March 2021 Edition - A Few Topics We Need to Consider
Part of my daily routine is to review articles from a multitude of sources to look for information that is or will be important to your multifamily ownership and investing in the southeastern U.S. From this mass of information, I try to select one topic each month that I believe you will find interesting and of benefit to you. This month I’m going to do something different. I have cut down my stack of articles to 33 papers whose headlines caught my attention. Here are my key take aways in no particular order. Let me know what you think.
1. Predictions 2021: What you should expect? This is an article by Natalie Sunderland, Chief Marketing Officer with Addepar, that provides comments/predictions from some leading voices in wealth management.
Kurt Miscinski, President and CEO, Cerity Partners: Expects “the U.S. and the globe to resume economic recovery and to have completed full recovery by the fall of 2021.” Clients of Mr. Miscinski took “a real pause” in 2020. “The pandemic caused them to place a greater emphasis on wealth preservation.”
Bryn Talkington, Managing Partner, Requisite Capital Management: Believes “that the secular growth companies, which can be found across sectors will continue to be market leaders and that bitcoin will continue to gain institutional adoption.”
Robert Wedeking, Chief Investment Officer, Geller Advisors: Thinks that “2021 has the potential to be volatile but that there is a lot of pent-up demand in the economy.” He feels that “investors need to be prepared for some volatility and maintain a long-term focus.” As with Mr. Miscinski, most of Mr. Wedeking’s clients “are very focused on capital preservation and potential changes to tax laws.”
Edward Swenson, Co-Founder and COO, Dynasty Financial Advisors: Describes his outlook for 2021 to be “fairly sanguine” (optimistic or positive, especially in an apparently bad or difficult situation).
2. NHMC Rent Payment Tracker Finds 80.4 Percent of Apartment Households Paid Rent as of March 6. National Multifamily Housing Council (NHMC)’s
Rent Payment Tracker found 80.4 percent of apartment households made a full or partial rent payment by March 6, 2021 in its survey of 11.6 million units of professionally managed apartments across the country. This is a 4.1 percentage point decrease from the share who paid rent through March 6, 2020.
NHMC points out that “the American Rescue plan includes $40 billion in essential housing and homelessness assistance, including $26 billion for rental assistance and $5 billion to assist people who are homeless. The bill includes NMHC supported provisions that will assist the nation’s apartment residents and housing providers – including rental assistance, direct stimulus checks and expanded unemployment benefits. Taken together, along with the funds included in the stimulus package passed in late 2020, this represents a truly significant investment in the 40 million Americans who call an apartment home and the nation’s rental housing industry.”
3. Multifamily Outlook, Quarterly Report // Winter 2020. Presented by Walker & Dunlop, one of the largest commercial real estate finance companies in the United States.
The U.S. economy is far from being back to ‘normal.’ The federal reserve’s balance sheet increased by nearly $3 trillion in 2020 as subsidies such as those provided by the CARES act backstopped businesses, individuals and farmers. That’s almost triple the subsidies provided in 2008 which have yet to be paid back, igniting a debate about whether the economy can grow out of its increasing debt burden, print money, or continue in a low interest environment to pay back debt. Long-term, that could put upward pressure on interest rates and inflation; however, interest rates are expected to remain at historically low levels in the near term.
The apartment market reflects similar trends to the broader U.S. economy. Tenants, now with higher work-from-home needs, are looking for larger spaces. Rent growth is strongest for two-bedroom and three-bedroom units. Studio apartments rents are declining as vacancy rates soared from near 6 percent in mid-2019 to near 8 percent currently on a national basis.
More broadly, the apartment market remains fairly stable. 62 of the 80 largest markets continue to post positive effective rental growth as of last September.
Despite all of these positive signals, the apartment market will face some downside risks going forward. An aggressive construction pipeline that delivered 200,000 units in the first half of 2020 will further stress the market; another 600,000 units are currently under construction. Two-thirds of these units are expected to be completed in the next 18 months.
