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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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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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CBRE released its 2021 US commercial real estate investment volume and announced a record $746 billion, up by 86% from 2020. The fourth quarter of 2021 also saw a record $296 billion, increasing 90% year over year.

For a pre-pandemic comparison, volume in 2019 was $542.4 billion, down 1.8%, and Q4 that year was $152.7 billion, down 8.1% year over year.

There’s been a lot of evidence throughout 2021 that the annual tally would be spectacular, with pandemic rebounds, volumes of cash sloshing over the sides of bank accounts as they looked to be invested, and concerns about inflation and the need for hedging. But it’s good to remember that these factors also drove up prices and that the actual deal volume could be different.

Multifamily was the hot sector in 2021 at $136 billion for the fourth quarter and $315 billion for the year, giving it a 45.9% share of the quarter and 42.2% of the year.

For the whole of 2021 across all types of investment, industrial had a 21.5% share; office, 18.3%; 9.9% for retail; and hotel at 5.7%.

By market, greater Los Angeles was at the top. Investment volume there was $58 billion, with New York coming in second at $49 billion and the $41 billion in Dallas coming in third. The fastest growth was in Las Vegas, where $9.7 billion was a 231.8% year-over-year increase. Houston saw 190.5% growth overall at $25.8 billion, while South Florida’s $27.9 billion was a 178.6% jump.

Multifamily saw the fastest growth in Las Vegas, with a 394.3% year-over-year jump. Next was Houston at 379.0% and South Florida’s 240.3%.

In office investment, the top three regions for growth were Austin (410.4%), Richmond (359.5%), and South Florida (277.7%).

Growth rates in industrial were lower, which may owe to the massive rush to build and spend in 2020 during the pandemic, raising the question for investors of whether growth could continue to lag, or if it might be a case of prices topping out to some degree. Top three regions: St. Louis (144.9%), Sacramento (143.8%), and Austin (142.5%).

Year-over-year retail investment was generally higher than industrial, with Seattle seeing 248.8%, Phoenix at 217.8%, and Houston, 210.6%

Volumes of hotel investment were overall lower, but the growth was remarkably higher in Seattle (1612.0%), Tampa (1284.8%), and Florida’s panhandle (1181.3%).

Big sources for cross-border investment were Canada’s $20.9 billion and $15.2 billion from Singapore. The two countries were far and away the biggest sources.

Final quarter numbers on cap rates show that the “everything is driving lower and lower” discussion might be over reactive. Even warehouse industrial saw cap rates of 5.47, not the “threes” many suggest as averages. Multifamily caps were lower, but still in the high fours. The highest: hotels and an average 8.33.

 

Source:  GlobeSt.

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Monthly home rents are rising sharply across South Florida, with some communities seeing as much as a 34% annual increase in December compared with a year ago.

While locals largely blame the wave of newcomers to the Miami and Fort Lauderdale areas, experts say there are solutions: build more apartments priced affordably for the working class and companies should boost wages.

Residents here are contending with the perfect storm. There’s been a steady migration in the pandemic of people coming from states with higher wages and cost of living who view Miami apartments as a deal, many firms are relocating to South Florida and there’s a pipeline of apartment buildings where rents range from $1,800 a month to $2,800 for studios and one-bedroom units.

“We have had very few affordable apartments,” said Jack McCabe, owner of McCabe Research & Consulting, a real estate and economic research firm in Deerfield Beach. “People (from the Northeast and Midwest) consider $2,200 for an apartment a great deal compared to where they are coming from. They also have more cash in the bank than people in Miami do. People in Miami can’t afford this, because their salaries are not going up as high.”

Zillow, an online real estate marketplace, reported that rents rose annually in the tri-county area — Miami-Dade, Broward and Palm Beach counties — to an average of $2,564 in December, up 30%. Real estate brokerage Redfin said in Miami apartment price tags soared year over year to an average of $3,020 monthly in December, a 34% jump.

South Florida’s annual rent hikes exceeded that of New York City and Atlanta, but the asking rates fell in the middle. According to Zillow, New York City had an average rent of $2,772 in December, up 16% from a year ago. Atlanta had an average rent of $1,882, up by 22%.

Rent increases show zero signs of subsiding in this region, experts say.

McCabe said people living in older rental homes also are seeing price increases of 8% to 12% a year.

“It’s still significant, because their income hasn’t gone up 8% to 12%,” he said. “Many people are struggling with their housing cost. Many are paying 50% (of incomes) for their housing expenses. It leaves little or nothing for a car, vacation, kids or even playing a round of golf. It has cut into their lifestyle.”

