Where is Commercial Real Estate Headed in 2017?

This article was originally published on ALEX Chatter: Where is Commercial Real Estate Headed in 2017? and all images are from ALEX Chatter.

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Left to Right: Panel moderator Barbara Byrne Denham (Reis); Charles Ostroff (Arbor Realty Trust, Inc.); Anika Khan (Wells Fargo); Bob Knakal (Cushman & Wakefield).

Here are key findings from the annual Reis Breakfast Briefing held at the New York Athletic Club in Manhattan last week.

Victor Calanog Ph.D., Reis, Inc. introduced the panel, which included Anika Khan of Wells Fargo Securities, Bob Knakal of Cushman & Wakefield, and Charles Ostroff of Arbor. The panel was moderated by Barbara Byrne Denham of Reis.

The panel answered questions covering the state of the commercial real estate market and what can be expected in 2017. Here are some notes of the talking points covered by each of the panelists.

Charles Ostroff – SVP, Agency Products, Arbor Realty Trust, Inc.

Despite a high level of multifamily development, absorption has remained strong. Rent growth is slowing, but remains positive and should be in the 3 – 4% range nationally next year. All of the new development is Class A product, no one is building the Class B/C product that remains in high demand.

The current financing market is still led by acquisitions, as opposed to refinances. Sellers are also looking at certainty of execution, not only the highest bid. The caps for Fannie Mae and Freddie Mac will remain at $36.5 billion for 2017, and will act as a balloon to provide additional liquidity if needed.

The Trump administration policy will be a wait-and-see approach. While policy details are uncertain, we could be entering a period of de-regulation. It will take time to roll back Dodd-Frank, if it happens at all, as banks are already set up for risk retention. Lending is a matter of competition and lenders need to decide how much risk to take.

Anika Khan – Managing Director & Senior Economist, Wells Fargo

Commercial real estate is subject to business and economic cycles. Economists have warned that real estate has reached a mature phase and that asset values are at an alarming level. Any unbalance in the economy could disrupt prices.

We don’t have clear policy details for the Trump administration, although infrastructure is a big fiscal multiplier. It remains to be seen what level of spending will be approved. Infrastructure spending has less impact during a late stage expansion — like we are in now — than during a recession.

Bob Knakal – Chairman, New York Investment Sales, Cushman & Wakefield, Inc.

We are in the second inning of a new game. The last game ended last year. 2014 and 2015 were the best two years ever for New York real estate. Sales volume is expected to be down in 2016, compared to the previous two years’ historic levels. Land and hotel values are already declining and other sectors are plateauing. Office concessions are way up, but rents remain stable, as fundamentals are eroding and interest rates are rising.

Forty percent of residential sales in Manhattan are investors buying condos, adding pressure to the rental market. Foreign investment remains strong, as Manhattan real estate acts as a safe deposit box for foreign investment, and Brexit has been a boost.

Tax laws that are beneficial to the real estate industry, such as capital gains tax rates and 1031 exchanges, should remain unchanged in the new administration.

Multifamily Market Update — Q3 2016

This article was originally published on ALEX Chatter: Multifamily Market Update — Q3 2016 and all images are from ALEX Chatter.

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The U.S. multifamily market continued to be boosted by the strong national economy during Q3 2016, as the job market posted steady gains and home prices approached pre-recession levels, although uncertainty remained around interest rates and added supply.

Rent Growth

According to Reis, the average asking rent reached $1,272/unit, a 3.9% increase over the $1,224/unit average one year ago, and has risen in every quarter since Q1 2010. The Class A average was $1,473/unit, up 3.8% year-over-year, while Class B/C properties increased 3.4% to $1,030/unit. Among primary markets, New York City posted the highest rent nationally, at $3,499/unit, followed by San Francisco, at $2,548/unit. Overall, Reis forecasts rents to grow 3.7% during 2016, and slow to 2.3% by 2020.

The strongest performing multifamily market in the U.S. over the last 12 months was Seattle, where average asking rent increased 9.3%, climbing to $1,491/unit, from $1,364/unit. Driven by a strong local economy—with a broad industry base featuring aerospace, high-tech, and e-commerce—rents have increased in every quarter since 2009 in the market.

Portland posted the second largest increase in the nation, boosted by high-tech job growth, including renewable energy business and tech start-ups. The area’s strong local economy built on port distribution, strong tourism, and affordability compared to the Bay Area, should help Portland remain a strong performer in the long run.

