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Ten Commonly Overlooked Investment Opportunities In Commercial Real Estate

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As the stock market continues to show volatility, many people are looking into other types of investment opportunities.

Compared to stock investing, commercial real estate has the potential to provide tax advantages and serve as a safeguard against inflation and market fluctuations.

Fortunately, there are many ways to invest in commercial real estate, and you can tailor your approach to fit your comfort level, budget and lifestyle—all while creating a dynamic portfolio.

Let’s look at 10 of the most commonly overlooked investment opportunities in commercial real estate.

1. Flex Warehouses

Industrial commercial real estate currently offers some of the best returns on the market. As organizations continue to work out complex supply chain issues, flex warehouses are becoming a crucial tool.

This type of warehousing offers a combination of storage and office space. It’s a way to deliver versatility for companies that need to store inventory and have a customer-facing area.

2. Parking Lots

With more than 282 million cars on U.S. roads, finding a parking spot is often a challenge. Parking lots are a low-maintenance commercial investment, and you can choose to operate the lot or lease it to a third-party operator. Dynamic pricing can capture the ebb and flow of demand to increase the return on investment.

3. Real Estate Investment Trusts

Real estate investment trusts, or REITs, are a great way to start off in commercial real estate investing. They allow you to skip the hands-on approach of dealing with a property.

Investing in a real estate investment trust (REIT) can offer a reliable source of income. Similar to real estate stocks, investors can buy and sell REITs on the market.

4. Self-Storage

Self-storage has outperformed other commercial real estate sectors for many years. Yet I see many people still overlooking self-storage. These properties can offer consistent, good returns even during downturns and recessions.

Remember to think strategically about the location, for this is critical when opting for this type of investment. In some areas, investors have seen some retraction due to oversaturation.

5. Cell Towers

Many people, especially those new to commercial investing, don’t realize that cell towers are a prime opportunity. They can become a source of steady income over time. As cell service expands into rural areas, investors can provide a much-needed service and a long-term return to their portfolios.

6. Senior Living Facilities

Senior living facilities are another commonly overlooked commercial property. As the number of U.S. adults 65 and older increases, more people are looking for long-term living in senior-specific residences. This creates a great investment opportunity for senior living facilities.

7. Mobile Home Parks

A growing number of homeowners are turning to flexible and budget-friendly mobile homes. And mobile homeowners have to park them somewhere. These areas can become a reliable source of passive income for investors. Lot rates have also increased in many markets recently, so now may be the perfect time to invest.

8. Commercial Multifamily Units

While residential multifamily properties only include two to four units, commercial multifamily properties include five or more. The increase in units can provide a larger stream of income, which could make this real estate opportunity a star performer in your portfolio.

Before investing in a commercial multifamily property, remember to do your due diligence. For instance, check the financial audit and property market reports, determine how the property will be managed and review service contracts, such as trash removal and lawn care.

9. Coin-Operated Laundry Shops

Getting into commercial real estate doesn’t always mean financing six-figure properties immediately. I find that coin-operated laundries are a simple way of investing in real estate for beginners.

One option is to convert an unused or overlooked space into an existing property. With this option, you can start small and even finance or lease equipment to avoid high out-of-pocket costs.

10. Undeveloped Land

All commercial real estate properties involve land. But sometimes, the investment opportunity is undeveloped land.

Investing in undeveloped land can be a little daunting if you’re unsure what your next step will be. Many commercial brokerages offer consulting or development partnerships to help you get the most out of your commercial land investment.

Adding Depth To Your Investment Portfolio

Investing in one or more forms of commercial real estate is an excellent way to improve your portfolio, and it can provide you with the versatility to withstand market and economic volatility.

A good tip is to explore commonly overlooked investment prospects, as they can offer entry points and create the right mix for your portfolio. One of the best ways to help you connect with these types of opportunities is by partnering with a brokerage.

