NATIONAL OVERVIEW

Ask a real estate economist what the office sector will look like five years from now, and you might get a similar response as if you asked your hybrid coworker if they will be in the office next Tuesday: “Unsure. We’ll see.” When it comes to the office market, especially in central business districts, the sector has a full list of open questions to contend with.

The role of remote work looks like it will be a long-lasting legacy of the 2020 shutdown. While fully on-site remains the dominant model across all workers, for workers that can work from home (WFH), hybrid setups have emerged as the dominant model.

The office sector held the lowest investment and development prospects of any sector in the 2023 ULI/PwC Emerging Trends in Real Estate Survey — a sign that the sector’s functional uncertainties are impacting investment demand.

Of course, the sector’s hotspots of difficulty are generally in the dense central business districts of major cities — the kind of office markets that can have a workforce commuting an hour or more each way.

According to MSCI Real Capital Analytics, the price of CBD office space declined by 8.1% year-over-year in 2022. Meanwhile, suburban offices, which cater to a much more local workforce than their CBD alternatives, fared much better in 2022, with asset prices only dropping 3.6% from a year earlier. Moreover, suburban properties continue to make up a bigger slice of the office investment pie. In 2011, when CBD office assets were viewed as the safest of all CRE investments, suburban office assets accounted for just 48.0% of all US office transaction volume. Fast forward to 2022, this volume share has catapulted up to 72.2% — its highest annual share on record.

Financials

TRANSACTION VOLUME

According to MSCI Real Capital analytics, office transaction volume totaled $112.8 billion in 2022 — a 23.3% drop-off from the previous year. A pullback in transaction activity was not uncommon for most commercial property types in 2022, as 2021 saw record volumes due to pent-up demand and a sense of urgency to get deals done before interest rates would rise.

However, the office sector was unique in that its 2022 transaction volume total was low even compared to previous years other than just 2021. While 2022’s volume was 26.0% higher than 2020’s pandemic-depressed total, it is still the next smallest tally in recent memory. Compared to 2019’s pre-pandemic benchmark of $144.2 billion, last year’s total sank a discouraging 21.8% lower. Moreover, 2022 saw the least amount of property value trade hands since 2013 — a testament to the souring opinions surrounding large office buildings in gateway markets.

CAP RATES AND PRICES

Early on in 2022, cap rates in the office sector followed the declining trend that defined all commercial real estate property types. Even as open questions about the property type’s long-term functionality swirled, the anticipation of rising interest rates sent buyers scurrying to secure assets like a game of musical chairs where the record player just stopped.

However, by Q2, the market inflection was already underway. Cap rates ticked up marginally in Q2, followed by more substantial movements of 12 basis points in Q3 and Q4, respectively. The last time that office sector cap rates increased by 20 or more basis points in a six-month period was in 2009. By the end of 2022, office cap rates had jumped to 6.4%, reaching their highest levels since Q1 2021.

With office cap rates on the rise and new tenant demand remaining tepid, valuations took a hit in 2022. After reaching an all-time high of $268/sqft in Q1 2022, prices declined for the three remaining quarters of the year, falling to $255/sqft by Q4. Asset prices are down 4.1% year-over-year through Q4 2022. Moreover, compared to the record high set earlier in the year, Q4 prices were down by a slightly more substantial 4.7%.

Regional Performance

In developing the regional office rankings, the SVN Research Team utilized a scoring matrix. The matrix offers a comprehensive view of how regional markets are performing within the context of growth from a year earlier, as well as compared to before the pandemic. The eight following criteria were included in the matrix:

1. Transaction Volume: 1-Year % Change
2. Transaction Volume: % Change Over Pre-Pandemic (2019)
3. Share of US Transaction Activity: 1-Year Change
4. Share of US Transaction Activity: Change Since Pre-Pandemic
5. Cap Rates: 1-Year Change
6. Cap Rates: Change Since Pre-Pandemic
7. Pricing: 1-Year % Change
8. Pricing: % Change Over Pre-Pandemic

TOP PERFORMERS: MID-ATLANTIC

The Mid-Atlantic, which is anchored by the likes of Washington DC, Baltimore, Philadelphia, and Pittsburgh, came out as the top-ranking region for 2023, driven primarily by a recent burst of price growth. No region saw more office sector asset appreciation in 2022 than the Mid-Atlantic, where prices gained 13.4% last year.

Moreover, the Mid-Atlantic was the only region to see any price growth at all, as valuations sank year-over-year in all other parts of the country. Recent cap rate trends also have the Mid-Atlantic standing apart from the pack.

The Mid-Atlantic saw more cap rate compression than any other area in 2022 and was one of only two regions to see compressing average cap rates last year. Further, compared to three years ago, office cap rates in the Mid-Atlantic have come down by a national-best 80 basis points.