One of the fastest movers year-to-date has been Atlanta, where asking rents increased 7.2%, to $1,067/unit from $995/unit. The market moved to #3 from #15 at the end of 2015. Atlanta has shown signs of its pre-recession past, with a strong housing market and inward-migration amid steady job growth.

Markets in the Bay Area have slipped. At the end of the third quarter, San Francisco came in at #75 out of 75 markets, with a 0.5% increase (the market was ranked #2 at the end of 2015) and Oakland-East Bay ranked #46 with a 3.2% increase (previously #7).

Vacancy Rate

The vacancy rate finished at 4.4%, an increase compared with 4.3% one year ago, although slightly higher than the most recent low of 4.2% reported in Q2 2015. The Class A vacancy rate was 6.2%, while Class B/C properties finished the quarter at 3.0%. Detroit had the lowest vacancy rate at 2.5%. Development of Class A properties is expected to exert upward pressure on the vacancy rate for the high-end market, while demand for Class B/C rentals is expected to remain high amid tighter supply conditions. Overall, Reis forecasts vacancy to increase to 5.1% by the end of 2020.

Nearly 46,000 new multifamily units were completed in the U.S. through the first nine months of 2016, compared to 206,000 units for all of 2015. Reis forecasts 218,000 new units to come online during 2016, representing 2.1% of the existing inventory, and would be the highest annual total on record. Absorption is forecast to reach 179,000 units for the year, falling short of the 2015 total of 188,000. An additional 492,000 units are expected to be completed through 2020, increasing inventory by 4.6%, with absorption expected to total 414,000 units during that time.

Multifamily Investment Sales

According to Real Capital Analytics, sales volume for U.S. multifamily properties totaled $35.0 billion during Q3 2016, higher than the three-year quarterly average of $32.9 billion, and brought the year-to-date total to $111.3 billion. Annual sales volume was on pace to reach $148.4 billion, which would nearly match 2015’s record-high total of $151.3 billion.

Real Capital Analytics also reported that cross-border capital investment represented 5.6% of total volume through the first nine months of the year, down from 12.8% for all of 2015. These transactions accounted for $6.2 billion in volume, one third the 2015 total of $19.6 billion.

Employment Growth

On the economic front, the U.S. Bureau of Labor Statistics reported that employment in United States increased 1.6%, or 2.4 million jobs, during the 12 months ending in October 2016.

Job growth averaged 181,000 per month year-to-date, compared with an average of 229,000 per month in 2015. The largest gains over the last 12 months were in the professional and business services (up 2.7%), construction (up 2.6%), and education and health services (up 2.6%) sectors.

The largest year-over-year increases in employment among metropolitan divisions were Fort Lauderdale-Pompano Beach-Deerfield Beach, FL (up 4.4%), Dallas-Plano-Irving, TX (up 4.2%), and Haverhill-Newburyport-Amesbury Town, MA-NH (up 4.2%).

Q3 2016: Multifamily Construction on the Rise

This article was originally published on ALEX Chatter: Q3 2016: Multifamily Construction on the Rise.

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The U.S. Census Bureau and the Department of Housing and Urban Development recently released new data on residential construction, including data for multifamily buildings (classified as structures with five or more units). All data is seasonally adjusted at an annual rate. 

Building Permits

Total privately-owned residential housing units were authorized by building permits in the United States at a rate of 1,229,000 in October, an increase of 28,000 (2.3%) from the year-end 2015 rate of 1,201,000.

Permits for units in multifamily structures were at a 439,000 rate in October, up 11,000 (2.6%) from the end of 2015, and represented 36% of the total residential permits issued. The multifamily rate for 2015 was the highest year-end level since reaching 614,000 in 1986.

For 2015, the states with the highest multifamily permits as a percent of total residential permits were the District of Columbia (92.6%), New York (83.3%), New Jersey (62.3%), Connecticut (57.5%), and Massachusetts (55.8%).

Housing Starts

Total housing starts were at a 1,323,000 rate in October, an increase of 163,000 (14.1%) from the 2015 year-end total.

Housing starts in multifamily buildings were 445,000, up 67,000 (17.7%) from the end of 2015, and represented 34% of total residential starts. The 2015 total was the highest year-end rate since 381,000 at the end of 2003.

Total residential housing units authorized, but not started, were at rate of 129,000 at the end of October, down from 149,000 (-13.4%) at the end of 2015, including 62,000 in multifamily structures, down from 80,000 (-22.5%).

