The movement for multifamily rent regulation has gained momentum nationwide over the past few years, and the pandemic has increased political and popular support for tenant safety. The negative effects that these policies will have on multifamily property owners and their capacity to upkeep and create housing has been vocally expressed.
According to a report by the National Multifamily Housing Council from earlier this year, owners are actively avoiding markets with rent limits or seriously considering leaving markets that enact these rules.
However, according to industry experts who spoke with Bisnow, California’s state and local rent control and limit regulations haven’t had a significant influence on multifamily financing. However, some projects, like value-add deals, have become more challenging to complete as a result of these and other laws affecting multifamily developments, particularly the still-in-effect eviction ban in Los Angeles.
Across the country, rent control is becoming more prevalent. In 2021, St. Paul, Minnesota, approved a 3% rent cap. According to a recent article in The Wall Street Journal, legislation that might establish rent restrictions has been proposed in at least a dozen states. The legislation would prevent rent increases by landlords of more than 2% to 10%. According to the WSJ, rents have increased nationwide by an average of 18% since the start of the pandemic. According to Insider, the states with cities that are considering similar restrictions are diverse in terms of geography, demographics, and ideologies. They include Arizona, Florida, Illinois, Kentucky, New Jersey, New York, Washington, and Massachusetts.
In 2019, Gov. Gavin Newsom signed AB 1482, which places a 10-year cap on how much landlords can raise rent in a sizable number of buildings throughout the state. California has had rent regulations in various forms for decades. Rent increases of more than 5% plus inflation per year are prohibited for multifamily landlords, as well as for owners of condominiums and single-family houses who are 16 years and older. According to the statute, landlords are also required to give “just cause” for evictions.
According to Doug Perry, senior vice president of sales at Archwest Capital, the law didn’t have the significant effect that many in the CRE industry had hoped.
The landscape didn’t shift overnight, according to Perry, whose company is a direct commercial lender with a nationwide concentration on multifamily and mixed-use properties. Rent control rules haven’t affected the way we underwrite loans, but they have made some situations a little more difficult.
For instance, it could be more challenging to complete a value-add project that entails purchasing a property with a lot of unfinished maintenance, upgrading it, and then boosting the rent.
Perry adds, “Those projects don’t get done as much because they can’t be done from a compliance standpoint with the rent control laws.”
There are workarounds that can be useful, such as “cash for keys,” in which a renter is given a lump sum in exchange for leaving a rental property. Most of the time, the rent for the apartment can be changed to reflect market rates. However, it can cost a lot of money to evict residents, and that money isn’t going toward the main goal of these projects, which is to improve the building so that the apartments can draw higher-paying renters.
According to Perry, “there are occasions when the expense of doing it increases the cost of the entire project to the point where it’s just not a profitable endeavor, and it doesn’t make sense.”
According to Perry, the impact of municipal rent control laws, as opposed to state-level ones, may be greater for smaller investors and individual owners who have investments in areas with such laws, but this is only a problem for specific projects and not a general problem.
Value-add deals may take longer to complete if there are eviction moratoria, like the one that is still in place in Los Angeles.
Shahin Yazdi, partner and managing director of George Smith Partners, which arranges loans for CRE borrowers nationwide, said that it is “simply not as realistic” for the borrower to expect to be able to turn around an entire building when there is an eviction moratorium and you can’t perform no-cause evictions.
Instead, it is necessary to diminish expectations, either that it will take longer to empty the building or that it won’t be empty enough. This means that the transactions must make financial sense even if only a portion of the building—say, half or a third—is made accessible to new, wealthier tenants. But in other situations, the resilience of multifamily during the epidemic has made this conceivable.
Regarding Los Angeles and its current eviction moratorium, Yazdi noted, “Multifamily continues to be a great performing asset, even with people not paying.” The rate of foreclosures did not soar. It’s a wonderful asset class for lenders since landlords, who may have made some postponed payments, nonetheless make their mortgage payments.