 

Source:  Forbes

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Development In Every CRE Sector Is Slowing Except Multifamily

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Looking out to 2024, a recent Marcus & Millichap report expects commercial real estate development to slow, based on “elevated” interest rates.

Additionally, construction materials costs remain elevated on a historical basis (up 33.5% above pre-pandemic levels), despite a retreat in shipping costs and the average prices of steel and gasoline in recent quarters. Wage growth was up 5.8 percent in 2022.

Projects that have already broken ground or locked in financing are moving forward, but banks have been executing fewer construction loans relative to previous years. Lenders are tightening their underwriting in response to increased risk exposure. Loans that are secured loans are at rates well-above measures recorded prior to the health crisis.

Industrial sector development is needed, but it slowed in Q4 by 40% compared to the first three quarters and further slowing is likely. Amazon’s decision to halt its ambitious warehouse starts for the next three years is another indication.

The total amount of square footage set to be delivered for both office and retail properties is projected to increase year-over-year in 2023, but new proposals in these sectors are showing signs of deceleration.

“The limited competition from new supply should aid performance metrics at existing retail and office properties,” according to the report.

The apartment sector is an outlier, as it continues to see record inventory growth, according to the report – completions in 2023 are expected to reach the 400,000-unit mark for the first time in over 30 years.

Marcus & Millichap finds that multifamily project starts during February of this year reached the second-highest monthly measure in three decades.

 

Source:  GlobeSt.

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February’s CRE Sales Volume Up Nearly 34% From January

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Retail led an unbalanced sales volume month in February for commercial real estate’s asset classes, according to a report last week from Colliers.

Overall, February’s volume totaling $25.1 billion was up nearly 34% from January sales levels, an above-average month-to-month increase.

Retail was the most heavily traded asset class in February, with $9.1 billion of activity, buoyed by the take-private deal of STORES Capital REIT. (Without it, the volume would have been $2 billion, and it would have fallen to a similar extent as other asset classes).

Office volume in commercial and business centers (CBD) was short of the $1 billion mark for the second month in a row – and the first time since 2010.

CBD office cap rates are up 70 basis points over the past year, and MSCI notes pricing is down 2.2%, though “recent cap rate movement would suggest a far more rapid price adjustment.”

Industrial volume got back to where it was in 2015-18 by increasing 63% from January. The STORE Capital REIT deal was the main reason why.

MSCI reported a 4.4% annual drop based on January to February pricing.

Multifamily sales volume is moving downward at a faster pace, with February’s $4.8 billion traded was the lowest monthly total since February 2012. A darling for so long, it is now the third-least-traded asset class for the first time since January 2015.

MSCI’s repeat sale index shows an 8.7% annual price decline, the sharpest of any asset class.

Hospitality sales volume was volatile as it was down 53% compared to last year but up month-over-month.

MSCI reports the strongest price appreciation of any asset class over the past year at 5.4%, and unlike other asset classes, when annualizing monthly statistics, hospitality shows a 2.1% gain on $2 billion in trades for the month.

 

Source:  GlobeSt.

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Multifamily Keeps Benefiting From Hurting Housing Supply

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In the 2022 US housing report from the National Association of Realtors and Move.com, which operates Realtor.com for the NAR, the big news is more of the same. The market is now, by their count, 6.5 million new single-family homes short of population and household formation growth. For multifamily, that turns into good economic news.

It’s impossible to look at multifamily independent of single-family homes because the two markets are intertwined with household formation. Between 2012 and 2022, there were 15.6 million household formations in the US, according to NAR, with nearly 2.1 million last year.

As formations happen, they need to live someplace, but there aren’t enough traditional single-family homes. During those 10 years between 2012 and 2022, 9.03 million single-family homes were started, with 8.5 million completed. That would be a 7.1-million-unit gap. There were also 4.2 million multifamily unit starts and 3.4 million completions.

The home ownership rate oscillates between about 63% and, at its high point in the fourth quarter of 2004, 69.2%. The current level is 65.9%. That should have meant more like 10.3 million completed single-family homes.