TOP PERFORMERS: SOUTHEAST

The Southeast pops up as a top-performing region again, which is hardly a surprise. The region continues to attract firms and workers that are ready to ditch costly office markets in favor of lower prices per square foot, lower tax bills, and an average temperature bump.

Over the past three years, no region has seen a bigger uptick in transaction activity market share. Between 2019 and 2022, the Southeast went from 12.7% of transaction activity by dollar volume to 17.2% — a 4.5 percentage point step-up.

Office prices are also up the most in the Southeast compared to any other region over the past three years. Compared to 2019, office valuations in the Southeast are up by 17.0% — narrowly beating the Mid-Atlantic and Southwest for the title.

The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing on Buying or Leasing Office Space? Contact us.

1. CPI INFLATION

• US annual inflation continues to decelerate through April. As reported by the BLS, the Consumer Price Index grew 4.9% year-over-year as of the most recent reading. The current pace of growth indicates a slowdown compared to the 5% year-over-year growth witnessed in March, signaling a gradual easing of inflationary pressures.
• Despite overall signs of cooling inflation, shelter costs, up 8.1% year-over-year, remain a sore spot.
• Conversely, prices for airline fares, new cars, and communication declined throughout the month, providing some relief to consumers. Food prices have remained relatively stable, with grocery store prices generally decreasing while the cost of eating out has continued to rise.

2. RENTER VS. HOMEOWNER INFLATION

• Personal inflation rates can differ widely depending on whether someone rents or owns their home. According to Chandan Economics’ latest calculations, the adjusted CPI for renters was 4.9% year-over-year in April, its slowest annual pace since April 2021.
• Meanwhile, the adjusted CPI for homeowners held steady at 2.4% year-over-year in April, remaining virtually unchanged from March.
• Inflation rates are adjusted for each group, stripping rental costs for homeowners and homeownership costs for renters. Further, the calculation assumes that fixed-rate homeowners would not feel the impact of higher shelter costs, given that they have already locked in monthly housing expenses that do not change.
• The inflation spread between these two groups fell for the first time in nine months in April. However, the difference between renter and fixed-rate homeowner personal inflation rates remains near their all-time high, currently sitting at 2.6 percentage points.

3. FOMC INTEREST RATE DECISION

• On May 3rd, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 25 basis points to 5.00%-5.25%, electing to continue tightening the economy’s financial valves as it tries to bring inflation down.
• The FOMC’s policy decision arrives amid heightened concern and volatility in the banking sector, which saw three high-profile bank failures over the past six weeks. Despite the most recent collapse—that of First Republic Bank—occurring just 48 hours before the FOMC’s decision, the committee decided to proceed with a rate hike based on the belief that liquidity backstops continue to function for the banking sector despite the recent panic.
• In their accompanying meeting statement, the committee acknowledged that tightening credit conditions will likely weigh on households and businesses in the weeks and months ahead, placing downward pressure on hiring and inflation. Fed Chair Jerome Powell suggests that the committee will take a “data dependent” approach to their upcoming rate decisions, making May’s employment, inflation, and expectations data paramount to the future path of monetary policy.

4. SENIOR LOAN OFFICER OPINION SURVEY

• Results from the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey (SLOOS) released on May 8th indicate that lenders are increasingly worried about near-term financial conditions as recession fears rise amid banking sector distress.
• During Q1 2023, the percentage of lenders indicating tightening standards increased across several key loan types. A net 46.0% of large and medium banks and 46.7% of small banks signaled tighter standards for Commercial and Industrial loans in Q1 compared to Q4 2022, up slightly from 44.8% and 43.8%, respectively.
• The net percentage of lenders indicating tightening standards for Commercial Real Estate loans similarly increased across all sub-types. A net 73.8% of banks showed tighter lending standards for construction and land development loans in Q1 2023 compared to a net 69.2% in Q4 2022. 66.7% of banks indicated tighter standards for nonfarm residential loans compared to 57.6% in Q4 2022. Meanwhile, 64.5% of lenders indicated tighter standards for Multifamily loans in Q1 compared to 56.7% in Q4.
• According to the survey’s findings, the most frequently cited reasons for tightening standards were a deterioration in credit quality within their loan portfolios, reduced risk tolerance, and concerns about bank liquidity and deposit outflows.

5. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• The on-time payment rate in independently operated rental units declined by 98 bps between March and April, coming in at 83.6%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.
• Encouragingly, while the monthly on-time payment rate fell slightly, the forecast full-payment rate rose again in April to a new record high of 93.8% — improving 40 bps from March.
• The pressures of higher interest rates have led to higher cap rates and fewer transactions, while banking sector turmoil has caused lenders to tighten underwriting standards. Despite such supply-side distress, tenant resiliency has been strong, keeping the apartment market afloat.
• Of the states with at least 500 tracked units in the RentRedi-Chandan Economics sample, Washington holds the highest on-time payment rate of any state in the country, coming in at 92.8% in April. Massachusetts (92.0%) and Virginia (88.5) are close behind. All three top performers are coastal, high incomes states.
• On-time payment rates dropped across all price points in April, with low-priced rentals seeing the largest month-over-month declines. By property type, 2–4-unit rental properties continue to see the highest on-time payment rates of all sub-property types as they have throughout the life of Chandan Economics’ tracking, coming in at 84.7% in April.

