2022, according to CoStar analysts. Without expanded unemployment benefits, stimulus checks, or an eviction ban in effect, the tightness of the rental market could loosen, softening demand.

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Source: Property Investors Spent More Than $1 in Every $3 on Apartments in Fourth Quarter

https://www.creconsult.net/market-trends/property-investors-spent-more-than-1-in-every-3-on-apartments-in-fourth-quarter/

Demand for Apartments Fuels Strong Start to the Year for Freddie Mac

A $61 million loan for the purchase of Arium Santa Rosa Beach apartments in Santa Rosa Beach, Florida, will help launch Freddie Mac’s first commercial mortgage-backed securities offering of the year. (CoStar)

Government-sponsored housing finance giant Freddie Mac is returning to the commercial mortgage-backed securities market as strong fundamentals push apartment deals to record-breaking levels.

Freddie Mac said it has three offerings on its calendar this week, totaling an estimated issuance balance of $2.6 billion.

Unprecedented demand for apartments combined with the vacancy rate hitting a historical low created record-breaking rent growth of 11% for U.S. multifamily properties in 2021, CoStar data shows. That helped fuel historically high sales.

The activity also spurred record multifamily lending. Total multifamily origination volume in 2021 was expected to hit $450 billion, according to Steve Guggenmos, vice president of research and modeling at Freddie Mac.

“Looking forward to 2022, we expect growth to continue but at a slower rate — up 5%-10% to $475 billion to $500 billion,” he estimated in a new forecast. “Despite more modest growth, these forecasts indicate a very strong year for originations and record-setting volume in 2021 and 2022.”

The economic and multifamily recovery is expected to continue through 2022, according to Guggenmos.

“Given the robust demand for housing this year, we believe that upward price pressure for both rental and for-sale housing will continue in the short term as we continue to experience an overall housing shortage across all housing types,” Guggenmos said.

Sun Belt Rent Growth

Among the top 10 markets, the pandemic emphasized trends that were already emerging prior to 2020, namely that the strongest rent growth occurred in less expensive Sun Belt and tech hub markets. The growth in these markets during the pandemic was explosive, with year-over-year rent growth of 21% or more.

Even among the bottom 10 markets, year-over-year rent growth was strong, with the weakest market reporting rent growth in excess of 3% and all others seeing rent growth of 5% or more.

“The migration changes initially brought about by the pandemic appear to be continuing,” he said. “New trends, however, are also emerging. During the early days of the pandemic, many residents fled expensive, densely populated, coastal urban city centers for less expense and less dense suburban locations. This demand for a lower-cost living continues to reshape the demand seen in markets across the nation.”

In 2022, gateway and some Midwest Rust Belt markets are expected to see improving vacancy rates. The largest projected drops in vacancy are concentrated in Northeast and mid-Atlantic markets such as Washington, D.C., and Boston, where vacancy rates are expected to decline by 160 and 130 basis points, respectively, according to Guggenmos.

A couple of factors could moderate historic demand and price growth nationally, he noted.

COVID-19 could still cause fresh waves of economic uncertainty that will likely persist throughout this year. And while the economy is growing, inflation has become a growing concern.

“Looking forward, we believe some areas of the economy will continue to see upward pressure on prices while others will likely see lessening upward inflation,” Guggenmos said.

The first securitization expected from Freddie Mac this week is the estimated $830 million FREMF 2022-KF128 offering.

The two largest loans in the deal back large acquisitions last year, according to Freddie Mac’s circular for the bonds. Brentwood Investment Group of Lakewood, New Jersey, acquired the 480-unit Crown Point Townhome Apartments in Norfolk, Virginia, for $77 million, and Carroll acquired the 280-unit Arium Santa Rosa Beach in Santa Rosa Beach, Florida, for $93 million.

The first deal on tap is backed by floating-rate loans. The other two offerings still expected to come this week are a fixed-rate offering estimated at $1.3 billion and an estimated $450 million small-balance offering backed by loans of less than $10 million on smaller properties.

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Source: Demand for Apartments Fuels Strong Start to the Year for Freddie Mac

https://www.creconsult.net/market-trends/demand-for-apartments-fuels-strong-start-to-the-year-for-freddie-mac/

No End in Sight Yet for Higher Home Prices

 

After a blistering year, the housing market shows no sign of retreat entering 2022.

Demand continues apace, especially in cities in the Mountain West and Southeast where population growth has been particularly strong, while the number of homes available for purchase has not kept up. Consequently, price growth has been meteoric during the pandemic, and while that may slow, it’s not happening yet.

The median price for existing homes grew by 13.9% year over year in November, according to the National Association of Realtors. The Case-Shiller home price index, which accounts for same-property transactions but is slightly lagged, grew by 19.1% from October 2020 to October 2021.