The market gap is where multifamily provides something of a stopgap. As NAR noted, “The gap between single-family home constructions and household formations grew to 6.5 million homes between 2012 and 2022. However, including multi-family home construction reduces this gap to 2.3 million homes.”

However, there weren’t enough multifamily units created to accommodate 34.1% of the housing volume, which would be 5.4 million, far more than the 3.4 million delivered.

This is where the market turns interesting. In 2022, multifamily unit construction increased, “reaching 35.1% of all housing starts by the end of the year, a level not seen since 2015.” That is a rate at which the housing market could begin to catch up and hit a sustainable stride.

Looking at the NAR analysis, over the 10-year period, 340,000 multifamily units were delivered per year on average. A recent research brief from CBRE projected that 716,000 multifamily units will reach the market within the next 24 months, or 358,000 a year, or a roughly 5.2% increase over the baseline. That’s an improvement, but not enough to catch up in the short run.

“If only single-family homes are considered, the rate of housing starts would need to triple to keep up with demand and close the existing 6.5 million home gap in 3 to 4 years” NAR wrote. “However, if the rate of total (multi- & single-family) housing starts increased by 50% from the 2022 rate to an average rate of 2.3 million housing starts per year, a pace of construction on par with what we saw in the early 1970s and some of the peak months for building in the mid-2000s,  it would take between 2 and 3 years to close the existing 2.3 million home gap, assuming the 2012 – 2019 average rate of household formations (~1.3 million households per year).”

One lesson for the multifamily industry to take — supported by the fuller CBRE analysis — is that the housing need is so great, worries about an oversupply overwhelming demand and leading to an undercutting of the market are probably unfounded.

 

Source:  GlobeSt.

 

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Are Multifamily Prices Coming Down Soon?

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What a ride! For the past five years, apartment building owners hit the jackpot with their property values going up nationally by 37%, according to Marcus and Millichap. This was fueled by record rental increases of 13.5% in 2021 and 6.2% in 2022 and mortgage rates hitting their lowest ever in January 2021. But this trend is seemingly slowing. According to CBRE, the average multifamily cap rate went up by 38 basis points to 4.49% in the last quarter of 2022, which means prices are starting to come down. And thank goodness!

As a commercial mortgage banker specializing in multifamily financing nationally, 2022 was an extremely difficult year. It was a head-on collision between property values going up and mortgage rates going up. This produced smaller loan sizes, killing many of our deals. It wasn’t pleasant telling my client, “Sorry, 40% down is no longer going to cut it. Can you come up with 50%?” He replied, “Really? I was only getting a 4% cash-on-cash return, and now you want me to be happy with 2%.” I told him to negotiate the price down with the seller, who opted to take the property off the market instead.

Why Both Buyers And Sellers Have Their Brakes On

Although multifamily is the most sought-after asset class in the commercial real estate market today, prices remain high. This is a result of low supply and demand. In fact, the 4th quarter of 2022 hit the lowest level for both since 2009, according to Moody Analytics.

So, it’s no wonder that both buyers and sellers have their brakes on. Why? Because many buyers can’t figure out what a property is really worth today. Worse yet, they are afraid they are buying at the top of the market with a recession around the corner. And many sellers are in love with those high prices. They know that this is not a good time to sell with rates being so high. I’ve found that most are financially strong and don’t have to sell. They can just wait for rates to come down—snug in the comfort of the very low long-term rates they have on the property.

Why Multifamily Sales Prices Could Come Down Slowly In 2023

The good news for sellers is that the economy seems to be getting stronger, with wages climbing 6.3% for jobs posted on Indeed and 4.8 million jobs created in 2022. Even better, in January 2023, 517,000 new jobs were created, and unemployment hit a 53-year low at 3.4%. Many sellers, real estate brokers and property managers I talk with are arguing that this should justify today’s high multifamily prices and support more rental increases in 2023 as wages have gone up too.