6. APRIL JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 253,000 jobs in April while the unemployment rate dropped slightly to 3.4%.
• Job growth exceeded most market expectations in April, remaining robust despite rising concerns about banking sector distress and rising recession risks. Meanwhile, average hourly wages rose by 4.4% year-over-year.
• The most significant job gains by industry occurred in professional and business services (+43,000), health care (+40,000), and leisure and hospitality (+31,000). Sectors that saw little change in payroll totals include construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, and other services.
• The strength of both job and wage growth should calm some short-term recession fears but also risks further complicating the Federal Reserve’s policy goals. On May 3rd, the FOMC raised their target fed funds rate by 25 basis points, signaling that inflation remains a broader risk despite recent bank failures and, therefore, is a higher priority.

7. NFIB SMALL BUSINESS OPTIMISM

• The NFIB Small Business Optimism Index, which indicates the strength of small businesses in the US, experienced a decline of 1.1 points in April. According to the survey, the two most significant challenges small businesses face are labor quality and inflation.
• Many owners have found themselves with excessive inventory due to overestimating demand. Owners are adjusting accordingly and beginning to decrease prices by an average of four points. Overall, there is an increased pessimism, with many owners expecting lower sales figures compared to March.
• Regarding employment, 17% of owners anticipate creating new jobs in the next three months, while 40% expect to be raising compensation for employees. Half of those planning to raise wages intend to do so within the next three months. However, it is worth noting that 33% of owners consider labor costs or labor quality to be their primary business challenge.

8. MORTGAGE APPLICATIONS

• Mortgage applications climbed by 6.3% during the week ending on May 5th, 2023, its most significant increase in close to two months, according to the Mortgage Bankers Association. During the last week of April, applications contracted by 1.2%.
• Refinance applications surged by 10.0% during the first week of May, while purchase applications rose 4.8%.
• The average rate on a 30-year fixed-rate mortgage dropped two basis points to 6.48% during the week — its lowest in three weeks.
• Application demand fell significantly during the second half of 2022 as mortgage rates rose steeply. After falling for much of December, mortgage applications increased to begin 2023 as market rates began to fall from their peak. Recent signals by the Fed suggesting a potential pause in interest rate hikes in the near future also appear to be contributing to a rise in demand.

9. ISM PURCHASING MANAGERS INDEX

• The Manufacturing PMI, a composite index where a reading above 50 generally indicates expansion in the sector while a reading below 50 indicates a contraction, measured at 46.3% in March, 1.4 percentage points below the February total.
• March represents the fourth consecutive month of contraction following 30 months of consecutive expansion, with the PMI reaching its lowest level since May 2020, when it fell to 43.5%.
• A sub-index measuring new orders fell to 44.3% — 2.7 percentage points below its February figure. The production sub-index rose slightly to 47.8%, half of a percentage point above February’s total but still in contraction.
• The prices sub-index fell 2.1 percentage points to 49.2% in March. The backlog of orders sub-index fell 1.2 percentage points to 43.9%.
• All remaining sub-indices, including the employment index, the supplier deliveries index, the inventory index, and the export and import indices, all moved lower in March compared to the month before and remain in contraction.

10. INFLATION AND INTEREST RATE EXPECTATIONS

• Inflation expectations for the year ahead dropped to 4.4% in April. Still, they increased at the three- and five-year forecasts, registering at 2.9% and 2.6%, respectively, according to the New York Fed’s Survey of Consumer Expectations. The median one-year ahead expected inflation rate peaked in June 2022 and has been receding ever since.
• Sentiment regarding current credit access and expectations of future credit access were mostly unchanged during the month. Credit sentiment began to shift in late 2021/early 2022 and has remained relatively stable since.
• As inferred by the Chicago Mercantile Exchange’s Fed Watch Tool, market forecasts firmly expect no interest rate hike by the Fed at its June 2023 meeting, anchored by falling inflation data and recent liquidity issues in the banking sector.
• Additionally, futures markets predict at least three rate cuts by the Fed by year’s end based on the prediction that policymakers will be forced to pivot if economic growth slows and unemployment rises due to tighter financial conditions.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (3) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm
• (4) https://www.federalreserve.gov/data/sloos/sloos-202304-chart-data.htm
• (5) https://www.chandan.com/independent-landlord-rental-performance-report
• (6) https://www.bls.gov/news.release/empsit.nr0.htm
• (8) https://www.mba.org/news-and-research/newsroom/news/2023/05/10/mortgage-applicationsincrease-in-latest-mba-weekly-survey
• (9) https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-onbusiness/pmi/march/

Rent cap and eviction protection are extended despite a tie vote by the supervisors.

