Aside from “location, location, location,” the most cliché phrase in real estate may be “people will always need somewhere to live.” Its overuse is a symptom of its accuracy. The Multifamily sector had every excuse available to post a down year in 2021, yet its performance proved to be nothing short of phenomenal. As noted by SVN® Multifamily Chair Reid Bennett, CCIM, the sector faced “unknowns of the pandemic, rent moratoriums, interest rate hike threats, and inflation at a four-decade high.” Nonetheless, markets across the country range from nearly fully recovered to well ahead of where they were two years ago before the pandemic.
A key reason why rental housing has seen such widespread success in recent years is that the US has undersupplied enough new stock to keep pace with growing demand. Between 2002 and 2010, the amount of vacant housing supply available for sale or rent has typically equaled between 4% and 6% of the total number of US households. 1 Through Q4 2021, after more than a decade of declines, this excess housing supply has slumped to just 2.6%. In other words, supply is (very) tight.2
A major concern when the pandemic started was whether renter households would be able to make their monthly payments on time, if at all. According to the NMHC, rent collections in professionally managed units dipped marginally during the beginning of the pandemic but not enough to be categorized as distress. On the other hand, rental units operated by independent, mom-and-pop landlords proved to be far more sensitive to the shutdown’s economic effects. According to Chandan Economics and RentRedi, on-time rental payments sank by more than 9 percentage points between March and May 2020. Still, despite the pandemic’s multiple waves, 2021 was a year of recovery for small apartment operators. Through January 2022, on-time rent collections were back in line with where they were entering the pandemic.
For the year ahead, there is at least some concern over how the sector will absorb higher interest rates as the Federal Reserve readies multiple rate hikes. Since 2010, the number of rented housing units in the US has expanded by about 13%.3 Over the same time, the amount of outstanding multifamily debt in the country has more than doubled (+114%).4 In short, the US rental housing sector has become substantially
more leveraged over the past decade. Given the relative increase in indebtedness and the specter for higher debt servicing costs on the horizon, this is an area that deserves some risk consideration in the year ahead.
Still, all else equal, the balance of factors broadly supports continued investment success in the US rental housing sector in 2022. With an eye on the horizon, Mr. Bennett identifies three underlying factors that should strengthen the sector in 2022:
• A high number of new entrants into the space (including retail buyers, office buyers, and multifamily syndicators) are competing with an already crowded pool of multifamily buyers.
• Household formations and Baby Boomers re-entering the rental pool will continue to support stiff competition for incoming supply.
• This year (2022) will be the last year of 100% bonus depreciation, where many buyers will be overextending to receive this benefit for themselves and their investors.
If 2020 was the year where dealmakers were sitting on the sidelines, then 2021 was the year where there were too many players on the field. According to Real Capital Analytics, annual transaction volume in 2021 totaled an incredible $332B — a 128% surge from 2020’s pandemic-impacted total of $147B. Moreover, the 2021 total stands as a 74% increase over the previous all-time high set in 2019.5 While the entire year was marked by consistently higher transaction volumes, the year-end record totals are largely a function of an unprecedented spike in deal activity in Q4. In the last three months of the year, RCA tracked $149B in apartment sales, more than any two other quarters combined last year.
Cap rates for Multifamily properties continued to sink in 2021, reaching new a new all-time low of 4.5% in Q4.6 Similarly, the spread between apartment cap rates and the 10-year Treasury, a measure of the sector’s perceived riskiness, fell to 298 bps in Q4 2021 — the lowest level since Q1 2019.7 In total, apartment cap rates fell 48 bps between the start and the end of 2021, marking the most significant annual cap rate decline since before the Great Financial Crisis (GFC). With benchmark interest rates set to rise in 2022 as the Federal Reserve initiates its monetary tightening cycle, some upward pressure on cap rates may be on the horizon.