Despite the optimistic response from the lender side, a study released in January 2022 by the National Multifamily Housing Council revealed that efforts to enact rent control are having an impact across the country, not just in California.
The study asked 78 CEOs and senior executives at national “apartment-related enterprises” if the growing number of areas that had implemented, strengthened, or were considering rent control or rent ceilings had an impact on development and investment decisions. 32 percent of respondents claimed to already steer clear of rent-controlled areas, and 26 percent claimed to have reduced their investment in these areas due to local rent-control strategies.
However, almost the same number of respondents (23%) stated that despite rent restrictions, they have no plans to alter their investments or developments in these locations.
California appears to stand out from the pack of rent control initiatives despite their rising popularity across the nation. The NMHC survey asked participants to indicate the markets they actively avoid because of current rent control laws or the potential implementation of new regulations. According to NMHC, out of the 31 respondents who responded to this question, 55% mentioned certain markets in California or the state as a whole.
According to Jim Lapides, vice president of strategic communications for the National Multifamily Housing Council, “California is a uniquely challenging environment to operate” because of the state’s rent control laws as well as the laws that local governments have either approved or are preparing to pass. It adds up for every city that enacts new rent control legislation and every moratorium that is still in place.
Despite these obstacles, investing there is still profitable, according to Lapides, and investors will continue to do so. According to a year-end analysis by CBRE, which used data from Real Capital Analytics, the greater Los Angeles region attracted $58.8B in investment expenditures in 2021, making it the biggest beneficiary of those funds. With nearly $35 billion in tourism, the Bay Area placed fourth. The statistics showed that apartments were the asset class that attracted the greatest investment in the East Bay and greater Los Angeles. (Offices in San Francisco received the most investment.)
According to Lapides, “California is always going to be an appealing market because there are tens of millions of residents, there are huge marketplaces, and it’s vital for the industry.” However, the course they have been on will seriously harm them.
In contrast, Perry observes a pattern of adaptation to the challenges that California has so far generated.
The reality is that rent control is in place throughout the state and has been for some time. We have learned to live with it, adjust to it, and make it work from both a lending and a borrowing position, Perry said.
There’s no way we should raise any taxes that make it more expensive to live or work in the Los Angeles area, given that inflation today is above 8% and at a 40-year high. Measures like ULA and SP are specifically designed to accomplish this. Voters in the City of Los Angeles will decide on Measures ULA and SP on the ballot in November. On these ballot initiatives, we advise anyone to choose NO.
These two initiatives together result in a $1.1 billion property tax hike, the greatest tax increase in city history, which will raise prices across the board. If they are approved, small businesses and apartment rents will both increase by 6%. In the end, consumers will bear the burden of these two measures through higher prices on goods and services of all kinds. Owners of commercial buildings and multifamily housing will be “hit” the most by the passage of these measures, and as a result, prices for consumer goods and all types of services will increase to pay for these new taxes.
Measures like ULA and SP dismantle decades-old Prop 13 safeguards for tenants, homeowners, and small businesses.
Information on Measure ULA
On property sales of $5 million or more, Measure ULA, the so-called “United to House L.A.” proposal, would impose a new “documentary transfer tax.” A tax of 4% of the sale price would be applied to any property selling for between $5 million and $10 million, while a tax of 5.5% would be applied to houses selling for more than $10 million. That’s a substantial new tax of $800 million for the transfer of documents.
The new Measure ULA tax’s stated goal is to combat homelessness. Some of the funds would be used to build 26,000 additional housing units over a ten-year period. The remaining funds would be used to avoid homelessness, provide temporary rent relief, help disabled renters make ends meet, and provide free legal services to tenants who are being threatened with eviction. The failures of Measure HHH, which include the slow disbursement of funding and the soaring costs of building under the measure (with one-bedroom homes costing upwards of $800,000 each), have all already been witnessed.