Home price trends are hard to reverse. Recent sales comparables drive valuations for buyers and sellers, and with prices growing at a rapid clip, it’s unlikely that that momentum will slow. Just over 42% of home sales closed above the asking price in the four-week period ending on Dec. 26, 2021, compared to about 20% in the same period in 2019, according to real estate brokerage Redfin.

Given this recent history, it may not be surprising that projections for home prices in 2022 are all over the place, ranging from continued strong price increases to declines. But a variety of factors influence the direction of the housing market, making the effort to produce forecasts challenging.

Millennial Demand Drives Prices Higher

A significant driver of housing demand will continue to come from millennials, who are aging into their first-time home-buying years. They have made up a large portion of homebuyers for the past few years, but a large share is yet to reach their 30s when owning a home becomes a larger priority. And although many millennials preferred urban areas prior to the pandemic, hybrid work schedules and flexible work-from-home policies have attracted many to move to suburban areas where home prices tend to be more affordable and construction is more feasible.

Further, those left behind in rental units are becoming more motivated to consider homeownership as apartment rents move ever higher. CoStar’s market rent series for U.S. apartments grew by 11.2 percent in 2021 — the highest rate of growth in the 21-year series. While the forecast calls for slower growth over the next five years, rents can be hiked annually or more frequently and are not as guaranteed as a 30-year fixed-rate mortgage, which helps make housing costs easier to budget and boosts potential demand for housing.

Yet inventories of homes for sale remain historically low. The National Association of Realtors reported 2.1 months of inventory in November, a record low, and Redfin reports that 26 days was the median number of days on the market for existing homes sold in the four-week period ending on Dec. 26, 2021, compared to roughly 50 days in the same period in 2019. During the pandemic, families were reluctant to move, depressing inventories. With a growing number of cases due to the omicron variant, the inventory of homes for sale should remain constrained through the early months of 2022.

At the same time, builders of new homes have faced rising costs of construction materials and labor, leading them to raise prices higher or choose to build homes with higher price tags. In the current environment of strong demand, it’s more likely the latter will occur. Private residential construction spending grew by 16.3% year over year in November.

It’s not all bad news. Rising prices have been a boon to homeowners who face financial difficulties by allowing them to refinance or sell at a profit, as home equity has been boosted. Some buyers expected a wave of distressed properties to reach the market in 2021 due to pandemic-related forbearance programs, but that never materialized. Mortgage data provider Black Knight reports that just 891,000 mortgages remained in forbearance as of Dec. 21, 2021, compared to a peak of roughly 4.7 million in May 2020.

At Some Point, Prices Should Decelerate

In reality, price increases at recent rates cannot sustainably continue unabated. At some point, erosion of affordability will limit the buyer pool, and that may be starting to happen. Fewer households can afford to buy a home at today’s prices than earlier in the pandemic, when incomes were supported through various government programs, such as stimulus checks and enhanced unemployment benefits. The National Association of Realtors housing affordability index fell to 148.2 in October 2021, roughly to 2017-2019 levels when the housing market was more balanced.

Furthermore, housing affordability has become a larger strain in high-cost-of-living areas such as San Francisco and Los Angeles. The housing affordability index in the U.S. West registers 111.9, compared to 200.9 in the Midwest.

To be sure, affordability has been buoyed by mortgage rates, which have been historically low despite a gradual increase to 3.1% in December from 2.7% a year ago for the average mortgage rate on a 30-year fixed-rate mortgage, according to Freddie Mac.

However, rates are expected to rise in 2022. The Federal Reserve announced last year that it would accelerate its winding down of asset purchases, including mortgage-backed securities. In its Summary of Economic Projections, the median projection calls for three rate hikes over the year, with three more likely coming next year. This would lead to higher long-term rates, which mortgages are usually tied to, and increase housing costs for buyers that wait to secure home loans.

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Source: No End in Sight Yet for Higher Home Prices

https://www.creconsult.net/market-trends/no-end-in-sight-yet-for-higher-home-prices/

Chicago Firms Form Venture To Invest $1.5 Billion in Single-Family Rental Homes

Harrison Street and Core Spaces together plan to develop build-to-rent communities in large metropolitan markets such as Austin, Texas. (Getty Images)

Chicago firms Harrison Street and Core Spaces plan to invest $1.5 billion in developing and buying rental homes throughout the country.

The companies on Monday announced a joint venture to invest in build-to-rent communities in large metropolitan markets, saying they will invest as much as $1.5 billion in the emerging real estate sector.

The venture will pair Core Spaces’ build-to-rent platform and Harrison Street’s large scope, with $39 billion in assets under management in several property types.

Core Spaces and Harrison Street will focus on single-family rental homes within master-planned communities that have high-end amenities and are located in high-growth suburban areas with characteristics such as top-tier school districts, they said in a statement.