But I think the data from the last quarter of 2022 supports a different argument—that multifamily prices must come down. According to CBRE, new investment in multifamily property fell by 70% (download required). Why? Because investors couldn’t make the numbers work, and the future did not look bright. According to Fannie Mae, there was a negative demand for multifamily units of -103,485 at the end of 2022. Now if we add to this the 783,000 new apartment units they report coming online in 2023, this is a recipe for rents remaining flat and rental concessions on the rise.

Savvy property investors know that if they are going to buy high, they have to raise rents to achieve the return they need in the future. This goes right to their bottom line, raising the net operating income in the income approach of a commercial appraisal and raising property value. But as noted in the report above, Fannie Mae is expecting rents to only achieve a 1.5% increase in 2023.

Today’s high prices just don’t seem sustainable, or I should say, they are not based in reality. The reality is that too many units are available for rent, too many units are coming online and too many renters are already paying more than they can afford with inflation. The reality is what an investor is willing to put down on a loan with today’s high mortgage rates. The reality is that those rates are likely to go higher as the Fed struggles to lower inflation to their benchmark of 2%. It’s at 6.3% now. And the reality is what an investor needs to earn.

A client of mine recently summed it up perfectly: “If I buy at today’s prices, I will be paying what the property will be worth in two years. And that’s if I can raise rents enough. Why would I do that?”

What does all this mean? If you are a multifamily investor, you might be better off waiting until prices come down. I think they will by the last quarter of 2023, as appraisal valuations come down and more sellers must sell due to divorce, partnership breakup, loan maturity or death. Of course, those who have the time may want to make lowball offers on properties with under-market rents in good neighborhoods where renters can afford future rent increases and wait for one to stick.

If you are a seller or listing real estate broker, unless you want to wait for a cash buyer, it’s important to not only sell the property’s upsides and value adds but also think about the buyers’ expectations for earnings. Based on actual net operating income, current interest rates and down payment requirement, what sale price will bring the deal to the closing table?

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

 

Source:  Forbes

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Little Distress Likely For Multifamily As 2023 Continues

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Multifamily will likely experience little distress this year, despite a deceleration in debt origination since the beginning of 2022.

Activity has “gradually decelerated” since Q1 2022, the second-best quarter on record for debt originations, according to an analysis from Newmark, which also notes that “preliminary loan figures overstate the severity of the slowdown” in Q4.

“The year-over-year comparison is severe, but the fourth quarter of 2021 was a very high bar to match,” the new report notes. “Projected volumes for the fourth quarter of 2022 are still the third-best fourth-quarter performance.”

The Sun Belt accounted for 57.9% of overall multifamily investment in 2022, led by Dallas, Atlanta, Houston and Phoenix, which together accounted for 21.6% of annual volume. Of the top 25 markets by volume, New York, Nashville and Philadelphia posted double-digit year-over-year sales volume growth.

But while December 2022 may have experienced a greater-than-usual seasonal boost as borrowers sought to capitalize on sharp declines in Treasury yields and spreads, Newmark says the question remains as to whether that momentum carried into the first quarter of this year.  With that said, wth the exception of loans originated in 2021, mark-to-market LTVs “are well-contained,” something that can’t be said for many office and retail vintages.

Banks leaned in heavily to the asset class in 2022, with bank exposure to loans secured by multifamily properties increasing by $11 billion from January 2022 to January 2023. But Newmark says this is unlikely to continue unabated, creating a liquidity gap in the market. Banks are also tightening lending standards and shrinking the profile of both assets and sponsors with whom they’re willing to lend.

“Banks are likely to be less active as they digest their expanded loan books, and the GSE’s will be active but static on volumes,” the firm notes. “The recent decline in spreads and reduced volatility in bond yields could incentivize market-driven lenders, such as CMBS, debt funds and life insurance companies to be more active on the margin. There is already some evidence of this in the corporate bond market, with new issuance picking up.”

The market may be also subject to more ups and downs as a result of lending caps on GSEs and a move by the entities to more “mission-driven” lending.