Declining cap rates in 2021 led to some significant upward pressure on pricing. As part of Real Capital Analytics’ post-2001 tracking, never have apartment asset values grown faster than 15% on an annual basis— that is, of course, until 2021. As of Q4 2021, average apartment unit prices finished the year at $ 213,761, a record-breaking 19.6% higher than a year earlier.8
Across subsectors, Garden-style apartment units, which tend to be in more suburban locations, once again experienced the most pricing growth in 2021. These Garden units saw asset prices rise by an incredible 21.8% last year, besting the sector-wide average by 2.2 percentage points.9 Meanwhile, Mid/High-rise apartment units saw the least robust price appreciation of all subsectors in 2021, growing by just 10.8%.10 Still, the annual improvement for the most urban-centric property type should not be overlooked. While Mid/High-rise units saw the least amount of price appreciation last year, they saw the most relative improvement. To close out 2020, valuations for Mid/High-rise units sank 3.5% year-over-year, making the 2021 mark a swing of 14.2 percentage points.11
The Sun Belt, and more specifically, the southeastern portion of the country, continues to be the largest hotbed for population growth and new housing demand. According to the latest US Census Bureau data, the South added roughly 816,000 new residents in 2021 alone. On a state-by-state basis, Florida remains the epicenter of the Southeast’s dominating success. In the last decade, the Sunshine State has come a long way to rebrand itself away from the Heaven’s Waiting Room nicknames of the past. Naples, FL, saw the single largest jump in market rents in 2021. According to CoStar, rents in Naples averaged $1,527 at the end of 2020. Fast forward to end the end of 2021, and average rents were nearly 43% higher at $2,183.12 Heading up Florida’s west coast, there are more rent growth accolades to go around. Fort Myers and Tampa ranked fourth and fifth for major metros posting the most rent growth last year, with rent growth coming in at 30.4% and 24.8%, respectively.13
Cut over to Florida’s east coast, and the story is effectively the same. According to Tim Davis, CCIM of SVN | Alliance Commercial Real Estate Advisors, “the housing supply shortage continues to grow in the Daytona Beach market area, generating continued demand for rental product.” Mr. Davis notes that new rental housing is needed across a number of different sub-asset types, including “traditional garden-style development, as well as cottages and BFR options.” In 2021, Daytona beach saw the country’s third-largest rise in Multifamily occupancy rates and the fifth-largest increase in asset valuations.14 Florida’s east coast success is attributable to “job growth along the I-95 corridor related to work from home policies, manufacturing, distribution, and private space exploration,” according to Mr. Davis.
Beyond the Sunshine State, the rest of the Southeast is also seeing widespread success. Durham, NC posted a 5.0 percentage point increase in its market-wide Multifamily occupancy rate through the end of last year, the fourth-best mark in the country.15 Savannah, GA, saw the tenth-largest increase in Multifamily rents across the US, with prices rising an appreciable 21.4% over the year ending Q4 2021.16
A general theme throughout the other top-performing multifamily markets around the country is that they tend to be ascending secondary metros that are more affordable and off either coast (excluding Florida). The two markets experiencing the highest levels of rent growth in the country outside of Florida are Las Vegas and Phoenix, which saw growth totals of 23.3% and 21.8% last year, respectively.17
Austin in recent years has gained the status of a “revolving door” market, a title given by Apartment List for its heavy flow of both inbound and outbound renters. As of Q3 2021, Apartment List reports Austin as the sixth-highest share of renters looking to jump to a new metro, as well as the seventh-highest share of inbound searches coming from renters elsewhere. Generally, this lines up with Austin’s profile rise as a young, tech-centric city where early-career professionals call home for a few years. Rent growth in Austin was robust last year, with prices growing 20.6%.18
Head due north from the Lone Star, and you’ll find another State seeing a fair share of success: Oklahoma. According to Raymond Lord of SVN OAK Realty Advisors, in 2021, “the Oklahoma City and Tulsa Multifamily market like many US Markets was incredibly active in apartment transactions.” Mr. Lord goes on to note that “Oklahoma City set a record at $961.8 million in 2021, […] [surpassing] the previous record of $541.3 in 2019.” In Tulsa, the story was more of the same, as it “also had record transactions in 2021 at $503.6 million versus $208.6 million in 2020.”
The US economy has experienced a robust recovery from the initial shock of COVID-19. A pandemic-driven shift in consumption away from services and into goods, boosted by a sweeping stimulus effort, reconditioned our economy well before an off-ramp from the public health crisis was in sight. By Q3 2020, inflation-adjusted GDP shrugged off its worst quarterly performance on record to record its best, a 33.4% annualized growth rate.1 In 2021, the total nominal value of all consumption and production reached $23.0 trillion, a 9.1% increase above 2020’s total and 6.9% above 2019’s total. After adjusting for inflation, the US economy is 3.2% larger than its pre-pandemic peak.2
The foundation of the economy’s rebound has been a swift labor market recovery. At its April 2020 peak, the official unemployment total reached a staggering 23 million people.3 By the start of 2021, the unemployment total had improved to just 10.1 million people out of work.4 Over the past year, this level has come down to 6.5 million people, less than one million above the pre-pandemic level of 5.7 million.5
One year ago, the market consensus was that the Federal Open Market Committee (FOMC) would not begin a monetary policy tightening cycle until 2023. However, as demand surges in the face of gummed-up supply chains, rampant inflation has emerged at center stage, forcing shifting guidance from policymakers.
After decades of tepid price increases, in January 2022, the Consumer Price Index (CPI) reached 7.5%, a level not seen in 40 years.6 Core-PCE, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, reached 5.2% in January, prompting the FOMC to be increasingly committed to an interest-rate hike at its March 2022 meeting.7 In just 24 months, policymakers at the Federal Reserve have repositioned themselves from a tighter monetary policy stance into an accommodative one and back to a tightening one. According to the CME Fed Watch Tool, as of February 23rd, future markets are forecasting seven rate hikes by the end of the year — a sizable shift from even just one month earlier, when future markets were forecasting just four rate hikes in 2022. Volatile swings in the medium-term outlook are symptomatic of the rapid shifts in economic activity that categorized the past two years.