On the other hand, the area’s home sales market provides little relief to prospective buyers, with steady price increases for houses and condominiums. Miami-Dade County has a median sales price now of $525,000 for houses and $355,000 for condos, while Broward has a median sales price of $500,000 for houses and $236,000 for condos.

Inventory of homes for sale is limited, too. Miami-Dade has two months of supply of houses to buy, and 3.3 months of condos. Broward has 1.1 months of houses on the market, and 1.7 months of condos. A balanced housing market typically consists of six to nine months of inventory for sale.

“For now, buyers are showing up to a store where the shelves have been picked clean and the buyers are fighting over the last loaf of bread,” said Jeff Tucker, a senior economist at Zillow.

Priced-out buyers in Miami will continue to rent, experts say. Many will look to live in the urban core, including Brickell, downtown and Edgewater, where many firms are opening offices. The urban core is experiencing a resurgence of activity in recent months after renters exited these neighborhoods early in the pandemic that began in March 2020, to find homes with more square footage and green space.

Experts say to alleviate the burden of higher rents on consumers more development of affordable and workforce housing and wage increases are necessary. McCabe said the Miami area needs 40,000 affordable housing units, thousands more than what’s in the pipeline in Miami-Dade and the city of Miami.

The reality is expect more transplants coming to South Florida, said Jeff Andrews, a data journalist at online real estate marketplace Zumper, and that means more rent increases this year.

“You still have a housing shortage and renters are still looking to move to their new pandemic reality, because they didn’t in 2020,” Andrews said. “Homeowners did. Renters don’t have the capacity to pick up and move whenever they want. They have to wait, plan for a deposit and save up.”

The list of expected newcomers includes 29-year-old Keyao Pan, a Florida International University history professor. After completing a yearlong post doctorate fellowship at Harvard University, Pan will relocate to Miami this summer.

“FIU is a great place, it does a lot of research,” said Pan, who holds a doctorate from University of Chicago. “I can count myself very lucky, because I know people who had a 10-year gap when they graduated and then they had a stable job.”

He pays $1,400 a month for a 700-square-foot studio apartment in Cambridge, below the $3,637 monthly average for a one bedroom in the Boston area, according to a December Redfin rental report. He hopes to find a 1,000-square-foot, one-bedroom unit for $1,500 a month near the FIU main campus in west Miami-Dade or in nearby Doral. If he can swing it, Pan said, he wants to buy a home with family help for less than $350,000.

“Both Chicago and Cambridge have a higher cost of living,” he said. “Miami is still more affordable than places in the Northeast. It is a growing market.”

Also, investors are swooping in to Miami and Fort Lauderdale areas, buying condo units and then getting high monthly rents for them. South Florida renters may finally get price relief in 2023, McCabe said. That’s because home sellers in the Northeast looking to move south may have a tough time unloading their houses or condos, because they will follow so many people from that region that already have exited, he said.

“The big question,” McCabe said, is “will we see more people moving to South Florida” in 2023 to keep boosting apartment rents.

 

Source:  Miami Herald

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JP Morgan sees an array of sectors in the US that are benefiting from high user demand and will perform well in 2022, according to its 4th annual Global Alternatives Outlook.

The report is based on the opinions of CEOs, CIOs and strategists from JP Morgan’s $200 billion-plus alternatives platform. It provides a 12- to 18-month perspective on the trends influencing their respective markets, as well as their most promising investment ideas and their thoughts on the underappreciated risks investors may face.

Logistics, Multifamily, Outdoor Industrial Storage Top the List

Logistics properties (particularly infill logistics assets in the so-called last mile between urban storage facilities and consumers); suburban multi-family and single-family housing in Sunbelt states; campus-like clusters (or nodes) of amenity-rich offices for the technology sector; and industrial outdoor storage facilities (including truck terminals, parking and equipment storage) in key urban locations, are set to flourish.

Deeper into 2022, JP Morgan believes that “contrarian investment opportunities in stressed corporate and retail subsectors may start to emerge,” according to the report. “Leasing markets for offices are likely to recover slowly, potentially creating refinancing challenges for asset owners. If declines in asset values overshoot the intrinsic development costs associated with these properties, opportunistic investments in offices may become highly attractive.”

Although contrarian plays are already apparent in retail, this sector is very different, JP Morgan’s report stated.

Core US Real Estate in ‘Sweet Spot’

Economic growth and inflation create a “sweet spot” for core real estate in the US, the report said.

Cash flow-generating assets are likely to become increasingly expensive in 2022 as the real estate market becomes more crowded, according to the report.

At the same time, long-term megatrends, such as the surging popularity of e-commerce transactions and, in the US, population migration to Sunbelt states, continue to drive demand for niche real estate assets, according to the report.