“As the market grows, they are providing less proportional and more targeted liquidity support, which makes a repeat of 2009 less likely but also leaves the market subject to greater ‘normal’ volatility,” the report notes.

Record quantities of debt are on track to mature by 2024, and Newmark says borrowers will face markedly higher borrowing costs as loans mature.

“Higher debt costs on refinancing will lower return for all and will give rise to a range of reactions within the market,” the report notes. “Some borrowers will choose to pay down debt, especially if the asset has appreciated meaningfully. Others will refinance the principal or partially pay down, whereas in a lower cost of capital environment, they would have re-levered. Still others will be unable to make the math work and will need to pursue a loan modification, return the keys and/or source rescue equity at an appropriate price point.”

Despite that, the asset class remains a top destination for capital globally.  International investment in US multifamily assets as a percentage of total US commercial real estate totaled 40.3% in 2022, up 990 basis points from the 2015-2019 average of 30.4%. And among the US regions, total returns in the Southeast have outpaced the broader market on short, intermediate and long-term bases. Garden-style properties throughout the Southeast have been a particularly strong niche within the sector, outpacing the US multifamily index by 440 basis points over the past decade.

 

Source:  GlobeSt.

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Multifamily Buyers, Sellers Waiting For The Other Side To Blink

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It’s a bit of same ol’, same ol’ for now in multifamily deal-making two months into 2023 – not a whole lot.

“Buyers are cautious, facing higher financing costs and downgraded projections of future rent growth,” writes, Paul Fiorilla, director of research, Yardi Matrix.

Cap rates averaged 5% at year-end 2022, up from the low- to mid-4% range at the beginning of the year, per Matrix.

“Most apartment owners are holding on to properties unless there is a reason to sell, such as a death, the dissolution of a partnership, or a capital event like a maturing mortgage that creates a need for restructuring,” Fiorilla said.

He said he expects distress to increase.

“Banks have become conservative with the prospect of a widely projected economic downturn, so borrowers are facing both rising rates and less leverage.”

There are several scenarios that will lead to distress in 2023, according to the report.

Properties that were financed at historically low rates in recent years coming up for maturity at higher prevailing rates; properties whose interest rate cap has expired and are now facing a large jump in debt-service payments; and properties that have a downturn in performance.

Indeed, despite the sector’s issues, many investors view multifamily as a safer place to park capital, Fiorilla said.

“Transaction activity will pick up when market conditions return to some semblance of stability and market players believe they can underwrite with a higher level of certainty than exists today,” he said.

Sellers Could Forgo Refinancing and Sell

Ian Bel, managing principal and CEO of Olive Tree Holdings, tells GlobeSt.com that market transaction activity will begin to recover in the second half of 2023.

“Given where debt and rate cap pricing are today, we expect to see an uptick in sellers that are opting to forgo refinancing and put their assets on the market,” Bell said.

“While volatility remains in the treasury rates, the swings have become more muted, allowing more certainty and visibility into the debt pricing. We are optimistic that this reduction in volatility will encourage more lenders to come into the market and hopefully reduce spreads.

“When the capital markets begin to thaw, lender demand is likely going to be largest for stabilized cash flowing assets in Tier I markets.”

Sellers Still Want 2021 Prices and Exit Cap Rates

But John Drachman, co-founder, Waterford Property Company, does not believe that transaction volume on the multifamily side will recover anytime soon.

“The bid-ask spread right now is extremely wide as buyers deal with the rising interest rates mixed with the near-term, choppy property fundamental outlook and sellers still want 2021 prices and exit cap rates,” Drachman said.

“In many ways, both sides are waiting for the other side to blink which has slowed the market. You also have many sellers who locked in long-term fixed-rate financing in 2020-2022 which does not make them feel forced to sell at all.

“You will see transaction volume pick up early next year when the realities of the current cycle hit and groups with short-term floating rate debt feel the pressure to sell. Until then transaction volume will be down.”

