Tag Archive for: multifamily sector

confidence_canstockphoto1206107 770x320

Brokers are giddy over the Fed’s announcement, while some caution fundamental challenges remain.

Commercial broker Jaret Turkell is ready to rock and roll. Turkell posted a GIF of Minions dancing with the tagline: “It’s time to PARTYYYYYY!” shortly after Federal Reserve Chairman Jerome Powell announced that the Fed was keeping interest rates unchanged, and signaled it would make three 0.25 percentage point rate cuts next year.

“We are back baby.  LFG!!!!!!” reads another tweet from Turkell, who focuses on multifamily and investment land sales at Berkadia in South Florida. (LFG stands for “let’s f**king go.”) The sentiment changed almost overnight,” Turkell said, tempering his initial enthusiasm a bit. “I’m not saying we’re back to 2021. Valuations will start to get a bit more attainable. Massive distress is going to be somewhat off the table, at least I hope so.”

The Fed’s decision is expected to boost confidence across commercial and residential real estate, especially in South Florida. The region has been somewhat insulated from headwinds in other U.S. markets since the Fed began hiking rates in the spring of 2022, but investment sales  volume is way down.

More than anything, the expected cuts are a sign of improving — not worsening — conditions. That could result in a boost of sales and financing in the second half of next year, brokers and attorneys say.

“Real estate is not a liquid asset, and it takes time for things to change. It takes time for that sentiment to build into transactions,” said Charles Foschini, senior managing director at Berkadia.

Still, the planned rate cuts won’t solve all problems, experts say. The high cost of insurance and construction will continue to hamper deals, brokers say.

“While South Florida maintains advantages over other major metros in the U.S., its biggest downside is insurance,” Foschini said.

Eternal Optimism Meets Reality 

Some pointed to the stock market rallying and the drop in inflation as breadcrumbs indicating that more good news is on the way.

“The signal that rates have stopped going higher and will go lower, psychologically is very impactful,” said industrial developer and broker Ed Easton. “But it’s not earth-shattering,”

In fact, most expected Powell would leave rates unchanged.

“No one was anticipating anything more than a standstill at this time of year,” said commercial broker and developer Stephen Bittel, chairman of Terranova Corp. The expected cuts are “not an enormously meaningful adjustment, but it does telegraph future expectations.”

Jaime Sturgis, CEO of Fort Lauderdale-based Native Realty, said he is already seeing that confidence translate into better terms.

“That will continue next year,” Sturgis said.

Still, asset classes like office and multifamily could suffer disproportionately, especially as suburban office tenants continue to downsize and multifamily landlords struggle to turn a profit.

“There will be pain and distress in that market, no question about it,” Sturgis said. “Some multifamily landlords and developers were already operating on razor thin margins to begin with. The smallest variations in that model can break it.”

Multifamily developer Asi Cymbal, who has projects in Miami Gardens, Fort Lauderdale and Dania Beach, agreed that rate cuts won’t solve major problems, such as if a developer overpaid for land.

But, Cymbal said, “the worst is over.”

Cymbal and others expect more groundbreakings in 2024, with some self-funding initial construction, expecting that they can secure a loan. He plans to self-fund the groundbreaking of Nautico, a $1.5 billion mixed-use development fronting Fort Lauderdale’s New River, in the next 90 days.

“The Fed news could help top tier developers get lower rates on construction. But not most,” Cymbal said. “Lenders will continue to be conservative.”

“Some prospective buyers who were ready to purchase may postpone their decision until rate cuts happen,” said Bilzin Sumberg partner Joe Hernandez.

 

Source: The Real Deal

outlook_forecast_184185546_s 770x320

Core CPI inflation and headline CPI both decelerated last month, in a trend experts say could portend more disinflation factors in the near term.

Analysts from Marcus & Millichap note in a new analysis that the prices for some commodities also fell in October, including apparel and used motor vehicles, and the fees certain medical services.

“And these may be early signs that less disrupted supply chains are alleviating some of the structural drivers of inflation,” Marcus & Millichap say.

Headline CPI increased 7.7 percent over the 12 months ending in October, the smallest year-over-year increase since January of this year. While the deceleration is notable, Marcus & Millichap experts say the downshift is unlikely to be enough to fend off another hike in the overnight lending rate in December.

“The Federal Open Market Committee noted in its most recent forward guidance that it is looking for a clear trend of inflation normalizing toward the 2 percent target,” Marcus & Millichap say. “Even so, the FOMC has also acknowledged that there is a delay between when monetary policies are put in place and when the economy responds, and last month’s slower price climb, paired with an uptick in unemployment, support a more moderate rate hike. The current expectation is for a 50-basis-point December rise in the fed funds measure, capping the fastest year of increases since the early 1980s.”

But October’s inflation news offers a “mixed outlook” for retail CRE: while rent growth has improved and vacancy has tightened over the last year, prices continue to keep pace at restaurants and grocers. Gas prices also ticked up in October after three months of decreases, and higher energy bills are predicted to constrain consumer spending entering the holiday shopping season.