Housing Completions

Total housing completions were at a rate of 1,055,000 in October, up 22,000 (2.1%) from the end of 2015.

Completions in multifamily buildings were at a 300,000 rate, down 16,000 (-5.1%) from the end of 2015, and represented 28% of total completed residential units. The 2015 total was the highest year-end total since 326,000 units were completed in 2006.

At the end of October, there were 1,049,000 housing units under construction in the U.S., including 597,000 in multifamily structures, representing 57% of the total.

A Look at the Most and Least Expensive Multifamily Investment Markets

This article was originally published on ALEX Chatter: A Look at the Most and Least Expensive Multifamily Investment Markets.

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As we enter the fall buying season, it’s useful to look at pricing in major multifamily markets through the first half of the year. Not only in the priciest markets, but also in markets that may represent higher yield opportunities.

Using transaction data compiled by Real Capital Analytics, we calculated the average sale price in the top 50 markets in the U.S. – specifically, the weighted average price per unit paid for apartment sales transactions over $2.5 million recorded during the 12 months ending in June 2016. The average price for the U.S. overall during that time was $134,000/unit.

Most Expensive Markets

San Francisco ($492,500/unit) was the highest priced multifamily investment market over the last 12 months. Its local economy has been boosted by the expansion of the technology sector, while opposition to new development has limited new supply. Given those attributes, San Francisco should remain among the more favored markets in the long term.

Manhattan ($485,800/unit) was second on the list, weighted heavily by the purchase of Stuyvesant Town and Peter Cooper Village for $5.3 billion at the end of last year. New York City remains the favorite destination for international investment capital. However, investors of all types have begun to approach this market with caution as the luxury condominium market has slowed recently. The area also now has the highest level of new development in the pipeline of any multifamily market in the country.

The third highest priced multifamily investment markets was also in the Bay Area: San Jose ($334,800/unit). Boosted by a strong local economy built around Silicon Valley’s entrepreneurial spirit, San Jose’s long-term forecast remains bright.

Washington, D.C. ($284,500/unit) and Boston ($257,200/unit), two additional traditional international gateway investment markets, rounded out the top five highest priced markets.

Least Expensive Markets

It’s also useful to look at recent sales transactions in the lowest priced multifamily markets, to see where high-yield opportunities may lie.

“The secondary and tertiary markets of the U.S. have apartment assets that price at a lower rate per unit and also at higher cap rates,” said Jim Costello, Senior Vice President at Real Capital Analytics. “In the six major metros, cap rates came in at 4.8% in during Q2 2016 versus a 6.4% rate in the secondary and tertiary markets. Given that GSE debt is priced about the same across markets in terms of mortgage rates, it implies more positive leverage opportunities in the secondary and tertiary markets.”

The lowest priced market over the last 12 months was Memphis ($54,600/unit). Memphis is expected to maintain strong economic growth as a major transportation hub with a healthy job market, low business costs, and an attractive downtown area.

Indianapolis ($57,600/unit) was another strong market that finished at the bottom of the list. The local economy is expected to continue its recent expansion, which has been driven by low business costs and favorable demographics, along with gains in employment in the high-tech and life sciences sectors.

Three Ohio markets, Cleveland ($59,600/unit), Columbus ($63,100/unit), and Cincinnati ($77,300/unit) were among the lower priced markets. Data from Real Capital Analytics shows that the average apartment cap rate in Ohio came in at 7.6% in during Q2 2016. The local economy in these markets should continue to pick up steam in the near term, based on strong growth of healthcare and professional services sectors.

Houston ($73,700/unit), where the local economy has been hurt by falling energy prices, rounded out the top five lowest priced markets.

Summary of the JCHS’s State of the Nation's Housing 2016 Report

This article was originally published on ALEX Chatter: Harvard Study Shows Multifamily Demand at a Three-Decade High.

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The Joint Center for Housing Studies of Harvard University (JCHS) recently released its The State of the Nation’s Housing 2016 report, which found that multifamily vacancy is at three-decade low, while rents are at a three-decade inflation-adjusted high.

Below are findings from the current report most relevant to multifamily investors.

Homeownership Continues to Decline

In 2015, the U.S. homeownership rate reached its lowest level since the 1960s, falling to 63.7%. Declines were particularly large in the first-time homebuyer age groups, although all age groups have declined since 1995 except for the oldest generations.