While the bill claims to be directly at the wealthy. There will need to be a way to pay for more taxes, and that way is by raising the cost of all goods and services. In the end, these extra taxes and expenses will be borne by regular customers.
Measure ULA would create a new “L.A. Tenant Councils and Citizens Oversight Committees” that could add up to $70 million in extra administrative and overhead expenses annually for taxpayers.
Information on Measure SP
The measure’s proponents claim that it is merely an extension of Proposition K. Measure SP is a 908% increase above Proposition K and doesn’t expire until 2026.
Renters, homeowners, and small companies in Los Angeles will pay more in property taxes under Measure SP, which will raise the cost of all consumer products and services.
If approved, the typical family of four would have to pay hundreds extra in property taxes every year.
A “special tax” of around eight cents per square foot could be imposed by the City of Los Angeles under Measure SP in order to help pay for parks and other leisure-related initiatives.
Despite the fact that two other tax measures already in place allow Angelenos to pay for additional parks, Measure SP is still being introduced.
Before Angeleno residents are required to pay yet another tax increase, the City of Los Angeles should use the $150 million in unallocated park funds that are already available.
We advise anyone living in LA to vote no on these increases.
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
Freddie Mac declared that it would expand lending for recently built or extensively renovated multifamily homes.
According to the statement, “the company will take advantage of the FHFA flexibility provided that allows for greater utilization of forward commitments, which are agreements to purchase loans at a later date with specific financing terms locked in today.” The agreements give construction lenders and home developers more assurance by reducing the risks they encounter when carrying out complicated multifamily acquisitions in unstable markets. In its Equitable Housing Finance Plan, Freddie Mac suggested using forward commitments more frequently.
Any firm, particularly in the commercial real estate industry, must constantly deal with uncertainty. The circumstance of increased risks make it more challenging for a business to plan and secure appropriate finance.
The issue is practically impossible to solve when inflation is high as building prices are rising quickly, and borrowing rates are being continuously pushed higher by the Federal Reserve. There are really too many unknowns. The problem is much more challenging if the project is for low income housing. There is little room for planning to cover future costs when there is a strict cap on the maximum amount that rentals can be.
Future obligations, according to the Federal Housing Finance Agency (FHFA), were to stay below Freddie Mac’s annual product cap of $78 billion for 2022. However, the FHFA has already announced that $3 billion in 2022—or just shy of 4%—would be excluded from the cap. The $500 million ceiling on forward commitments for properties not covered by the Low-Income Housing Tax Credit program is now being lifted by FHFA.
Since September 2021, the Biden administration has talked about ways to enhance the availability of affordable housing. The strategy calls for federal agencies to increase the supply of high-quality, reasonably priced rental homes by resuming a collaboration between the Department of Treasury’s Federal Financing Bank and the Department of HUD Risk Sharing Program, as stated in a previous GlobeSt.com report.
To “improve the flexibility of state, local, and tribal governments to employ American Rescue Plan (ARP) funds to boost the supply of affordable housing in their areas,” the Treasury Department published “new instructions” in July 2022.
According to the Treasury, it has “encouraged” state and local governments to use some of the $350 billion in State and Local Fiscal Recovery Funds (SLFRF) to create and maintain affordable housing units. The continuous obsolescence of older, more affordable housing stock makes it harder to overcome the housing gap, experts have repeatedly told GlobeSt.com.
The SVN Vanguard team can help with your Multifamily Real Estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale leaseback? Contact us.
In an effort to shift to a more restrictive policy stance, US central bankers have increased their benchmark lending rate by 75 basis points at each of their most recent three meetings. As some economic sectors, like the housing market, have slowed due to the substantial increase in borrowing prices, total consumption seems to be holding up well while inflation remains above the central bank’s 2% objective.
“I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening,” he said.