High housing costs are good news for the multifamily sector, where rents continue to rise at a rate that’s half the typical house payment. Over half of last month’s CPI increase was driven by higher housing costs, Marcus & Millichap says.

“In recognition of these housing needs, multifamily construction activity is set to hit a record magnitude next year,” Marcus & Millichap say. “While the new supply is warranted in the long-run, in the short term it will drag on fundamentals, especially as high inflation and rising interest rates weigh on economic outlooks and prompt more households to stay put in 2023.”

Lenders are also pumping the brakes as the cost of debt continues to increase. CBRE’s Lending Momentum Index fell by 11.1% quarter-over-quarter and 4.7% year-over-year in Q3, while spreads widened on 55%-to-65%-loan-to-value (LTV) fixed-rate permanent loans running from seven to 10 years in length. Marcus & Millichap has noted that pricing is recalibrating across most property types as the expectation gap between buyers and sellers widen and lending criteria have tightened.

“But once interest rates stabilize, however, investors and lenders will be better able to determine valuations and move forward on trades,” the firm says. “In the interim, the dynamic environment fostered by the Fed could lead to unique options for buyers, who may face less competition now than when rates plateau.”

 

Source: GlobeSt.

 

Businessman looking through binoculars

As we round the halfway mark of 2022, dynamics are shifting in the commercial real estate investment environment.

Preliminary data from SitusAMC Insight’s second quarter 2022 institutional investor survey shows changing preferences among property segments.

Compared to the previous quarter, the percentage of investors selecting industrial as the best property type over the next year plummeted from 47 percent to 11 percent, citing major concerns that the sector is overpriced. Apartment was the most favored segment among investors; 56 percent of investors ranked apartment as the best sector, up from 21 percent last quarter.

Skyrocketing mortgage rates are putting a crimp in single-family affordability, resulting in strong demand conditions for apartments. Several investors also remarked that apartments were the best inflation hedge among the property types. Retail appears to be making a comeback, with investor preference for the sector climbing to 33 percent from just 11 percent last quarter, citing opportunity for yield plays. Investor sentiment on office, on the other hand, is extremely bearish; no investors selected it as the top property type, with the sector falling from 16 percent in first quarter.

SitusAMC is seeing these sentiment shifts play out in their client work. After so many quarters of seemingly unstoppable growth, the industrial sector is starting to show initial signs of a slowdown, even though fundamentals are still strong. While rents are still growing in most markets and investors are still anticipating widespread above-inflationary rent growth and are underwriting to these assumptions, it is unrealistic to expect another quarter of 8 percent to 12 percent rent growth. Meanwhile, the buyer pool for industrial has been shrinking since the beginning of the year, and some of the larger portfolios are not being financed or traded.

Some Value Deterioration

The value driver for apartments in the second quarter was market rents and rent growth. There is still very strong sales activity, but, as with industrial, there are fewer investors at the table when the bidding reaches the best and final round. Regardless, the fundamentals remain very strong. For the first time in several quarters, low-rise apartments are performing better than garden apartments. Suburban is still outperforming urban, but some urban locations are showing signs of growth.

Investment rates are not decreasing across the board— they are very specific to the assets and the submarket. Gateway markets are lagging but improving. New York is the leader of the gateway markets, and Chicago is seeing improvements in rent growth, which is translating into some value improvement. San Francisco is starting to produce positive indicators as well, and Boston and Seattle are experiencing growth momentum. SitusAMC Insight’s proprietary multifamily affordability indexes indicate improved affordability in gateway markets vs. affordability deterioration in non-gateway metros.

SitusAMC’s retail valuations were slightly up in second quarter. Leasing activity has picked up, with many reflecting short-term mid-pandemic leases that are expiring and being renewed. A couple of large deals involving grocery-anchored centers have signaled very strong cap rates, in the low-to-mid 4 percent range, in strong markets like San Diego and Miami. However, these rates were negotiated at the beginning of the year when the debt markets had not yet changed.

Some SitusAMC clients are repricing their assets down slightly because of the debt market environment. In addition, recent strong retail sales are unlikely to continue as inflation erodes consumers’ disposable income and redirects spending to everyday necessities like gasoline and food. Retail outlets that provide essential goods, such as neighborhood and community centers with grocery anchors, will likely maintain steady income streams. Malls could be hurt by the decline in nonessential spending.

Office values remained relatively flat in the second quarter; most of the increases in values seen were owing to contractual rent increases. Overall office values are skewed, however, by strong growth in life science. SitusAMC is seeing many tenants downsizing. Daily office occupancy is mired around 40 percent, and it might not exceed 60 percent in the long term. There has been a flight to quality as employers try to attract top talent during a tight labor market.

On the bright side, near-term market rent growth has steadily increased over the past year, however, and is getting closer to the standard 3 percent. The strongest growth markets continue to be in the Sun Belt and the suburbs, which are doing better than CBD and gateway markets, but rents are increasing in those areas, as well. There have also been a lot of early renewals—near 10 percent, the highest level since 2015—though this is partly due to leases that expired during the pandemic and were renewed on a short-term basis.

 

Source: Commercial Property Executive