4. Institutional Investors Pouring Equity With ‘Urgency’ Into Mid-Market Multifamily. Presented by Brian Rogal, Bisnow.
It recently only took Waterton Real Estate Investments eight months to secure $1.5 billion of equity commitments from global institutional investors and close its latest multifamily fund in February. Officials from the Chicago-based firm said it usually takes about 12 months to close out its multifamily funds, but the pandemic quickened the pace. “The coronavirus created a sense of urgency” according to Waterton’s Head of Investor Relations, Michelle Wells. Ms. Wells further stated that “with the retail and hospitality sectors in tailspins ever since the crisis began, investors have been seeking out safe places to park their money and hopefully garner strong returns” and the multifamily market is it.
5. Commercial Real Estate Trends Report presented by Integra Realty Resources
“Those hoping that a post-pandemic economy will swiftly return to conditions prevailing in late 2019 are going to be disappointed.” Real gross domestic product (GDP) is still $670 billion less than the pre-Covid peak. Even with the new 2021 stimulus plan, the impact will come with a lag that delays traction until later in 2021. Consider the magnitude of the task ahead. The best three-year average real GDP gain in the past decade (2010-2019) was $115 billion per quarter. The worst three-year average was $70 billion per quarter. With this range as a guide, a return to the prior real GDP peak would occur in the first quarter of 2022 or the second quarter of 2023.
Structural damage to the economy has been done. Fortune magazine has reported that 100,000 businesses have permanently closed. For firms that make it through to next summer, recovery could be a long haul. After the Great Recession (2008-2009), it took until 2016 for private sector non-residential construction to recapture its prior level of dollar volume.
6. Construction Outlook presented by JLL.
After weathering an extremely volatile year, 2021 is expected to bring more stability to the construction industry, but this year will look unlike anything we saw during the last recession and recovery cycle. One of the biggest differences will be growth in residential construction, which will continue to impact labor and material markets, and drive-up construction cost across the industry. The net impact for nonresidential work in 2021 will be a challenging combination of decreasing work volume but increasing costs.
Construction work tends to lag behind the overall economy, and the coming year will be no different. While the economic recovery is underway, the construction industry has not yet reached the bottom. Nonresidential construction was down 24 percent last year, which means less work will take place this year, even if new projects pick up again. Overall, nonresidential construction volume is expected to decline again in 2021 after already falling in 2020.
Adding to the challenges this year, construction cost escalation picked back up in earnest in the fourth quarter of 2020 and is expected to continue throughout 2021. Both construction labor and material markets have experienced shortages that are driving input prices higher.
Most significantly, the fundamental economics behind construction generally mean that although cycles come and go, at least down years for demand are generally matched by down years in cost inflation. In 2021, nonresidential construction will experience the opposite, with a challenging combination of fewer new projects, lower construction spending, but elevated cost inflation.
This is not a total construction downturn, single-family residential construction is booming but, the reality is, there is enough overlap between residential and nonresidential work that the fate of one impacts the other. Although some firms and materials are specialized, the overall pool of construction labor can generally move from one side to the other and to varying degrees many of the same materials are used across the industry.
The key factors influencing construction in 2021 will be: total construction cost which will increase between 3.5 to 5.5 percent; labor costs are expected to increase in the 2 to 5 percent range; materials costs will continue to increase between 4 to 6 percent throughout the year; construction volume will decline between 5 to 8 percent; and political implications from the Biden Administration will be wide ranging and are likely to evolve and have the aggregate impact of further increasing construction costs.
7. Biden’s Use of Fair Housing Act Could Open Doors for Development by Bendix Anderson
“Exclusive suburban areas can be held to account if their policies create places where housing is consistently too expensive for people protected by the law. The new administration of President Joe Biden has expressed an interest in putting the existing Fair Housing Act into practice – along with regulations that clarify what local officials need to do to live up to the law. These rules ask local officials to consider the housing need in their communities in new ways.