“Affordability challenges in the U.S. housing market and changes in lifestyle preferences are driving demand for single-family rentals and we believe our progressive design and hospitality-driven approach will differentiate our BTR communities in the single-family rental market,” Dan Goldberg, president of Core Spaces, said in the statement.

The firms join several others that have been pairing up resources to move into the BTR sector.

Earlier this month, Plano, Texas-based More Residential and San Francisco-based Stockbridge Capital Group said they plan to buy $4 billion worth of single-family rental homes.

Late last year, Miami-based Starwood Capital Group acquired Houston-based Land Tejas for an undisclosed sum, and Atlanta-based Invesco Real Estate bought a 75% stake in Avanta Residential, the single-family rental affiliate of El Paso, Texas-based Hunt Cos.

The Harrison Street-Core Spaces venture’s development pipeline already has $2.5 billion in total capital, with more than 6,500 units in areas including Austin, Texas; Denver, Colorado; Dallas, Texas; Orlando, Florida; and Nashville, Tennessee. The venture said it already has nine projects in various stages of development.

The firms have invested together in student housing deals on campuses including the University of Illinois at Urbana-Champaign, the University of California at Berkley, University of South Florida, Georgia Institute of Technology, University of Oklahoma, and Auburn University.

“The U.S. single-family BTR market is a rapidly expanding asset class with strong demographic tailwinds, and we are excited to draw from our U.S. student housing BTR experience alongside Core Spaces, an experienced developer and operator with significant residential real estate expertise, to identify attractive investment opportunities,” Harrison Street co-founder, Chairman and CEO Christopher Merrill said in the statement.

Harrison Street also invests in properties including life sciences, senior housing, and storage. It also has offices in San Francisco, London, and Toronto.

In another deal announced Monday, Harrison Street said it has acquired 11 medical office properties across six states from Ryan Companies. Tenants in the buildings include Edward-Elmhurst Health of Illinois, Froedtert Health & the Medical College of Wisconsin, and Children’s Hospital of Wisconsin.

Harrison Street and Ryan have completed 17 transactions in senior living, medical office, and healthcare, according to the statement.

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Source: Chicago Firms Form Venture To Invest $1.5 Billion in Single-Family Rental Homes

https://www.creconsult.net/market-trends/chicago-firms-form-venture-to-invest-1-5-billion-in-single-family-rental-homes/

3 Takeaways From ULI’s Housing Report

A just-released study from the Urban Land Institute reveals what stakeholders from all areas of the nation’s rental housing market see as the most urgent issues in today’s environment—and critically—what needs to be done to ensure more stability for both renters and property owners.The report, Stable Residents, Stable Properties, was authored by Senior Visiting Research Fellow Michael Spotts of ULI’s Terwilliger Center for Housing and was formulated through 30 interviews and 280 survey responses from tenant advocates, renters, public officials, housing affordability researchers, developers, and property owners. Spotts discussed the report and moderated a panel discussion with ULI Minnesota Executive Director Stephanie Brown and Principal Research Associate at the Urban Institute Christina Plerhoples Stacy on the findings during a Dec. 15 webinar. “Resident/housing system stability will not be solved without addressing root causes and long-term issues,” Spotts wrote in the report. Here are three top takeaways from the study:

A holistic approach

One of the overarching themes of the report, which took a deep dive into the challenges faced by owners and residents in today’s rental market, was the need for a more universal approach by stakeholders in order to improve resident stability. “…improving resident stability requires a holistic approach that considers both the needs of renter households and the realities of high-quality property operations and management,” Spotts wrote in the study. “The challenges are not separate, but two sides of the same coin.”

Bad-faith actors

The study found that perspectives of the whole are often shaped by the few when it comes to the rental housing landscape, and it can have a disproportionately negative impact on stability and policy. Bad-faith actors, whose numbers are typically very small, tended to impact how both renters and property owners viewed the group in general. “The problems created by bad-faith actors have a toxic effect on policy discourse, eroding trust and inhibiting good-faith dialogue,” read the report.

Finding common ground

The wide-ranging report found key areas of agreement that could help form a solid action plan going forward. There was a general consensus that the status quo of the market was “unsustainable” and respondents showed significant support for public policy to increase affordability and neighborhood choice. Property owners and managers and tenant advocates agreed that there was a need for more rental housing across a range of income levels, the addition of which could help to cool down rental prices and offer more options for renters.

The study found common ground for implementing and improving best practices for resident stability. Practitioners were generally supportive of efforts that would identify and disseminate best practices for improving resident stability, while tenant advocates showed wide support for a ‘renter bill of rights that would present a set of principles and policy recommendations for local and state officials looking to level the playing field and/or improve tenant protections.

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  Source: 3 Takeaways From ULI’s Housing Report

https://www.creconsult.net/market-trends/3-takeaways-from-ulis-housing-report/