November 2021 Edition - Big Changes in 2022!
Third Quarter of 2021 has set a new record for commercial property sales as $193 billion of commercial real estate transactions were recorded in the three-month period! Sales are up 19% from pre-pandemic levels in Q3 of 2019. The most traded property types in the quarter were apartment buildings, life-science labs and industrial properties. (Real Capital Data)
Multifamily investment has been the frontrunner for activity. “There is so much capital in the market on the buy side and there are few greater alternatives to get returns right now than the multifamily market.” (Jim Doyle Ex VP Bellwether Enterprise) Multifamily prices are up 10.1% from the same time last year as of May 2021. (Real Capital Analytics Commercial Property Price Index) Will this rally continue into 2022?
The good news is that real estate investments were largely spared from feared negative tax treatment in Biden’s Build Back Better Plan. "Some of the earlier tax proposals floated would have devastated the real estate sector, which makes up nearly one-fifth of the entire economy," said Shannon McGahn, chief advocacy officer at National Association of Realtors. "This framework has no 1031 like-kind exchange limits, no capital gains tax increases, no change in step-up in basis, no tax on unrealized capital gains, no increased estate tax, no carried-interest provisions, and no 199A limits (Tax Cuts and Jobs Act, Provision 11011 Section 199A- Qualified Business Income Deduction). The tax provision of this framework is very positive for consumers, property owners, and the real estate economy."
After pulling back during the pandemic, banks returned to the market with high liquidity. The Mortgage Bankers Association (MBA) forecasts commercial and multifamily will close $578 billion by the end of 2021, a 31% increase from 2020. Multifamily lending alone is projected to set a record at $409 billion in 2021, a 13% increase from 2020. Activity is expected to reach higher levels in 2022, with the MBA forecasting continued economic growth and even further increases in commercial and multifamily lending. (Jamie Woodwell, MBA VP for Commercial Real Estate Research)
After December 31, 2021 new financial products cannot be tied to the London Inter-Bank Offered Rate (LIBOR). The Federal Reserve and the Alternative Reference Rates Committee (ARRC) have endorsed the Secured Overnight Financing Rate (SOFR) but lenders have been slow to adopt the new reference rate as it does not reflect credit risks as LIBOR did. Ford Motor Company made headlines in September when it refinanced $15.5 billion in revolving credit lines using pricing tied to Daily Simple SOFR. “This multi-billion dollar facility, arranged by one of America’s leading financial institutions for one of America’s largest corporate borrowers, marks a significant milestone in the transition away from LIBOR,” per a statement from Price Waterhouse Coopers in their recent publication, “LIBOR Transition Market Update: Sept 16-30, 2021.”
As the economy has shown signs of “substantial progress,” the Federal Reserve is expected to take steps to withdraw economic cushions previously put in place to limit damage from the pandemic. Starting last December, the Fed started purchasing $120 billion per month in bonds to encourage lending and spending. The Federal Reserve is expected to begin tapering bond purchases as early as this month and to phase out in mid-2022. The process is expected to be gradual but the reduction in monetary supply will put upward pressure on yields (%), driving up the 10-Year Treasury which is a key benchmark for mortgage rates.
Logistical issues lingering from the pandemic such as supply chain disruptions, inventory shortages and a complex labor market are continuing to fuel inflation. Consumer prices rose 5.4% in the past year, (09/2020 to 09/2021) and 0.4% in the past month (08/2021 to 09/2021) according to data released by the Labor Department. Moderate price increases were expected, but if inflation continues, the FED will likely consider raising interest rates. Although there are industries that face unique challenges, take solace that retailers are looking at the summer of 2022 as their target for a supply-chain recovery. (Assistant Professor Tao Lu of the UCON School of Business - Operations and Information Management Department).
In closing, we have a lot to look forward to in 2022. There are big changes on the horizon along with positive signs of further economic recovery. Here is hope for the Federal Reserve to hold off on raising interest rates and for the 1031-Exchange Program to remain unscathed. Multifamily remains a strong investment and it is a very good time to start building your portfolio or to upgrade to a higher asset class. We look forward to assisting you with next purchase.
“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners. It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given). Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience. I can be a valuable resource to you without adding expense to your budget. I look forward to speaking with you and having an opportunity to meet with you. I am always at your disposal to assist you with your multifamily business. If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com.
Respectfully,
Rick
G.F. Rick Baker, CCIM
Multifamily Specialist/Investment Advisor
www.RickBakerMultifamily.com
2504 Tinderbox Ln.
Greensboro, NC 27455
Cell: 336.549.6083