In December, Fed officials looked on cautiously at the near-term outlook as Omicron emerged as a roadblock to economic normalcy. After the Delta variant led to declining activity and sluggish job growth in mid-to-late summer 2021, some officials worried that Omicron, a more transmissible variant of COVID compared to previous waves, would hinder the recovery. While a significant wave of US cases followed, the Omicron wave proved to be less deadly and less straining on the US public health system than previous ones. As a result, an increasing number of US states and municipalities are relaxing masking and vaccine restrictions. On February 25th, the CDC introduced a new slate of guidelines that experts say shifts the US into the “endemic phase” of the pandemic. The new guidelines would put more than half of US counties and over 70% of the population in “low” or “medium” risk designations, bolstering the FOMC’s willingness to remove accommodative monetary policies.
Still, a measurable dose of uncertainty overhangs stock markets and the whole macroeconomy. The VIX, a volatility index captured by the Chicago Board Options Exchange, has remained stubbornly elevated since the onset of the pandemic. Despite moderately retracting during the fall of 2021, the annual average for the VIX in 2021 was 19.7, 27.7% above its 2019 average.8
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.
NATIONAL OVERVIEW SOURCES
- Chandan Economics analysis of US Census Bureau Data
- Chandan Economics analysis of US Census Bureau Data
- US Census Bureau
- https://www.osc.state.ny.us/files/reports/osdc/pdf/report-10-2022.pdf
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- Real Capital Analytics; Through Q4 2021
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
- CoStar; Through Q4 2021. Note: Measured across the top-100 markets
MACRO ECONOMY SECTION SOURCES
- US Bureau Economic Analysis
- US Bureau Economic Analysis
- US Bureau Labor Statistics
- US Bureau Labor Statistics
- US Bureau Labor Statistics
- US Bureau Labor Statistics
- US Bureau of Economic Analysis
- Chicago Board Options Exchange
“All good things must come to an end,” said nobody in the Industrial sector in 2021. As the US economy continues to modernize and consumer behavior evolves, the Industrial sector has stood as a winner at every step along the way. Heading into 2021, the National Association for Industrial and Office Parks (NAIOP) forecasted that net absorption on the Industrial sector would total 329.5 million square feet for the calendar year — a figure that would have represented a 28% increase over the previous record high. When all was said and done, the Industrial sector posted net absorption totals of 432.5 million square feet, blowing past the previous record by more than 68%.1 With an eye on the horizon, NAIOP anticipates that fervent demand will continue to outpace new supply leading, with net absorption forecast at a robust 401.4 million square feet.
Even as COVID restrictions became less widespread in 2021 and consumers returned to shopping aisles, in absolute terms, last year was the most active for e-commerce consumption on record. In 2020, e-commerce retail sales jumped by 32%, landing at $759.6 billion.2 In 2021, e-commerce retail sales grew by 14.6%, coming in at $870.7. Moreover, 2021’s e-commerce sales growth rate of 14.6% is well in line with the pre-pandemic pattern.3 In the five years leading up to 2020, e-retailing grew by an average of 14.2% per year, while never growing slower than 13.4% or faster than 15.4%.4
Hefty demand growth coming from the steady surge of e-retailing has sent prices in the sector soaring. Noted by SVN® Industrial Product Chair Curt Arthur, SIOR, “the price index for industrial properties rose a record 28.1% from a year ago, the fastest annual rate among the major property sectors, according to Real Capital Analytics.” Further, transaction activity reached a fever pace towards the end of last year, as December alone “was the most active month in US history with one-month sales exceeding annual totals from 2008-2011.”
Pushing our e-shopping carts to the side, it isn’t just e-retailing distribution facilities that are responsible for Industrial’s record year — manufacturing also had a significant role to play. The Board of Governor’s Industrial Production Index for Manufacturing, which measures the inflation-adjusted output of manufacturing activities, saw a steep drop-off during the pandemic lockdowns, with production declining by nearly 16% month-over-month in April 2020. Now, as of January 2022, manufacturing production has made up all its lost ground, and output currently stands at its highest level since Fall 2018.5
The Industrial sector maintained its solid momentum in 2021, posting the most transaction volume of any commercial property type other than Multifamily. For the calendar year, according to Real Capital Analytics, $173.6 billion of Industrial assets changed hands in 2021. Compared to 2020 levels, last year’s transaction volume totals rose by about 63% — the second-lowest mark across the core-four commercial property types.6 However, the only reason why Industrial’s 2021 transaction growth rate stands below Retail and Multifamily is because of its strong 2020, despite macroeconomic headwinds. In 2020, sans Industrial, all CRE property types saw declining transaction volumes between 24% and 38%.7 Meanwhile, Industrial only took a slight step back, declining by just over 9% in 2020.8 Compared to 2019’s previous peak, 2021’s transaction volume totals are up by an impressive 48%.9
If Sir Isaac Newtown had been invested in the Industrial sector, perhaps the phrase would have been “what goes up must go down, and for Industrial cap rates, what’s already down can just keep on going.” Measured year-over-year, Industrial cap rates have fallen every quarter since Q3 2010.10 Through Q4 2021, Industrial cap rates are down to a lowly 5.4% — a decline of 32 bps from one year ago.11 Across the different industrial sector sub-types, Warehouse assets saw the most significant cap rate compression in 2021, declining by a weighty 42 bps, bringing cap rates down to 5.3%.12 Single Tenant Industrial space also saw steady cap rates declines, with yielding falling 31 bps year-over-year to average 5.5% in Q4 2021.13 Despite the rebound in manufacturing activity measured in 2021, cap rates for Flex Industrial space ticked up marginally last year, rising by 8 bps to land at 6.1% through Q4 2021.14
With cap rates declining to new all-time lows in 2021, significant pricing pressure was felt throughout the industrial sector. Measured year-over-year on a price per square foot basis, valuations ended 2021 30.8% higher than they were one year ago — the highest mark of all commercial real estate property types.