The Los Angeles County Board of Supervisors opposed extending rent safeguards for another year and extending the provisions to unincorporated regions of the 4,083-square-mile county, an area larger than Rhode Island. The vote was tied at 2-2 with one abstention.

Resolutions to limit rent increases to 3% or the change in the Consumer Price Index over the previous year, whichever is less, were among several that fell short of a majority. According to a story in the Los Angeles Daily News, the measures would have also prolonged residential renter rights for one year throughout the county and its 88 communities.

Protecting tenants from eviction who have taken in extra occupants—including pets—during the pandemic and prohibiting landlords from evicting tenants without a reason were among the rights that were not extended.

The Board of Supervisors was encouraged by tenant and renters’ rights organizations to extend the pandemic-era rent safeguards because they think a wave of evictions is on the way that will peak when the county formally ends the COVID-19 emergency on March 31.

The tenant safeguards would have added further difficulties to landlords who are already dealing with growing prices, according to a group of roughly 20 self-described mom-and-pop landlords and numerous trade organizations that represent apartment owners.

According to the newspaper report, Fred Sutton, vice president of public affairs for the California Apartment Association, told the board that “cities can make these decisions on their own.”

Supervisor Janice Hahn, who voted against the rent protection extensions, claimed that she would have voted in favor of them a year ago, but that now that the pandemic is over and unemployment is low, Los Angeles County no longer needs “emergency regulations” and “restrictions” shouldn’t be placed on landlords in unincorporated areas.

According to Hahn, the county would provide assistance to unincorporated cities in developing their own local rent rules. The board adopted a resolution ordering the county director of consumer affairs to be available to assist localities in developing rent regulations after rejecting the renter protection extensions.

Co-author of the resolution extending renter rights, Supervisor Lindsey Horvath, made the case that the protections are crucial for reducing homelessness.

According to the newspaper story, Horvath said that a state of emergency had been established regarding homelessness. Helping those folks afford the homes they are in is the most crucial thing we can do to stop the flood of homelessness.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.

Voters were promised a housing fund of $900 million; the city now expects about $672 million.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale/lease.

1. INFLATION

• The Consumer Price Index (CPI) rose 0.4% month-over-month and 6.0% year-over-year on a seasonally adjusted basis through February, according to the Bureau of Labor Statistics’ March 14th release. Both the monthly and annual measures decelerated from January.
• Last month’s annual inflation rate was the lowest since September 2021, while the previous two months have seen a rise in monthly inflation after slowing to 0.1% and 0.2% in the final months of 2022. Core prices have risen by 5.5% over the past 12 months, the lowest annual climb since 2021, but registered their highest monthly increase since September.
• Shelter accounted for roughly 70% of monthly price increases, rising 0.8%. Food prices rose 0.4%, while energy prices fell by 0.6% month-over-month.
• Eyes now turn to the Fed — with their March policy meeting on the horizon, markets have tried to telegraph their upcoming policy decision in the face of tight labor markets, recent US bank collapses, and mixed inflation data. Following Tuesday’s CPI release, futures markets coalesced around a 25 basis point forecast for next week’s policy decision.

2. SILICON VALLEY BANK CRISIS

• The March 10th collapse of Silicon Valley Bank — and Signature Bank a few days later — became the largest US bank failures since the 2008 financial crisis. For the former, a requested capital raise triggered a crisis in confidence among depositors who feared a deterioration in bank liquidity, triggering a run on the bank and, eventually, government intervention.
• The collapse highlights the risk posed by a rising interest rate environment on the financial system, resurfaces questions about moral hazard in banking, and complicates the Federal Reserve’s hawkish stance as it prioritizes price stability amid high inflation.
• Markets initially fell in the wake of the bank failures but have rallied in the days since as federal intervention and reduced fears around contagion restore confidence in the financial system.
• While regulators stepped in with depositor guarantees and public assurances to help affirm faith in the financial system, futures markets have adjusted their forecast for the upcoming FOMC rate-hike decision to reflect an expected 25 basis point hike, down from a projected 50 basis point hike that markets predicted just a few weeks ago.

3. CRE EXPOSURE TO RECENT BANK COLLAPSES

• The recent closures of California’s Silicon Valley Bank (SVB) and New York’s Signature Bank could have implications for commercial real estate lending. While much of SVB’s business was concentrated in the tech sector, the bank’s 2022 financials showed that 15% of its loans were attached to residential mortgages
  or commercial real estate projects.
• Moreover, Signature Bank’s business focused on CRE lending. The bank’s balance sheet shows that it held $110.36 billion in assets and $88.59 billion in deposits at the close of 2022. $35.7 billion of Signature’s portfolio included loans for multifamily, commercial property, acquisition, development, construction, and home equity lines of credit.
• The tech sector’s exposure to SVB could also have implications for prop-tech firms, not only due to direct exposure but due to the common thread of venture capital firms whose portfolio consisted of several businesses that lacked diversified banking relationships. Banks often typically require single-banking relationships from lending agreements with large depositors — a standard that will likely come under increased pushback in the future.
• On the other hand, many analysts believe that The Federal Reserve’s backstopping of affected banks last weekend helped restore confidence among depositors at tech-focused banks. Some VC groups focused on prop-tech have stated that recent distress will not significantly impact their activity in the sector.