It appears that the complicated new federal regulation might encourage some investors and developers to build new apartment properties in some jurisdictions where they have previously been prohibited resulting in a rebalancing of where new affordable housing is created. Investors have worked for years to start construction on new apartment buildings in exclusive suburban areas – with limited success.”
8. The CRE Daily
New Record: U.S. Construction Spending Surpasses $1.5 Trillion:
Construction spending for February 2021 is a 1.7% higher than December’s $1.49 trillion in spending, and 5.8% higher than the January 2020 estimate.
Follow the Money:
According to Preqin data, global real estate funds have at least $300 billion in cash to buy up distressed commercial real estate. The pandemic basically shut down $146 billion of CRE that’s now at risk of bankruptcy.
Real Estate and Government:
The Federal Housing Finance Agency (FHFA) recently announced that it will disburse $1.09 billion to Fannie Mae (FNMA) and Freddie Mac (FMCC) for affordable housing spending. This is more than double the 2020 disbursement.
9. Any signs Of A Distressed Market Yet? An article by Les Shaver.
Moody’s analysis shows subtle discounts for retail and hotel but limited evidence of stress for all other sectors. Retail and lodging have suffered tremendously through the pandemic and there are questions about forbearance activity in multifamily. The good news is, things are improving. In the fourth quarter, transaction count and volume for all property types increased as much as 50% from Q3, according to Moody’s analytics. For multifamily and industrial, the levels were on par with Q4 2019. CAP rates fell and price per unit increased in the multifamily and industrial sectors.
According to Moody’s the number of 121-day delinquent status for loans on all property types is stable. “At this point, we cannot contribute to the banter either way, other than to say we are not seeing strong signs of a distressed transaction market. While there might not be clear signs of distress, groups are lining up to buy troubled assets.”
10.These are real estate executive’s worst worries for 2021 by Sasha Jones
A survey of real estate executives found 85 percent see 2021 as a year of opportunity, but 70 percent said that the overall commercial real estate sector will not return to pre-Covid levels until 2023. Their most pressing concerns were the closings of restaurants, gyms and other businesses; eviction and foreclosure moratoriums; and a recession in the U.S. 90 percent believe that the shift to work-from-home will have long-term impacts on the office market, while 70 percent think the same for the residential market.
The industry was divided on the Biden administration, with 54 percent saying it will not have a positive impact on commercial real estate in 2021. Although Biden has talked of doing away with 1031 exchanges, 62 percent of the respondents did not expect tax reform to have a significant effect on the industry this year.
11.Multifamily Concessions To Keep Falling in 2021 an article by Lynn Pollack.
Concessions hit their peak in the summer of 2020 but decreased in the fourth quarter. Multifamily concessions are now on the decline, according to new research from Yardi Matrix. Concessions are on the decline in part due to job market gains and an increase in consumer sentiment as the economy has reopened and Covid-19 vaccines have become available. The optimism has boosted demand and, generally, multifamily demand has shifted from more expensive properties and metro areas to less expensive areas.
Multifamily rents stabilized considerably in the latter half of last year according to end-of-year data from ApartmentList. In December, rent declines were consistent with historical trends across the fourth quarter of 2020 and year-over-year, ApartmentsList reported a national rent decline of 1.3%.
12.Apartment Rents Hit Biggest Growth Spurt Since 2019 an article by Kelsi Maree Borland.
Apartment rent trends may have hit a new stride. The ApartmentList national rent index increased 0.7% month-over-month in February for the largest monthly increase since June 2019. The increase also represents the second consecutive month of rent growth, a possible turn in the downward trend in rates catalyzed by the pandemic. This month-over-month increase represents a substantial move forward. For the past three years, February rent growth was 0.3% month-over-month. The report from ApartmentList notes that the 2021 increase is more than double February 2020.