Across most commercial real estate verticals, Gateway markets have lagged the rest of the pack during the pandemic. Still, major metros have not lost their shine when it comes to Industrial CRE performance. Even as residents have left costly coastal metros like New York and Los Angeles on the margins, these markets remain behemoths of population agglomeration. As of the 2020 Census, there were more than 20 million people living in the New York MSA and more than 13 million living in the Los Angeles MSA. No other metro area is above 10-million residents.
With respect to Industrial space demand in major markets, in short, the conversion from physical retail to e-retail has far outweighed any marginal population losses. In Northern New Jersey, an area that sits with the Greater New York Metropolitan Area, Industrial rents per square foot surged by 14.1% last year, according to CoStar — the second-best reading in the country. From a valuation perspective, the North New Jersey area saw the third-highest levels of asset appreciation last year, growing 19.8%.15
Moving over to the West Coast, the Inland Empire — an expansive semi-urban area directly adjacent to Los Angeles— saw the second-highest levels of Industrial asset appreciation last year, with prices growing by 20.8% year-over-year.16 Moreover, the Inland Empire finished 2021 with the seventh-highest occupancy rate (96.4%) of all tracked markets.17 Ventura and Los Angeles follow as the eighth and ninth-highest Industrial occupancy rates in the country, reflecting overall strength throughout the Greater Los Angeles area. According to David Rich of SVN | Rich Investment Real Estate Partners, “Industrial remains the healthiest commercial real estate sector in Los Angeles – outperforming even multifamily in terms of price and rent appreciation.” Mr. Rich goes on to note that in Los Angeles, “demand is expected to continue into [mid-2022], due in large part to accelerated online consumer consumption from the COVID economy.”
In NAIOP’s Q1 2022 Forecast Report, the researchers note that concerns over future space needs in the future are spurring competition for available space today. In dense markets such as the metropolitan areas surrounding New York and Los Angeles, where space is limited, the effect is bottlenecking of prices. These observations are shared by Mr. Rich, who remarks that “area growth restrictions and increased developments costs [in Los Angeles] will contribute to strong property values and rental rates beyond 2022.”
Head west a few hundred miles from the eastern seaboard, and you’ll run into an inter-region set of markets that all straddle similar longitudes. Markets such as Atlanta, Knoxville, and Columbus may not share much in common other than their time zones, but they all stood out as top performers in the Industrial sector last year.
Columbus, OH, was one of the most consistent booming Industrial markets in 2021, posting the tenth highest increase in market rents (+11.8%) and the tenth highest increase in Industrial occupancy rates (+2.7 percentage points).18 Doug Wilson of SVN | Wilson Commercial Group, LLC notes that “the definition of “’ Industrial real estate”’ is evolving rapidly in Columbus. There are few industrial operations any more here, but there are many distribution centers. And those are complemented by the prevalence of massive fulfillment centers. And add to that, large data centers to round out the new wave of industrial “sized” properties populating this market. The construction pipeline of speculative industrial buildings is surging to about 13–15 million SF, while vacancy is a mere 2%-3%.”
Atlanta posted significant Industrial sector rent increases in 2021, coming in at the fifth-highest annual increase in the country.19 Closing out last year, according to CoStar, Industrial space in Atlanta was renting for an average of $7.26 per square foot— an increase of 12.7% year-over-year.20 No market had a higher occupancy rate than Knoxville, TN, in Q4 2021, coming in at a stellar 99.0%.21
The US economy has experienced a robust recovery from the initial shock of COVID-19. A pandemic-driven shift in consumption away from services and into goods, boosted by a sweeping stimulus effort, reconditioned our economy well before an off-ramp from the public health crisis was in sight. By Q3 2020, inflation-adjusted GDP shrugged off its worst quarterly performance on record to record its best, a 33.4% annualized growth rate.1 In 2021, the total nominal value of all consumption and production reached $23.0 trillion, a 9.1% increase above 2020’s total and 6.9% above 2019’s total. After adjusting for inflation, the US economy is 3.2% larger than its pre-pandemic peak.2
The foundation of the economy’s rebound has been a swift labor market recovery. At its April 2020 peak, the official unemployment total reached a staggering 23 million people.3 By the start of 2021, the unemployment total had improved to just 10.1 million people out of work.4 Over the past year, this level has come down to 6.5 million people, less than one million above the pre-pandemic level of 5.7 million.5
One year ago, the market consensus was that the Federal Open Market Committee (FOMC) would not begin a monetary policy tightening cycle until 2023. However, as demand surges in the face of gummed-up supply chains, rampant inflation has emerged at center stage, forcing shifting guidance from policymakers.