4. MORTGAGE RATES FALL

• Mortgage rates fell to begin the week, with the 30-year fixed mortgage dipping to 6.57% on Monday, March 13th, from a recent high of 7.05% registered last Wednesday.
• Movements in mortgage rates are generally concurrent with movements in US Treasuries, which saw yields fall sharply in the wake of last week’s bank collapses.
• After reaching a high of 7% last September, mortgage rates declined to close 2022 and fell as low as 6% in January, prompting an 8% jump in pending home sales that month. Recent rate reduction could generate a similar jump in homebuying activity in March.
• Since mortgage rates are indirectly influenced by movements in the Federal Funds rate, recent volatility around March rate hike projections is likely also contributing to the recent fall in rates.

5. MARCH RATE-HIKE PROBABILITIES

• Forecasts for this month’s interest rate decision by the FOMC are somewhat split as of March 15th, 2023. According to the Chicago Mercantile Exchange’s Fed Watch Tool, markets are pricing in a 55.4% probability of a 25-basis point hike at the Fed’s March policy meeting, while 44.6% see the committee
  holding rates at the current range of 450-475.
• Recent US bank failures catalyzed the current split consensus and increased the likelihood of a rate-hike pause. Some investors are betting that the financial market distress will encourage the Fed to pause rate increases to provide liquidity to the market.
• However, financial markets have normalized in recent days. While concerns about the banking system remain front of mind, recently released inflation numbers showed only a marginal month-over-month deceleration in price pressures. With inflation still the primary focus of ongoing Fed policy, they are likely to move forward with a 25-basis point hike.
• Futures markets now anticipate a slower pace of Fed rate increases moving forward and forecasts that the committee will terminate rate hikes after the May meeting.

6. NAIOP INDUSTRIAL SPACE DEMAND

• NAIOP, a commercial real estate development trade association, raised its projection for Industrial net absorption in 2023 in the latest Industrial Space Demand Forecast.
• The Q1 report, released earlier this month, revised its estimate for net absorption in 2023 up to 310 million square feet, which reflects a more resilient economic start to the year than previous estimates anticipated and upwardly revised net absorption totals from 2022. NAIOP forecasts 323 square feet of Industrial net absorption in 2024.
• During the final two quarters of 2022, Industrial net absorption averaged 176 million square feet, a significant drop from the 236 million square feet absorbed during the first two quarters of last year. Overall, the sector finished 2022 with a net absorption of 413 million square feet.
• Despite rising interest rates and new supply coming online, the Industrial market remains a standout in CRE performance, with low vacancy rates and industry-leading transactions and price growth.

7. FEBRUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 311,000 jobs in February while the unemployment rate ticked up ten basis points to 3.6%.
• While US job growth declined from a 6-month high of 517,000 in January, February’s growth was still robust in a historical context, remaining well above the average job-add levels seen during the post-GFC jobs cycle.
• Despite the uptick in unemployment and a recent rise in jobless claims, last month’s jobs numbers combined with February’s inflation rate of 6.0% are likely to reinforce policymakers’ conclusion that the labor market is too tight relative to price stability, prompting them to push forward with a March rate hike.
• The leisure and hospitality, retail trade, government, and healthcare sectors saw the most significant employment growth. Employment declined in Information occupations, including tech, and transportation.

8. JOB OPENINGS AND UNEMPLOYMENT

• Total US job openings declined in January, falling from 11.2 million in December to 10.8 million in the first month of 2023.
• Total hires and separations were little changed during the month, registering 6.4 million and 5.9 million, respectively. However, breaking down the separations data, a decline in quits was offset by a rise in layoffs, a potential signal that the labor market is beginning to loosen.
• Job openings per unemployed person continue to sit near record highs, holding at 1.9 available jobs per unemployed worker, unchanged from the previous month. The ratio has been persistently high since mid-2022. In January 2020, shortly before the pandemic began, the ratio stood at 1.2, which had been a post-GFC peak.
• While record job openings continue to elevate the ratio, continued increases in joblessness may begin to place downward pressure on it. During the week ending on Saturday, March 4th, 211,000 people filed initial jobless claims, up from 190,000 the week before.