In his remarks, Waller explained how the rent component in inflation measures contributes to inflation remaining high, a tendency that is unlikely to reverse itself anytime soon.
According to Waller, “Shelter inflation is a particularly persistent component of inflation.” Unfortunately, the message is that the cost of housing will probably continue to rise for a while.
While the demand for rental housing is still robust, Waller claimed that increased borrowing rates were slowing down the housing industry. He stated that in order to reduce overall inflation, the cost of commodities and other services would need to moderate.
According to Waller, we are beginning to see some adjustment to excess demand in interest-sensitive sectors like housing, and the monetary policy stance is modestly restrictive. However, more work needs to be done if inflation is to be reduced significantly and continuously.
The September payroll report will be presented to policymakers on Friday. According to a Bloomberg study, unemployment is predicted to remain at 3.7%. Because of this, Waller called accomplishing the twin mandate “a one-sided war.”
He stated, “Monetary policy can and must be employed aggressively to drive down inflation because we now do not confront a tradeoff between our employment target and our inflation objective.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
As more Americans start going shopping again, brick-and-mortar store owners are recovering from the plague with unexpected strength, reporting some of their greatest figures in years and planning expansions.
According to real estate services company Cushman & Wakefield, asking rents for U.S. shopping malls in the second quarter were 16% higher than five years earlier, while U.S. retail vacancies dropped to 6.1%, the lowest level in at least 15 years.
According to a Morgan Stanley survey, more stores opened than shuttered in the United States last year for the first time since 1995. Some analysts predict that trend to continue this year even as recession fears increase.
The retail real estate market’s recovery is the result of a painful, decades-long adjustment that saw hundreds of retailers file for bankruptcy, many storefronts go unoccupied, and a decline in the desire for enclosed malls. After several years of overbuilding, the pace of new retail construction has dramatically reduced over the last ten years.
Instead of developing new homes, the majority of developers prefer to repair aging homes. When they do start new developments, they are generally more cautious and obtain leases from tenants first before breaking ground. Companies that began as online-only businesses, like Warby Parker Inc., are increasingly using real estate to draw clients and spur development. According to financial documents, the retailer of eyeglasses added nine new locations in the second quarter, increasing its total to 178 outlets.
Additionally, many consumers have discovered they prefer shopping in stores for goods like apparel and food, despite being compelled to buy more items online at the beginning of the pandemic. This is a reassuring indicator for the long-term viability of brick and mortar retail.
Oversupply still affects other real estate sectors. The epidemic and the rise of virtual work have made an already difficult situation in the office sector even worse. According to some real estate specialists, it will probably take years for supply to decrease to the level of office demand that existed after COVID-19.
As businesses who made it through the difficulties of internet shopping and the pandemic aspire to expand, retail real estate is now profiting from years of minimal construction after going through its own tough reinvention.According to Brian Kingston, managing partner at Brookfield Asset Management, “we’ll have fewer new stores opening in the U.S. than closures for the first time in almost five years.” And an estimated 23 million square feet of space will be needed for these net new 2,600 stores.
One of the largest mall owners, the real estate company, reported that expenditure at its 132 U.S. malls is 31% above prepandemic levels.
According to Brookfield, Simon Property Group, and Macerich Co., operators of high-end, Class A malls, occupancy rates have recovered from previous drops to more than 90%, while many middle-and lower-quality malls are still having trouble.
High inflation, quickly rising interest rates, and the possibility of a recession might reduce retail sales and increase vacancies in the next few months. However, executives and analysts noted that retail’s improving performance throughout the pandemic shows the sector is better equipped than it has been in years to weather impending storms.
According to Chad Cress, chief creative officer of DJM, a real estate investment, development, and management company based in California, “coming out of COVID, our foot traffic and sales across all of our locations have improved, even above pre-Covid levels.”
Long before Amazon.com, difficulties in the retail sector existed. According to Ronald Kamdem, chairman of U.S. retail development, since the 1970s, the rate of increase in retail building has been four to six times that of population growth in the U.S. Morgan Stanley conducts research on REITs and commercial real estate.