After decades of tepid price increases, in January 2022, the Consumer Price Index (CPI) reached 7.5%, a level not seen in 40 years.6 Core-PCE, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, reached 5.2% in January, prompting the FOMC to be increasingly committed to an interest-rate hike at its March 2022 meeting.7 In just 24 months, policymakers at the Federal Reserve have repositioned themselves from a tighter monetary policy stance into an accommodative one and back to a tightening one. According to the CME Fed Watch Tool, as of February 23rd, future markets are forecasting seven rate hikes by the end of the year — a sizable shift from even just one month earlier, when future markets were forecasting just four rate hikes in 2022. Volatile swings in the medium-term outlook are symptomatic of the rapid shifts in economic activity that categorized the past two years.
In December, Fed officials looked on cautiously at the near-term outlook as Omicron emerged as a roadblock to economic normalcy. After the Delta variant led to declining activity and sluggish job growth in mid-to-late summer 2021, some officials worried that Omicron, a more transmissible variant of COVID compared to previous waves, would hinder the recovery. While a significant wave of US cases followed, the Omicron wave proved to be less deadly and less straining on the US public health system than previous ones. As a result, an increasing number of US states and municipalities are relaxing masking and vaccine restrictions. On February 25th, the CDC introduced a new slate of guidelines that experts say shifts the US into the “endemic phase” of the pandemic. The new guidelines would put more than half of US counties and over 70% of the population in “low” or “medium” risk designations, bolstering the FOMC’s willingness to remove accommodative monetary policies.
Still, a measurable dose of uncertainty overhangs stock markets and the whole macroeconomy. The VIX, a volatility index captured by the Chicago Board Options Exchange, has remained stubbornly elevated since the onset of the pandemic. Despite moderately retracting during the fall of 2021, the annual average for the VIX in 2021 was 19.7, 27.7% above its 2019 average.8
The SVN Vanguard team can help with your industrial real estate needs. We can help you find the ideal industrial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
NATIONAL OVERVIEW SOURCES
1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau
5. Board of Governors of the Federal Reserve
6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021
12. Real Capital Analytics; Through Q4 2021
13. Real Capital Analytics; Through Q4 2021
14. Real Capital Analytics; Through Q4 2021
15. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
16. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
17. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
18. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
19. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
20. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
21. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
MACRO ECONOMY SECTION SOURCES
1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau
6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021
SUMMARY OF SOURCES
• (1) https://app.rcanalytics.com/#/trends/downloads
• (2) https://www.bls.gov/news.release/empsit.nr0.htm
• (3) https://www.bls.gov/news.release/empsit.nr0.htm
• (4) https://www.bls.gov/jlt/
• (5) http://www.sca.isr.umich.edu/
• (6) https://www.trepp.com/trepptalk/monthly-snapshot-cmbs-cre-clo-banking-january-2022
• (7) https://www.globest.com/2022/02/09/real-estate-investor-cash-home-purchases-on-the-rise/
• (8) https://www.newyorkfed.org/microeconomics/hhdc
• (9) https://www.fanniemae.com/research-and-insights/surveys/national-housing-survey
• (10) https://libertystreeteconomics.newyorkfed.org/2022/02/housing-returns-in-big-and-smallci
We are ready to assist investors. For questions about Commercial Real Estate Investments and Commercial investment properties, contact your Los Angeles and Long Beach commercial real estate advisors at SVN Vanguard.
By Monsef Rachid | February 4, 2022
According to the Mortgage Bankers Association’s latest CREF Loan Performance Survey, delinquency rates for mortgages backed by commercial and multifamily properties declined during the final three months of 2021.
“The fourth quarter saw continued improvement in the performance of commercial and multifamily mortgages, particularly among property types that were the most impacted by the downturn,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The share of outstanding balances that are delinquent fell for both lodging and retail properties, as property owners and lenders and servicers continue to work through troubled deals. The share of loan balances becoming newly delinquent was the lowest since the onset of the pandemic.”
Key Market Findings for December 2021:
The balance of commercial and multifamily mortgages that are not current decreased slightly in December 2021.
Loans backed by lodging and retail properties continue to see the greatest stress, but also saw improvement during the fourth quarter of 2021.
Because of the concentration of hotel and retail loans, CMBS loan delinquency rates are higher than other capital sources, but also saw improvement during the final three months of 2021.
Originally posted on TheWorldPropertyJournal
We are ready to assist investors. For questions about Commercial Real Estate Investments and Commercial investment properties, contact your Los Angeles and Long Beach commercial real estate advisors at SVN Vanguard.
By Lynn Pollack | February 01, 2022
Inflation is as high as it’s been in years, but that’s with respect to goods and labor.
Developers should break ground on new projects now, while the cost of capital remains low—despite rising inflation, according to one industry expert.