9. APARTMENT MARKET INVESTMENT INDEX

• The Freddie Mac Multifamily Apartment Investment Market Index (AIMI), a measure of overall multifamily sector investment health that tracks asset prices, property-level incomes, and mortgage rates, fell by 7.6% during Q4 2022 and 25.8% year-over-year.
• The AIMI declined in all the 25 major market tracked by Freddie Mac, and corresponds with rising mortgage rates that dampened investment demand, resulting in the index’s sharpest annual drop in its history.
• Analysts generally agree that the Multifamily sector fundamentals have not, nor are they expected to, weaken significantly, but falling net operating income and property price are indicative of broader monetary constraints as borrowing costs climb and investors become more selective.

10. CONSTRUCTION COSTS

• According to the latest Cost of Construction Survey by the National Association of Home Builders (NAHB), roughly 60% of sale value consisted of construction costs in 2023, based on average home sales prices.
• Since NAHB began tracking construction cost-to-value ratios in 1998, the metric has only risen above 60% on three other occasions. However, the recent uptick is not a significant deviation from historical patterns. Construction costs last crossed the 60% threshold in 2019, when they contributed towards 61.1% of home values, with the other two instances in 2013 and 2015, which saw ratios of 61.7% and 61.8%, respectively.
• Breaking construction costs down further, interior finishes accounted for the largest sub-share (24.0%), followed by framing (20.5%), major system rough-ins (17.9%), exterior finishes (11.8%), foundations (11.0%), site work (7.4%), final steps (5.9%), and other costs (1.5%).
• Finished lot costs contributed the second highest cost at 17.8%, a decline from 2019’s 18.5%. Overhead and general expenses averaged 4.9%, unchanged from 2019, and were followed by sales commission (3.6%), financing costs (1.9%), and marketing costs (0.7%) — all of which have fallen from 2019 contribution levels.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm
• (2) https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank
• (3) https://www.globest.com/2023/03/14/%E2%80%8Bbanks-collapse-affecting-mortgage-rates-vcproptech/
• (6) https://www.naiop.org/research-and-publications/research-reports/reports/industrial-spacedemand-forecast-1q23/
• (7) https://www.bls.gov/news.release/empsit.nr0.htm
• (8) https://www.bls.gov/news.release/jolts.nr0.htm
• (9) https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-macmultifamily-apartment-investment-market-index-0?_ga=2.226689373.1581823799.1678995759-1965643130.1605283640
• (10) https://www.nahb.org/blog/2023/03/60-percent-of-home-sales-price-goes-to-construction-costs

In response to the recent approval of a set of eviction and rent safeguards for renters around the city, multifamily landlords in Los Angeles are taking legal action.

The Greater Los Angeles Apartment Association (AAGLA) filed a lawsuit against the city to overturn and prohibit the execution of the new ordinances that make it more difficult to remove tenants as well as penalize landlords for raising rent.

One of the ordinances in dispute demands that at least one month’s worth of rent be unpaid before starting the eviction process. The other requires landlords to cover relocation costs if a tenant is displaced as a result of a rent increase of at least 10% or by 5% above the rate of inflation, whichever is lower. That entails paying $1,411 in moving expenses in addition to three times the unit’s fair market rent.

The office of City Attorney Hydee Feldstein Soto stated that it is reviewing the case but would not provide any further information.

Cheryl Turner, head of the AAGLA board of directors, declared that the new ordinances are “clearly illegal” under the state’s Costa-Hawkins Rental Housing Act, a 28-year-old statute that exempts some properties from rent-control regulations.

Rental units like newer construction, single-family homes, and condominiums are exempt from price controls like rent stabilization ordinances, but [the city’s new ordinance] potentially imposes severe financial penalties on any owner that increases rent above specified limits on a rental unit that is exempt from rent control, should the renter then decide to move, Turner said in a statement.

The policy, according to Turner, flies in the face of state law, which enables owners to issue three-day notices and commence legal processes, as it needs a minimum amount of past-due rent to trigger evictions.

Renters may now continue to live in their homes in violation of their lease agreements without facing consequences because owners may now have to wait months or even years to collect past-due rent, according to Turner. According to the city’s ordinance, renters, not property owners, can now effectively determine the amount of rent they desire to pay.

Unscrupulous tenants can simply stretch out legally owed rent payments for months or even years by “short-paying” rent in increments of $50, $100, or more per month, according to Daniel Yukelson, executive director of AAGLA, and rental property owners will be left with little to no remedy.

To make matters worse, there are very few remedies under state law to collect the aged, compounded rental obligation after any amount of delinquent rent is past due for more than 12 months, Yukelson added.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale/lease.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.

1. JANUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the US economy added 517,000 jobs in January while the unemployment rate was little changed at 3.4%. The number of unemployed persons was also little changed at 5.7 million.
• On the surface, the January report registered way above most industry expectations, with some observers concerned that the Federal Reserve may need to continue rate increases for longer than markets are anticipating. However, January’s total is likely to be significantly revised downward following adjustments, as is historically common during January.
• Notably, January’s significant payroll increase followed the announcement of massive layoffs by several tech giants, including Google and Microsoft — while corporate America also frets about the risk of a looming US debt ceiling limit.