According to data provider MSCI Real Assets, there is now about 22 square feet of retail space per inhabitant in the United States. Morgan Stanley calculates an even higher per-capita square footage than France and the United Kingdom—and nearly eight times China’s rate—Morgan Stanley calculates an even higher value of 23, more than any other nation.
According to Nick Egelanian, founder and president of retail advisory firm SiteWorks, when Americans moved to the suburbs following World War II, downtown shopping districts dominated by small businesses and family-run department stores lost their way to regional malls and retail chains. Later, developers hurried to erect large, outdoor shopping malls featuring big-box retailers.
For the most part, up until the Great Financial Crisis, we just kept building, said Brandon Svec, national director of U.S. retail analytics for data company CoStar.
When the recession hit in 2008, e-commerce was only beginning to gain traction among middle-class consumers. According to Morgan Stanley, more than 850 stores declared bankruptcy in 2008 and 2009.
Additionally, retail construction fell. Since 2010, less than 150 million square feet of new retail space has been produced annually by developers, which is half the amount that was delivered in both 2008 and 2009.
Retailers had been struggling for years with the increased popularity of online shopping by the time the epidemic struck, pushing consumers to turn to the internet for everything from groceries to workouts. According to the U.S. Census Bureau, e-commerce, which made up 3.6% of all retail sales in the first quarter of 2008, would increase to almost 12% by the same period in 2020. Counting Houses
The Census Bureau reported that the percentage of online retail sales decreased after reaching a peak of 16.4% of total sales in the second quarter of 2020. 14.3% of retail sales were made online in the first quarter of this year, up from 12.5% before the epidemic, but at a more slow rate of growth that shows consumers still prefer to shop in-person.
This year, according to Mr. Kingston of Brookfield, “retail sales growth in physical brick and mortar stores is actually expanding faster than e-commerce.”
Retail executives and analysts agree that the epidemic prompted businesses to speed up the integration of their online and offline services. Customers can now pick up or return online purchases from more businesses. More parking spaces are being set aside for curbside pickup by shopping center owners.
Some internet retailers are turning to real estate to attract clients as the cost of online advertising has gone up.
Todd Snyder, a menswear designer who started his brand in 2011, claimed that after opening his first physical store in Manhattan in 2016, his online sales in the New York metro area tripled within the first year.
“It’s a fantastic approach to increase brand recognition. Additionally, Mr. Snyder, who has since launched five more businesses, stated that it was a terrific way to receive customer input.
Instead of creating new stores, many real estate executives are renovating historic ones to appeal to contemporary consumers. The 46-year-old shopping complex that real estate investment trust Brixmor Property Group Inc. bought in 2005 in the Mamaroneck, New York, suburb of New York City, has just undergone a $13 million refurbishment.
One recent afternoon, customers were wheeling trolleys out of North Shore Farms, a neighborhood supermarket in the retail complex that took the place of the previous grocery chain, A&P, which shut down in 2015 after declaring bankruptcy.
Jennifer Mercer, 52, claims she visits the store frequently to stock up on specialty items such as Greek feta cheese and olives, as well as fresh fruits and vegetables.
I enjoy selecting my own produce. I enjoy looking around, “Ms. Mercer added. “I get ideas when I visit stores like this. They had prepared things, so I thought, “Oh, I’ll cook that.”
There are still issues with retail real estate. Some important tenants, like Bed Bath & Beyond Inc., are under intense financial strain and have made broad closure announcements. Retail in office-dependent districts is still having trouble since fewer people are shopping there because of remote work.
And the United States is still too detailed. According to Mr. Kamdem of Morgan Stanley, approximately one-third of the 1,100 currently operating malls and more than 10% of the 115,000 shopping centers will probably fail in the upcoming years and should be dismantled.