“The question my clients ask me almost every single day is, do I put the shovel in the ground today or do I wait a year from now when we might see lower inflation. The bottom line is it’s better to put the shovel in the ground today,” CBRE’s Spencer Levy told CNBC last week. “Yes, inflation is as high as it’s been in years, but that’s with respect to goods and labor. But the cost of capital is still relatively low.”
Levy predicts that demand will keep pace and shortages in housing and industrial will persist into the next year, and says “the cost of capital is lower today than it will be a year from now.”
When asked if we’re approaching bubble territory, Levy said he isn’t worried.
“One of the great things about the commercial real estate industry is that it’s somewhat self-regulating with the respect to the type of construction you’re seeing, he told CNBC most construction is in high-demand, low-supply property types like industrial and multifamily, not in sectors like office or retail.
“As a matter of fact, if you take a look at last year, we saw unbelievable rent growth in multifamily and industrial, the areas where we’re seeing the most construction,” he pointed out. And while that rent growth won’t continue at the same eye-popping levels we’ve seen as of late, Levy told CNBC he expects advanced growth in 2022 and beyond as long as rate hikes stay within the three- to five-hike band most experts are predicting.
“Long term, modestly rising interest rates and inflation has actually been good for commercial real estate, both for rents and for property values,” he said. But “if we’re wrong on these three, four, five rate hikes, and it’s much worse than that, then you should be concerned. But if it stays in that band it’s a very favorable environment for commercial real estate.”
In fact, Levy says that even if the 10-year Treasury goes up by 100 basis points, “that’s still an incredibly low cost of capital by any measure.”
Still, it is hard to ignore that headline inflation is up 7.1% from last year, the biggest uptick since 1982.
“The Fed looks a bit panicked,” CBRE’s Richard Barkham, Global Chief Economist and Global Head of Research, said last month. “At the moment, we’re at peak inflation and I suspect it will stay there for the first half of the year and then begin to ease. It should settle back in the 2 to 3 percent range by year’s end, which is still higher than the pre-pandemic norm of about 1 to 2 percent.”
Barkham says “three rate hikes this year should be enough,” noting that while the hikes will “unnerve” the stock market, strong corporate earnings will support them.
Originally posted on Developers Should Break Ground Now While Capital Is Cheap | GlobeSt
By Jeffrey J. Smith | November 17, 2021
Economic, social, and digital disruptions combine to force a change in how CRE is developed, financed, and used
As we turn the corner on 2021, hopes that we would be doing the same on COVID-19 have stalled. The Delta variant has clouded the near-term outlook as vaccination, masking, and social distancing requirements have impacted commercial work and gathering facilities. The commercial real estate (CRE) industry is positioned at the forefront of the recovery: Office employers are balancing productivity and safety; retailers face critical turning points in an evolving industry; residences are competing for tenancy amid shifting migration patterns and heightened affordability concerns. Meanwhile, companies face increasing demands to prioritize environmental, social, and governance (ESG) issues, aging technology infrastructures, a tightening labor market, and increasingly differentiated competition. How the CRE industry proceeds into early 2022 could set the foundation for its success over the next several years.
Here are the key findings from Deloitte’s 2022 commercial real estate outlook:
Despite some financial concerns and an evolving regulatory environment, optimism around fundamentals prevails. Eighty percent of respondents expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels.
Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate. Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.
Many CRE firms are focusing on retrofitting properties and repurposing spaces for alternate uses to maximize value. However, only one-quarter of respondents say their companies are substantially increasing technology investments to bolster portfolio and asset management capabilities.
Sustainable properties are often key to a better tenant experience; building partnerships to provide new offerings to tenants can also enable real-estate-as-a-service (REaaS). Over three-fourths of respondents say their companies will likely expand partnerships with or invest in proptechs, which could help firms deploy the REaaS delivery model.
As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape. The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.
Most CRE companies are in the early stages of addressing climate risk; respondents indicated sustainability concerns, and the need to address them were priorities in this year’s survey. But in the wake of the pandemic and community demands for more equitable playing fields, CRE leaders should also prioritize social issues and diversity, equity, and inclusion (DE&I) initiatives. The CRE industry has a long way to go to achieve equitable representation.
As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape.
The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.
Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate.
Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.
Real Estate Industry Services
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Originally posted on 2022 commercial real estate industry outlook | Deloitte Insights
By Erik Sherman | November 08, 2021 | Originally Posted on GlobeSt.com
The benefits of the new spending to real estate are largely indirect.
After more legislative drama than found in a West Wing rerun, the House passed the infrastructure bill, which now goes to President Biden’s desk for an expected signature.
The biggest story is not what it is, but what it isn’t. The original proposal was $2.6 trillion, according to a New York Times breakdown from August. The plan had included many items that wouldn’t make the cut: housing, schools, home- and community-based care, R&D and manufacturing, and more.
What passed was $1.2 trillion in spending. But it wasn’t all new, as $650 billion was extending previous spending. New spending of roughly $550 billion, mostly over five years, breaks out as follows, according to CNN.