Fewer Sellers Means More Competition

Robert Stepp, Principal with Stepp Commercial Group, tells GlobeSt.com that in 2022, Stepp Commercial Group had a significant number of listings with Los Angeles-area sellers who were frustrated with rent control and other problematic apartment legislation.

Stepp Commercial Group completed over $200 million in transactions throughout greater Los Angeles last year and helped identify 1031 exchange opportunities in several states including Arizona, Florida, and Texas.

Clients were looking to trade into states that provided a stronger ROI for the long-term and fewer restrictions, Stepp said.

“We see that trend continuing into 2023 as owners seeking a passive income want to enjoy stability and realize wealth management goals,” he added.

“The market experienced a slowdown in transactions in late 2022 and that is continuing in Q1 2023. With interest rates rising, sellers are having to look at their asking cap rates and adjust their pricing accordingly.

“The good news is that with fewer sellers, there is more competition for the assets on the market. While the listings aren’t resulting in as many offers as a few years ago, they are still garnering strong attention from fewer buyers who have a significant amount of capital to put down, many paying all cash.

“Ultimately, many major markets across the nation continue to experience a dearth of rental housing options. With fewer construction starts due to higher development and labor costs, we can expect to see more multifamily trades later this year as confidence in the market is likely to return as we ease into an adjusted selling environment.”

Staying Committed to Multifamily Sector

Steve Figari, co-founder and managing partner at Shoreham Capital, tells GlobeSt.com that despite an overall slowdown across the industry, markets like Florida and the larger Sun Belt region, are still experiencing significant demand.

“We are focusing on areas with positive supply/demand dynamics and long-term growth rates,” Figari said. “We are also looking at deals that may arise from special situations, including distress, where there are opportunities to recapitalize and reposition properties.”

He said that Shoreham remains committed to the multifamily sector because, “with this approach, we believe we will emerge with an irreplaceable portfolio as market fundamentals stabilize.”

Secondary Markets Could be First to Get New Capital

Mike Madsen, vice president of acquisitions and economics, RealSource Properties, tells GlobeSt.com that month-over-month changes in macro rental rates have normalized since August but lag in Consumer Price Index trailing 12-month measurements.

“The case for the Fed to achieve their desired soft landing is building as employment remains resilient,” Madsen said.

“If the Ukraine-Russia conflict deescalates during the first half of the year that could also put downward pressure on energy, transportation, and food prices. Although uncertainly remains, the record levels of capital ready to bounce could move quickly back into buy mode in Q3, aiming for a discount from peak prices.

“We expect the 10-year rate might front-run a Fed pause, opening a window to lock in lower commercial mortgage rates from the peak. A soft landing and top in the Fed Funds rate in Q3 could be a scenario the lights could turn on as quickly as they turned off as lender cautionary levers and spreads bake in less risk of weakening rental demand.

“Capital could first jump into select secondary metros with strong rent growth expectations without oversupply threats.”

Renters Won’t Be Becoming Home Buyers

Joe Smazal, senior managing partner, Interra Realty in Chicago, tells GlobeSt.com that in the middle-market space, he’s still seeing healthy sales velocity for well-located assets in Chicagoland.

“Private capital remains interested in acquiring multifamily assets for long-term ownership, and investors have been encouraged by strong rental market and operations in Chicago,” according to Smazal. “We also don’t expect to see much attrition from renters going into first-time homeownership this year.”

Relative to other markets that were more popular over the last couple of years, Chicago has shown a lot of stability and, depending on the specific location within the city, still presents opportunities to acquire deals with cap rates at or above interest rates, Smazal said.

“If we see rates come down and/or less trepidation from the macroeconomic uncertainty, we’ll see the floodgates open.”

 

Source:  GlobeSt.

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The State Of Multifamily Investing In South Florida

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South Florida’s apartment buildings have traded at record prices as rents continue to climb.

However, there will likely be fewer apartment building transactions this year compared to last year, according to a recent report from Cushman & Wakefield.