Three factors have led to the decline in homeownership. First, foreclosures remain approximately twice the annual average compared to before the downturn and are likely to continue to exert downward pressure on homeownership in the short-term. Second, subprime borrowers (those with credit scores below 620) are far less likely to have their mortgage credit extended as compared to during the early 2000s. Third, real incomes have dropped 18% among 25-34 year olds and 9% among 35-44 year olds between 2000 and 2014.

The report cites several factors expected to improve homeownership levels in the future, including a loosening of credit standards for mortgage borrowers and increased wage growth. It also states other factors that could have a negative effect on homeownership, such as the rising tide of student loan debt: The share of the 20-39 age group with student debt jumped to 39% in 2013, compared to 22% in 2001. During that time, the average debt balance increased from $17,000 to $30,000 per borrower.

Home buying has also been delayed by the increased average age of marriage and childbirth, as well as the growing minority population — though offset by aging baby boomers, who increased the rate of homeownership. The study was unable to make a determination as to whether the housing crisis permanently diminished the appeal of homeownership in the U.S., though points to evidence that it did not.

Rental Market

In good news for multifamily investors, the housing recovery continues to be driven by the rental market. Over 36% of U.S. households rented in 2015, the largest share since the late 1960s. The number of renters increased by 9 million over the previous 10 years, which was the largest 10-year gain on record. Demand has been driven by all age groups, with the largest gains measured among older renters and families with children.

This high level of demand has driven vacancy rates steadily downward since 2010, falling to 7.1% at the end of 2015. Additionally, rents increased 3.6% during 2015, based on the Consumer Price Index for rent of primary residences. Adjusted for inflation, it has been three decades since either indicator of the rental market reached such levels.

Although activity has spiked in the multifamily development pipeline, which could help loosen conditions, much of the new supply is intended for the upper end of the market. The national average for high-end new developments was $1,381 per month during 2015, well out of the price range of the typical earner’s average earnings of $35,000 per year.

The Moody’s/RCA price index for multifamily properties was 39% above its previous high at the end of 2015, and capitalization rates were below the levels reported prior to the recession. Valuations were especially high in gateway markets such as New York, where property levels were up 93% compared to their previous peak, and San Francisco, up 85%.

Affordability Remains an Issue

The number of cost-burdened households remains an issue on both the owner and renter sides.

On the ownership side, the number of households paying more than 30% of income for housing decreased by 4.4 million households since 2008, finishing off 2014 at 18.5 million. However, the decline in cost-burdened ownership has been improved by high foreclosure rates pushing out financially strained owners.

On the rental side, the number of households paying more than 30% of income for rent increased by 3.6 million since 2008, finishing off 2014 at 21.3 million. The number of severely burdened households paying more than 50% of income increased by 2.1 million, to a record 11.4 million. Among the nation’s lowest-income renters — those earning less than $15,000 — 72% are severely burdened.

Outlook

The rental market continues to expand at a robust pace, while the owner-occupied market continues to recover. Home prices have rebounded since the recession, and homeownership rates are expected to remain level over the next few years. However, affordability remains a major issue in the U.S., with record numbers of renters paying more than half their income for housing.

Download the full 2016 State of the Nation’s Housing report.

Top Performing Multifamily Markets - Q1 2016

The multifamily market has experienced a nearly unprecedented run since the end of the recession. Multifamily growth has been driven by age related demographic trends, homeownership is nearing its lowest point in nearly half a century, and foreign investment reaching new highs.

As the multifamily cycle matures, investors are beginning to seek out value-add markets. This week’s release of Q1 2016 data from Reis gives an opportunity to examine the strongest performing markets over the last 12 months.

According to Reis, the hottest multifamily market in the U.S. has been Portland, where asking rents increased 9.7% year-over-year, climbing to $1,084/unit in Q1 2016 from $988/unit in Q1 2015. Only one year ago, Portland ranked #26 on the rent growth list. Job growth has been strong across the board in Portland, boosted by high-tech commerce, including renewable energy businesses and tech start-ups. As compared to the Bay Area, Portland’s local economy — built on port distribution, strong tourism, and affordability — should help the market remain a strong performer in the longer run.

Full Article: ALEX Chatter

Notes from NMHC’s Research Forum

Last week I had the privilege of attending the 2016 National Multifamily Housing Council’s (NMHC) Research Forum. This was my second year attending, and I learned a lot from my counterparts in other areas of the multifamily research community.

There were some great presentations given by some of the top thought leaders in the multifamily research industry, so I thought I would post some notes and highlights of the event.

Read the full summary here: The State of Multifamily in 2016: Notes from NMHC’s Research Forum