While this trend is encouraging, ApartmentList notes that rent trends are very market specific. Rents in some markets are hitting a trough – or recovering from one – while booming markets are continuing to see rent growth. Multifamily has shined in the sunbelt region through the pandemic. Some investors are forming investment strategies to respond to the trend by investing in vintage multifamily assets throughout the Sunbelt. The region has become a favorite among investors during the pandemic due to strong inward migration supported by work-from-home policies.
13.Most Multifamily Investors Are Targeting Smaller Metros Now by Kelsi Maree Borland.
Investors are following renter migration patterns outside of the big cities with non-major metros receiving the highest investment activity on record last year. According to new research by Newmark, 75.8% of multifamily investment happened outside of major metros in 2020. This is the highest investment allocation outside of big cities on record.
While the pandemic certainly encouraged renters to migrate to new markets, it wasn’t the impetus for the trend. According to Newmark, investment capital has slowly been increasing investment allocation to small markets for over the last five years. Sunbelt markets continue to be a favorite for outbound rents with the Southeast and the Southwest leading in population growth.
14.Triad city makes top 5 nationally for apartment rental growth. Here’s why and what to expect ahead, Lloyd Whittington, Editor in Chief, Triad Business Journal.
A host of new apartment projects are under construction in the Triad but demand is still far outpacing supply. This is among the reasons rental rates are growing at such a fast clip and elevating Greensboro to Number 5 nationally. Apartment rents in Greensboro grew 0.5% month-over-month in February, and more importantly 8.3 percent versus 12 months earlier. This places Greensboro at number 5 among the 100 largest cities in the U.S. according to research by national research firm ApartmentList. By comparison, apartment rental rates slipped by 0.8% over the past 12 months nationally, but increased by 1.6 percent across North Carolina.
Winston-Salem is also seeing significant rental rate growth, ranking third among North Carolina’s largest cities with 1.9 percent change in February over January and 7.2 percent year-over-year. High Point also experienced 1.1 percent month-over-month growth in February and 5.6 percent year-over-year growth.
“It really comes down to supply and demand,” said Jon Lower, executive director of the Piedmont Triad Apartment Association. “We have seen some pretty decent growth in population in the Triad, and the rate of construction has never caught up since the recession. It’s an extension of a long-term trend.”
While there’s been much talk nationally about movement of people from larger to smaller metros due to the Covid-19 pandemic, Lowder said the Piedmont Triad Apartment Association doesn’t have data at this point to document that. Rather, he sees it as a reflection of the influx of people moving to the region from the North and Northeast over the past decades because of the lower cost of living here. Those same dynamics are at work in the for-sale residential market, and in the apartment market, he said. Driving up demand have been retirees, some of whom move here and live in apartments until they purchase a home, as well as some who decide to rent long-term as they don’t want to commit to a new mortgage – or the upkeep that comes with a home.
Lowder believes apartment demand is also driven by young professionals, many of whom are having a harder time buying. A big factor on that front is that the limited supply of single- family homes has put upward pressure on what houses are on the market, which in turn can price many out of the market.
Those who are migrating to the Triad “can afford to buy at a higher price, and that puts more pressure on the ownership market,” Lowder said. “I think that can be a barrier to folks who want to buy; it raises the bar.”
Even as prices increase, the Triad’s cities rank among the most affordable statewide based on median rent for a two-bedroom unit. Winston-Salem was the least expensive statewide at $950 per month, followed by High Pint ($980), then Fayetteville ($1,000, and Greensboro ($1,010). These averages are well below the national average of $1,101, according to ApartmentList.
OK. I give up and I haven’t even gotten through half of the 33 articles I wanted to cover or commented on apartment sales in the Triad, the significance of our highway system infrastructure, the very significant industries that are moving into the area or finished commenting on the impact of the significant increase in construction materials costs, especially lumber, and the shortage of construction labor. But, I’m sure you’ve had enough by now and there is always next month.
“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