Bloomberg News points to a number of funding sources for the bill, including unspent pandemic relief funds, assumptions of greater economic growth leading to increased tax revenue, states that ended unemployment benefits early and in doing so reduced the need for that federal money, spectrum auction sales, and more. There is disagreement over how much the measure will add to the deficit. The Congressional Budget Office expects the measure to add $256 billion over a decade.
Nothing in the bill directly speaks to real estate, but there are expectations that the industry would benefit indirectly. “While real estate is not included in the plan, real estate inherently needs strong infrastructure to be useful for tenants,” said a recent report from BlackRock.
For example, flood mitigation, new tax revenues to states, better transportation and communications, and improved power and water services are all positive for business in general, which would then presumably need more services from CRE.
One potential issue is that increased construction spending on infrastructure would increase demand for materials and labor that might drive up costs for CRE.
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by 6.9% week-over-week during the week ending on October 1st, 2021, falling to its lowest level in three months.
1. BEIGE BOOK – ECONOMIC ACTIVITY
• Economic growth downgraded slightly in July and August, according to the September release of the Federal Reserve’s Beige Book. Manufacturing, transportation, non-financial services, and residential real estate stood out as stronger than average sectors during the survey period. According to the analysis, the slowdown in economic activity was largely due to a weakening in demand for dining out, travel, and tourism, presumably stemming from the rise of the Delta variant.
• Supply disruptions and labor shortages also continue to dampen growth in some areas of the economy, particularly auto sales— which have been impacted by a worldwide microchip shortage, and home sales, which suffer from persistently low inventories. Both residential and non-residential construction rose across districts during the latest survey period, with loan volumes varying widely.
• All districts reported rising employment, but most also continued to note a persistent shortage of available workers that in many cases, are impeding business activity. Early retirements, childcare needs, challenges in negotiating job offers, and the presence of enhanced unemployment benefits were noted as the largest barriers constraining hiring.
2. VTS OFFICE DEMAND INDEX (VODI)
• Office demand decreased in July following six consecutive months of growth, according to the latest reading of the VTS Office Demand Index (VODI). The VODI dropped 1.2% month-over-month, the steepest fall in the index since December 2020. Office demand is up 252% year-over-year— largely a base effect from the steep fall in economic activity in early-to-mid 2020 but remains 16% below its 2018-2019 average. Office demand fell as low as -84% below its pre-pandemic benchmark during June of last year.
• As was the case during the last time the VODI fell this steeply on a month-over-month basis, the nation saw a significant uptick in COVID cases during July’s decline. According to VTS, 6 out of the 7 metros tracked in the survey reported an uptick in cases during the month of July, with Seattle being the lone exception.
3. CALIFORNIA ZONING LAW CHANGES
• On August 26th, The California State Assembly passed a bill that would allow for the construction of two-unit buildings on lots previously zoned for single-family housing only. If signed, the new law would supersede existing zoning rules on the local level.
• The new bill would allow for increased density in a state where restrictive zoning has led to some of the highest land values in the country, with median home prices in California rising by 27% in just the past year. The bill would also allow for homeowners to subdivide their current properties to up to 4 units on a single lot.
• The bill’s passing comes shortly after the August 23rd passing of a bill that makes it easier for multifamily construction by simplifying the approval process in some areas.
• If successful, the push for zoning law changes in California would be a big win for industry leaders and advocates pushing for reform to address the nation’s critical housing supply shortage. With national policy leaders signaling a desire to tackle housing affordability in the US, the California bill could become a framework for zoning reform across the country.
4. PROPOSED TAX CHANGES ON PARTNERSHIPS
• The Senate Finance Committee has begun drafting legislation that would introduce new tax liabilities on business partnerships, which could potentially impact how real estate transactions take place.
• The proposal would require partnerships to use the “remedial” allocation method during tax filing, which would limit the ability for partners to shift gains and their related tax liabilities between each other.
• Current law affords partners the choice of revaluing their assets upon the change in the interests of one of the partners, but the new proposal would require such revaluing. Critics note that the mandatory review would remove flexibility afforded to commercial real estate partnerships and could delay transactions. The National Association of Home Builders has announced opposition to the legislation.
5. JOBS REPORT
• The August Jobs Report arrived underneath most forecasts, adding just 235,000 jobs in the month according to the BLS. Economists surveyed by Dow Jones projected up to 720,000 new hires in the month, but public health fears and an activity slowdown that accompanied the emergence of the delta variant likely caused more of a shock than many predicted.
• For the first time in six months, the leisure and hospitality sector did not lead the nation in job growth, with professional and business services rising to the top in August with 74,000 new hires. Employment in leisure and hospitality was relatively unchanged and remains 10% below February 2020 levels.
• Major industries such as construction and wholesale trade also stalled, while transportation and warehousing, private education, and manufacturing posted gains.
• Wages have continued to rise, climbing 4.3% year-over-year in August. Average hourly earnings for all employees rose by 17 cents to $30.73 and have now climbed for five consecutive months.