The report; authored by Calum Weaver, director of Cushman & Wakefield’s multifamily group in Florida; stated that sales volumes slowed this summer “and will likely be 20 to 30% lower than in 2021.”

That’s because higher interest rates have impacted the profitability of multifamily deals.

Despite the headwinds, multifamily sales activity remains strong as foreign and domestic buyers continue to “pour into South Florida,” Weaver said.

“Investors view it as a safe, stable, and strong asset class,” he added. “Especially compared to turbulent stock, Bitcoin, or exotic NFTs.”

South Florida’s apartment buildings traded at record highs in the first half of 2022, for an average of $345,000 a unit in Miami-Dade, $300,000 a unit in Broward, and $379,000 in Palm Beach County.

The deals add up to $4.96 billion in multifamily transactions, in “the second-highest six-month sales total in history.”

Forty-two percent of South Florida’s 367 multifamily transactions between January and July took place in Miami-Dade, while 34% were in Broward, and 24% were in Palm Beach County.

First-time investors made many of those purchases in a trend that’s expected to continue, according to the report.

Landlords’ net rental income, or effective rent, isn’t rising much as it did in 2021. But their profits continue to increase, the report stated. Over six months, rents increased 7.5% to $2,186 a month in Miami-Dade. In Broward, rent rose 5.3% to $2,326 a month during the same time.

In Palm Beach County, the rent increase was flat, with an increase of less than 1% to $2,326 a month.

It’s the first time average rents in all three counties exceeded $2,000 a month, Weaver wrote.

South Florida has led the nation in rent hikes since the pandemic as well-paid remote workers and executives moved to the region from other parts of the United States, brokers and developers have told the Business Journal.

There are signs, however, that rent increases are slowing down.

Ken H. Johnson, an economist at Florida Atlantic University, has theorized that asking rents will drop as some remote workers return to their points of origin due to employers’ demands that they spend more time in the office.

There is some anticipation that rent increases will stabilize as more apartment units are built in South Florida. A recent report from property technology company Yardi projected that 19,000 apartment units will be finished by year-end.

Weaver’s report noted that year-to-year vacancies increased in Broward to 4.4% from 3.5%. Vacancies also went up in Palm Beach County, to 6.4% from 4.5%.

However, vacancies remain “at historic lows” in Miami-Dade County, at 3%, the report stated.

As more multifamily units are built, vacancies are expected to marginally increase in South Florida.

There are now 39,216 units being constructed in South Florida, including 9,192 apartments that recently broke ground in Miami’s Brickell Financial District and downtown areas, 3,657 units in Hialeah and Miami Lakes, as well as 3,611 units in West Palm Beach, Weaver wrote.

There could be a decrease in new projects as it becomes more difficult for developers to obtain construction loans, the report noted.

But demand for rentals is expected to remain high as home prices rise in tandem with rents.

The median price for a single-family home in South Florida rose to about 13% to $542,878, the report stated, adding that “average home values are increasing at a greater rate than rents, making ownership for many even tougher.”

Meanwhile, South Florida’s population grew by 47,000 people year to date.

“This was more than the 42,842 population increase for all of 2021,” the report declared, adding that the population hike was “equally split among the three counties.”

South Florida’s population is expected to continue to grow, according to Cushman & Wakefield.

“Household formations in South Florida are expected to increase to over 37,000 each year in the next five years,” the report stated.

If half of these new households are renters, “that represents over 18,500 new renters a year in South Florida.”

Rising rents may be a boon for landlords, but they could dissuade some professionals and companies from moving to South Florida, some experts have warned.

Their costs are rising, too, as insurance cost hikes “continue to be a challenge” with premiums per unit ranging from $1,000 to $1,800 a unit, the report stated.

However, Weaver’s report noted that South Florida is home to a strong job market, with unemployment at 3% or lower and salaries increasing by 6% over the last 12 months.