Nevertheless, he continued, business is better prepared than it has been in decades for any economic unrest. Though not to the same extent as the 2008 financial crisis, retail bankruptcies increased throughout the epidemic.
Although there will be a headwind, Mr. Kamdem predicted that losses will not be as great.
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
As expected, the Federal Reserve increased the federal funds target by 75 basis points on Wednesday afternoon. The rate hike announcement is meant to both curb demand and bring down inflation in the upcoming months. The statement was met with an immediate response from watchers in the multifamily sector.
In particular, following the CPI data earlier in the month, this week’s rate rise was anticipated, according to Dave Borsos, vice president for capital markets at the National Multifamily Housing Council, who spoke with Multi-Housing News. As we move forward, investors will need to keep a careful eye on the rate of inflation and whether the Fed may start thinking about lower rate hikes. However, the Fed has made it plain that if inflation is high, rates will continue to rise until it is brought under control.
Compared to the single-family industry, the multifamily sector hasn’t been as negatively impacted by rising interest rates. Despite the robust demand we are now seeing, Borsos continued, “However, coupled with the larger economy, high-interest rates will have a negative influence on development if they endure for the foreseeable future.”
Ongoing adjustments
Jamie Woodwell, the vice president of commercial real estate research for the Mortgage Bankers Association, emphasized that the Fed is still fighting persistently high inflation by using the main tool at its disposal: interest rates. The detrimental effects of inflation can be apparent in multifamily construction. According to him, costs have increased over the previous year, making it more expensive to construct each new unit.
The drawback of the Fed’s activities, he continued, can also be seen in the fact that every increase in interest rates raises the cost of developing and financing apartment buildings and makes it more difficult for new deals to be financially viable. “Shorter-term rates have been significantly more impacted by the Fed’s policies than longer-term rates. However, since the start of the year, the cost of long-term borrowing has nearly doubled.
After a record-breaking first quarter for borrowing and lending, Woodwell continued, “As a result, we foresee a marked slowdown in the second half as developers, purchasers, sellers, lenders, and others adjust to the continuous changes in market circumstances.” It’s not that there isn’t enough loan or equity capital available at this time. The market is changing to reflect the conditions and interest rates of that funding.
Both debt and equity transactions can be liquidated. However, Kelli Carhart, head of multifamily debt production for CBRE, noted that capital is now more selective and has tended to favor lower-risk profiles. Financing significant debts is difficult in the current climate. Multifamily investment sales are expected to decline for the rest of 2022, but activity has remained steady at historical levels.
The market would continue to be impacted by headwinds including rising rates, reducing leverage and greater equity checks that reduce returns, she said. Investors are still anticipating changes in cap rates and an increase in interest rates.
According to Marcus Duley, chief investment officer of Walker & Dunlop Investment Partners, the rate hike has little to no immediate or direct impact on obtaining fixed-rate financing.
He continued that fixed-rate loans are impacted by increases in the yields for 7-year and 10-year Treasuries. Index rates, such as the SOFR or LIBOR, often rise in tandem with the Fed’s expansion of the Fed funds target range. “Floating-rate loans are getting more expensive, along with less proceeds based on actual DSCR limits and a substantially higher cost for lender-required interest rate caps, as a result of both rising index rates and lenders’ new demand for significantly bigger spreads.”
Greatest influence
Given that these transactions have frequently been financed with variable-rate debt, core market assets and value-add initiatives are most likely to be negatively impacted. According to David Scherer, co-CEO of Origin Investments, large negative leverage could be encountered by investors, making it difficult to meet debt servicing commitments. The build-for-rent (BFR) industry would benefit the most from the recent rate increase and other cumulative hikes, he claimed.
“There are actually millions of people who want to buy homes but are imprisoned as renters. They can no longer afford to purchase their first homes. The same housing dynamic is produced by BFR without the associated costs.