6. DELTA VARIANT IMPACT ON HIRING
• The emergence of the Delta variant has renewed some American’s hesitations to return to work, according to new results from the Census Bureau’s Household Pulse Survey (HPS).
• Results from the survey conducted between August 18th-30th reported that 3.2 million Americans indicated they were not working due to being “concerned about getting or spreading the coronavirus”, up from a reported 2.5 million from the survey covering July 21st to August 2nd.
• Since tracking the metric began in April 2020, the number of American’s citing COVID-risk as a barrier to returning to work peaked at 6.24 million in July 2020 and has steadily come down since. After receiving a positive boost earlier this summer as vaccines became widely available across the US, the recent negative turn in sentiment reflects the fears surrounding the recent surge stemming from the delta variant.
7. RETAIL SALES
• US retail sales rose by 70 basis points month-over-month in August following a 1.8% decline in July. Sales exceeded most economists’ expectations, with the Bloomberg survey of economist predicting a 70-basis point drop in August.
• Some industry watchers point to back-to-school shopping as a boost to retail activity, while the report also showed strength in online retailers and furniture stores as home relocation saw an uptick during the month.
• The Delta variant’s effect on the service industry has also likely shifted consumer spending to other areas of the economy, and the latest report signals that retail goods have been a beneficiary. 10 of the 13 categories outlined in the Census Bureau’s report noted increases in August, with electronics and appliances, sporting goods, and car dealers being the only categories the declined.
8. A CASE FOR RETAIL RESILIENCY
• While the retail sector of Commercial Real Estate has been the focus of much concern during the pandemic, a recent analysis by Propmodo on the success of some retail property managers in recent months has provided a case for resiliency.
• Simon Property Group, the nation’s largest mall operator, reported total sales in June 2021 that were on par with June 2019 figures, according to the analysis. Year-to-date sales through June were reportedly 13% higher than the same period in 2019.
• Similarly, National Retail Properties, another large operator, reported 98.3% occupancy and 99% rent collection across their single-tenant retail properties.
• While the Retail Sector has faced some of the worst pandemic-related headwinds of any area of the US economy, record savings being held by consumers alongside the rebound in economic activity in recent months has provided a dose of stimulus to companies that have weathered through the storm.
9. HOME BUILDING GEOGRAPHY INDEX
• The Q2 Home Building Geography Index (HBGI) produced by the National Association of Home Builders reported a consistent level of activity in the single-family sector nationwide throughout the quarter, with the multifamily sector finding higher growth in counties where affordable housing is more readily available.
• The report’s findings show a shrinking of multifamily growth within the core countries of many metro-areas compared surrounding counties. In Q2, core counties accounted for 38.7% of multifamily construction activity, down from 40.2% in Q1.
• Further, the report finds that roughly half of the US population resides in the “least-affordable” counties according to the Index’s definition, which is based on price-to-income ratios derived from the 2019 American Community Survey. Just 2.8% of the population lives in the “most-affordable” counties.
10. DIVERGING INFLATION
• A recent analysis by Bloomberg indicates a diverging pattern in price increases across different metros dating back to the beginning of the pandemic.
• Utilizing data from the BLS, the analysis shows that the steepest local increases occurred in St. Louis, climbing from an inflation rate of 2.1% year-over-year in February 2020 to 6.6% in August 2021. Other notable standouts were the Houston and Atlanta metro areas, with Houston rising from just 1.5% in February 2020 to 5.3% in August 2021. Atlanta rose from a pre-pandemic rate of 2.9% to 6.6% in the latest reading.
• Conversely, Los Angeles saw the most tepid change in local inflation, rising from a rate of 3.4% year-over[1]year in February 2020 to 4.00% in August 2021. Phoenix followed, climbing from 4.4% to 5.1%, with San Francisco close behind— rising from 2.9% to 3.7%.
• Notably, the metros with the lowest increases all started the pandemic with higher inflation rates than those that sit at the top of this analysis. Soaring housing costs, which were already prevalent in metros like Los Angeles and San Francisco before the pandemic, alongside regional migration patterns that have increased
consumer demand in smaller metros, have likely contributed to the divergence.
Have questions about Orange County commercial real estate? Looking for Orange County commercial properties for sale and lease? Contact SVN Vanguard today.
Summary of Sources
• https://www.federalreserve.gov/monetarypolicy/beigebook202109.htm (1)
• https://vts.drift.click/august-vodi (2)
• https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB9 (3)
• https://www.finance.senate.gov/imo/media/doc/Wyden%20Pass-through%20Reform%20One%20Pager.
pdf (4)
• https://www.bls.gov/news.release/empsit.nr0.htm (5)
• https://www.census.gov/programs-surveys/household-pulse-survey/data.html (6)
• https://www.census.gov/retail/index.html (7)
• https://www.propmodo.com/understanding-retails-resilience-and-lopsided-recovery/ (8)
• https://www.nahb.org/news-and-economics/housing-economics/indices/home-building-geography-index
(9)
• https://www.bloomberg.com/news/articles/2021-09-16/inflation-soared-in-some-u-s-cities-barely-budged[1]in-others (10)