2. FOMC INTEREST RATE DECISION

• On February 1st, the Federal Reserve’s policy-setting committee raised their target Federal Funds Rate (FFR) range by 25 basis points to 4.50%-4.75%, slowing their speed of rate increases after four consecutive 75 basis point hikes and one 50 basis point hike in December.
• The FOMC’s policy decision arrives after weeks of falling leading inflation indicators. However, several macroeconomic indicators remain far from recession territory, convincing many officials to stay committed to additional increases and holding rates higher for longer if needed.
• Based on data from the Chicago Mercantile Exchange’s Fed Watch tool, most market watchers anticipate another 25 basis point hike at the FOMC’s next meeting in March.

3. JEROME POWELL STATEMENTS

• In his first public press conference since January’s 25 basis-point hike, Federal Reserve Chair Jerome Powell claimed that the Fed still has a “significant road ahead” to bring down inflation, despite the FOMC recently slowing their pace of rate hikes.
• Powell’s comments came just a few days after the release of the January jobs report, which showed higher-than-expected payroll growth and an unemployment rate pushed to its lowest level since 1969.
• Powell suggested that several more rate increases are likely on the horizon, though he did not indicate what the pace of the increases may be. He also states that the longer-run Fed Funds rate will likely end up higher than where markets are currently pricing.

4. HOUSING AFFORDABILITY INDEX

• According to the latest Housing Affordability Index by the National Association of Realtors, housing affordability rose in December for the second consecutive month, following consecutive declines in September and October.
• The index reflects how much a “typical” family can afford a “typical” home, defined as a family earning the median family income and an existing single-family home at the national median price, respectively. The median-priced existing single-family home has declined for seven consecutive months, while the median family income has risen for 12 straight months.
• Regionally, housing affordability is highest in the Midwest, followed by the Northeast, while the South and West were less affordable. All regions have seen affordability rates fall precipitously over the last year.

5. FREDDIE MAC MORTGAGE MARKET INDEX

• According to Freddie Mac, mortgage rates rose slightly during the week ending on February 9th.
• The 30-year fixed-rate mortgage ticked up to an average of 6.12% as of February 9th, up three basis points from last week. The 15-year fixed rate mortgage averaged 5.25%, up from 5.14% the week before.
• Mortgage rates remain well above their levels from a year ago as the Federal Reserve continues its monetary tightening actions in an effort to calm US inflation. In recent weeks, mortgage applications have risen significantly as rates began to dampen slightly in January. The recent uptick may be a boon to homebuying markets as consumer interest grows right in time for the busy spring season.

6. LOGISTICS MANAGERS INDEX

• The Logistics Managers’ Index (LMI), a diffusion index where above 50 signals expansion in transportation and warehousing activity and below 50 is a contraction, increased to 57.6 in January, up from 54.6 the month before and is the index’s second consecutive monthly increase.
• The consecutive increases follow seven declines in the LMI over the past eight months. According to the report, the uptick was primarily driven by the transfer of overstocked inventories away from upstream wholesalers toward downstream retailers.
• Notably, a temporary increase in the LMI in September 2022 came amid supply chains that were newly flushed with high inventory. Such fundamentals at the time signaled that goods were merely moving from place to place, and during the previous two LMI increases, inventories were much lower. The consistency may be showing the beginning of a trend toward sector growth.
• According to the report, another critical development for global warehousing and transporting activity is the reopening of China’s economy. Over the past several years, supply chains had to account for the “start-stop” nature of Chinese manufacturers. However, an economic surge in January after an end to the nation’s “zero-COVID” policies is sparking new life and certainty in logistics markets.

7. CMBS DELINQUENCIES FALL IN JANUARY

• According to data from Trepp, the CMBS delinquency rate declined in January 2023, following several months of only tepid increases despite anticipated trouble arising from rapidly rising interest rates.
• The Trepp CMBS delinquency rate fell ten basis points in January to 2.94, the second-lowest reading since the pandemic began. Annually, delinquencies are down by 124 basis points.
• Tracking delinquencies by sector, Industrial maintains the lowest rate of 0.40%, falling slightly monthover- month. Multifamily follows with a delinquency rate of 1.56% in January, down from 2.17% in December. Office registered a 1.83% delinquency rate in January, a 30 basis points increase and the only sector outside of lodging that saw a month-over-month increase. Lodging delinquencies stand at 4.44%, up from 4.40% in December. Meanwhile, Retail maintains the highest delinquency rate by sector at 6.58% but is down nearly 40 basis points from the month before.