 

Source:  SFBJ

 

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Broker Sentiment Falls On Industrial. Yes, Industrial

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That super hot industrial market? Brokers are losing confidence and seeing strain, according to the first quarter sentiment report from the Society of Industrial and Office Realtors. Office, though, is still on the rebound.

The industrial sector might seem an odd subject for a loss of confidence. The sector has led CRE through the pandemic, scoring top marks time after time and continuing to crush cap rates. But nothing can go on forever.

“The red-hot industrial market is starting to see the effects of high demand and lack of space catching up with each other,” the report stated. “This strain caused by limited supply caused confidence in the industrial sector to drop for the first time in sentiment reporting.”

On-schedule industrial transactions had been increasing for almost a year. That changed in the first quarter of 2022 as they fell by 3%. On-hold transactions were up by 10% and cancelled transactions went from 4% to 6%. A “lack of space seems to have caught up to the industrial sector, which saw a 25% decrease in leasing activity in Q1. Only 61% of industrial SIORs reported high leasing activity, compared to 81% in Q4 2021.” It was the lowest leasing activity in over a year and 93% of respondents said vacancy was lower than a year before.

If you’re a broker, you need property to lease and sell. Without it, there’s little you can do other than perhaps donning a hard hat and heading to a construction site.

There’s been other growing evidence that areas of real estate were pressing the bounds. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. Similarly, according to the 2022 RCM Lightbox Investor Sentiment Report, another star, multifamily, is facing headwinds this year. And while there’s some room for cap rates to fall more with additional upward pressure on prices, as First American Financial Corporation notes, things have been getting closer to modeled cap rate bottoms.

 

Source:  GlobeSt.

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Here Come The Multifamily Headwinds

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There are usually multiple ways to look at anything. In the case of the Yardi Matrix National Multifamily Report for March 2022, you could emulate the late lyricist Johnny Mercer: accentuate the positive, eliminate the negative, and don’t mess with Mister In-Between.

But what works for an upbeat song isn’t necessarily good for business planning. There is ample good news of increased asking rents and occupancy rates, but in a sense, that’s all in the past. The question investors and operators must ask is what might be coming.

One big consideration is rent growth. “Asking rents increased by $34 nationally, up 2.1%, in the first three months of 2022, which is record growth for a first quarter,” the report said. However, that’s unlikely to continue for a few reasons. One is slowing economic growth as inflation continues to take a toll on activity. Slower growth will affect incomes, meaning the likelihood of fewer gains to cover costs of higher rents. The war in Ukraine is also an issue, according to Yardi because that could help sustain inflation, especially with the effect on energy prices.

Inflation means higher interest rates as the Fed tries to cool the economy. But multifamily acquisition yields are low, at a 4.5% average and down into the threes for prime locations. “Low cap rates caused little concern when the risk-free rate was 1% and the typical mortgage coupon was 2.5% to 3.5%, but when the cost of capital gets more expensive, low yields can complicate transactions and refinancings,” the report says.

Then there’s household formation.

“Although official numbers for 2021 have not been released, some estimates put the number of new households formed in 2021 in the two million range, which makes sense given record multifamily absorption of nearly 500,000,” the report says. “Household growth and absorption are likely to slow to more normal levels in 2022, to about half of last year. That would presage healthy—albeit more moderate—gains in multifamily fundamentals.”

Also, rent growth is not at all nationally even. Migrations to the southeast and west are a big force in rent growth, presumably because there’s a lot of new construction happening, which means higher costs given rising building materials and labor expenses and a steady stream of asking rents not tied to previous occupancy.

Occupancy is cooling in some high-growth metros—that is, the very west and southeast that has led growth because of demographic migration.

“Occupancy rates in several markets have decreased over the last year as demand hasn’t kept pace with deliveries,” the report says. “Phoenix showed the largest decrease in occupancy (-0.5%) in March, followed by the Inland Empire and Las Vegas (-0.4%) and Sacramento (-0.3%).”

 

Source:  GlobeSt.

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