According to Carhart, the foundations for multifamily housing are still strong. Although mild rent hikes are anticipated, there is a strong demand for housing overall. She added that increased mortgage rates and the dearth of cheap single-family homes will favor multifamily, adding that “a scarcity of affordable housing will also continue to drive demand in that market.”
Transwestern’s Doug Prickett, senior managing director of research and investment analytics, concurred. According to him, demand in the rental sector should continue to be high as the alternative for-sale market becomes less accessible. However, new supply may also decline as a result of rising costs and dwindling construction financing options.
“Demand pressure on existing product will be exacerbated by an already existing lack of housing supply,” Prickett concluded. Observers of the multifamily industry expressed strong sentiments three months ago following another rate increase.
The SVN Vanguard team can help with your multifamily real estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
Any medical facility appreciates positive improvements in the space’s condition. The fundamentals of medical office buildings are improving, which benefits operators, investors, and property owners alike.
The top 100 U.S. markets are covered in a Q3 2022 study on healthcare real estate by Colliers. The report’s executive summary stated that “Despite economic worries and industry obstacles, the medical office property sector (MOB) continues to grow, hitting record highs for asking rents, sales volume, and pricing over the past four quarters.” Demand is surpassing supply, there is little room for error, and capitalization (cap) rates are largely consistent. As a result, development activity is accelerating and demonstrating sector confidence.
But there is a catch: things aren’t looking so good for the healthcare sector, on which they rely. Price pressures remain present, and MOB owners may need to be monitored and given possible treatment options.
On the bright side, the top 100 metro areas had an average vacancy rate of 8% in the first half of 2022. This constitutes a 40 basis-point decrease from the same time last year.
The highest net MOB asking rentals in the top 100 were in Los Angeles, where they were $36.85 per square foot. This price is certainly an anomaly.
The research noted that none of the other top 10 metros had an average MOB rent of over $30 per square foot. The lowest costs in the top 10 didn’t include numbers, but a graph clearly demonstrated that four—Atlanta, Boston, Dallas, and Philadelphia—were much below the national average. “Boston and New York are the next highest, at $26.26 per square foot and $26.19 per square foot, respectively.”
Construction increased in an effort to keep up with demand; 14 million square feet were completed in the four quarters that ended in Q2 2022. This was an increase above the 13.7 million square feet from the previous year. More dramatically, from 30.9 million to 37.1 million square feet, MOB under development increased.
Additionally, investor demand was high—it reached a record-high $17.2 billion in the four quarters that ended in Q2 2022.
Since many individuals find it difficult to refuse medical care, MOB is substantially positioned to survive economic storms. The prices are also a concern for practitioners. That would suggest real estate overhead will also be under review. “In the face of lower income and, in some cases, operating losses, some providers are eliminating staff despite an overall shortage of employees in the healthcare industry.”
As the inflationary environment intensifies, multifamily deals with pre-existing loans and favorable interest rates will be the most popular in the coming months. Stabilized properties will also be in even greater demand because they can offer higher returns and more certainty, according to one industry veteran.
According to Otto Ozen, Executive Vice President of The Mogharebi Group, the asset class will continue to be a desirable inflation hedge because it has historically outperformed other asset classes from a yield perspective, and demand drivers are still strong given that the costs of homeownership are still staggeringly out of reach for many prospective buyers.
He claims that when mortgage rates increase, the affordability gap grows, raising the entry barriers for home buyers and ultimately pushing them into renting. Because of this change, the rental market will be robust and rental rate growth will outperform inflation.
At a panel discussion at GlobeSt’s upcoming Multifamily Conference in Los Angeles in October, Ozen will elaborate on these observations and provide more perspectives on what will make multifamily deals successful in the current environment. He says he’ll be keeping an eye on core inflation and interest rates going into 2023 to better understand transaction velocity. He mentions that value-add and opportunistic deals may start to slow down as the risk involved with these transactions increases as interest rates rise.