8. VTS OFFICE DEMAND INDEX

• Office demand finished 2022 down 20.7% year-over-year, according to the latest Office Demand Index by VTS (VODI).
• Notable upticks in office demand occurred during the Spring and Fall of 2022; however, it was not enough to offset other seasonal declines.
• According to VTS, office demand has strongly correlated with average job postings over the past year. Washington DC exemplified this, with the local VODI increasing 21.4% year-over-year through December 2022 as the metro’s concentration of government, nonprofit, and professional services employment helped keep demand high.
• Remote work remains the most significant challenge to office sector growth, though its prevalence has declined. Work-from-home prevalence has reduced from roughly 5% to 30% during the early days of the pandemic to a current range of 40 to 60%. The variation in the frequency of occupations using remote work has narrowed while remote work rates have stabilized at current levels.

9. MSCI 2023 TRENDS TO WATCH

• A new report by MSCI summarizes several key trends in Real Estate that the authors believe will be pertinent in 2023, including the importance of price expectations for market liquidity and a more critical role for market fundamentals.
• Higher interest rates are creating repricing opportunities for many commercial real estate assets sold during the previous decade’s low-yield environment. As a result, there is a growing gap in price expectations between buyers and sellers, accelerating the slowdown in transaction volume. How this gap shifts will be vital in evaluating likely 2023 outcomes.
• Similarly, as the Fed tightens interest rates, yield performance is no longer accelerating market returns, forcing managers to focus on retaining tenants and operating efficiently.

10. ECONOMIC OPTIMISM

• Economic optimism in the US increased to a ten-month high in February, according to an Index developed by Investor’s Business Daily and Technometrica Market Intelligence.
• The index is based on a nationwide survey of 900 adults and measures the six-month forward-looking economic outlook, where a reading above 50 indicated optimism and one below 50 indicated pessimism.
• February’s Economic Optimism Index ticked up to 45.1 from 42.3 in January. Though the index remains in “pessimistic” territory, the percentage of consumers who believe that the US is currently in recession or that their personal finances are at risk saw month-over-month declines.
• Other key items included climate risk, which has proven difficult for investors to price, but rising evidence shows that buildings that meet specific sustainability standards sell at high premiums. Down-market resilience and due diligence in using data were also important developments to keep an eye on.

SUMMARY OF SOURCES

•  (1) https://www.bls.gov/news.release/empsit.nr0.htm
• (2) https://www.federalreserve.gov/newsevents/pressreleases/monetary20230201a.htm
• (3) https://thehill.com/finance/3847680-heres-why-the-strong-january-jobs-report-will-push-interestrates-higher/
• (4) https://www.nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index/methodology
• (5) https://freddiemac.gcs-web.com/news-releases/news-release-details/mortgage-rates-increaseslightly-1
• (6) https://www.the-lmi.com/
• (7) https://www.trepp.com/instantly-access-delinquency-report-january-2023?utm_
  campaign=Delinquency%20Report&utm_medium=email&_hsenc=p2ANqtz-8Z7gFrQUDi9GPmrvVWBjUKEiUBV0HOrlsUTxQu-
  aXkawu8O8iVUn0ETjXmHKmL8HlHbVaC1-_sDt9Cf0ve3_W_wiE2Q&_
  hsmi=244332373&utm_content=244332373&utm_source=hs_email&hsCtaTracking=633d8656-b8ab-
  4cee-aa48-48c94fb2d86d%7C3d1edecf-80f8-4c7a-83e6-cf60e3259855
• (8) https://www.vts.com/
• (9) https://www.msci.com/research-and-insights/2023-trends-to-watch-in-real-assets?utm_source=onemsci&utm_medium=email&utm_campaign=msci-weekly-2023-2-9
• (10) https://www.bloomberg.com/press-releases/2023-02-07/february-s-ibd-tipp-poll-showseconomic-optimism-on-the-rise

Research demonstrates that eviction safeguards helped keep people housed throughout the crucial period of the pandemic, according to tenant advocates and renters. These supporters contend that maintaining renters in their housing shouldn’t end with the pandemic’s emergency phase in a city where a sizable portion of the population is homeless.

Nithya Raman, a council member whose district includes Encino, Silverlake, and Los Feliz, described the additional safeguards as the most significant since the establishment of the Rent Stabilization Ordinance in a tweet on Friday.

Before the end of this week, the council is expected to hear from the two last components of the renter safety net. The other would establish a minimum amount of time that would need to pass before tenants could be removed for nonpayment. The first would mandate that landlords provide basic relocation assistance for tenants who move out because they have experienced a rent rise of 10% or more.

Sasha Harnden, the public policy advocate with the Inner City Law Center, said, “We must put the two remaining permanent protections in place so that we can have a really full safety net of protections and make sure that we do not see a rise in evictions and homelessness.”

According to Harnden, only those two safety net components can effectively address rent and renters in the future. In the event that they are put into effect,   “we will have the strongest protections for non-payment evictions in the county of Los Angeles,  maybe in the entire nation,” he claimed.

In a way that we haven’t seen in a while, according to Harden, the council’s five new members have demonstrated genuine leadership and real engagement with these issues.

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale/lease.

Given the ongoing uncertainty, the sentiment gauge is still in the negative zone.