May 2021 Edition - As One Real Estate Party Ends, Another Begins

Wow!  It’s the middle of May already.  The first four and one-half months of this year have gone by like a flash.  Memorial Weekend and the official beginning of summer are just around the corner.  We’re still under Covid social distancing restrictions and being required to wear masks but the vaccines are getting distributed and we’re starting to see the light at the end of the tunnel.  Despite the ongoing economic challenges related to the Covid pandemic, commercial real estate optimism has been quick to recover.  Exclusive research from the May 2021 Wealth Management Real Estate (WMRE) research unit and Marcus & Millichap Investor Sentiment Survey as reported by Beth Mattson-Teig shows that investor sentiment has returned to pre-pandemic levels.  This is not really surprising considering the health crisis will likely be a short-term shock to the system compared to the Great Financial Crisis.  Although the pandemic chaos has lasted a year now, in real estate terms that is a relatively short time period because hold time tend to run five to ten years or longer.  Another key difference between the Covid recession and the Great Financial Crisis is the liquidity in the market.  Financing is still available for most property types and areas, and more than half of the respondents to the survey said they have an abundance of capital ready to invest.

The confidence in the market is reflected in the appetite for acquisitions.  Fifty-five percent of the investors surveyed say they plan to increase real estate allocations in 2021 by an average of 10 percent.  An additional 35 percent of respondents plan to continue to invest at their 2020 rates during 2021 and only 10 percent anticipate a decrease.

Another factor influencing increased investment activity in real estate is the changing view on whether the real estate market is approaching a cyclical peak.  While 74 percent of the respondents thought commercial real estate values were near the peak a year ago, just 41 percent now hold that opinion.  “The spread between interest rates and cap rates remains attractive, and expectations that interest rates will rise could spur transaction activity as investors capitalize on the current low rates,” says Even Denner, Executive Vice President, Head of Business for Marcus & Millichap Capital Corp.

The survey also indicates a strong investor appetite for assets in smaller markets.  At least half of the respondents believe now is the time to buy in tertiary markets, secondary cities and suburban areas.  This speaks well for our southeastern multifamily market.  Investors are particularly targeting the larger cities and their outlying areas in the southeast that have been experiencing strong migration and population growth for several years, according to John Chang, Senior Vice President of Research Service at Marcus & Millichap.  This trend accelerated last year as the pandemic spurred people to seek more space and a lower cost of living once they were not tied to a work commute into a major city.  Private investors in particular have led the charge into tertiary markets.  “The pandemic has sparked an important investor recalibration,” says Chang.  Going back just five years most investors were pursuing assets in the urban core.  That model has changed, at least temporarily. “Investors are pulling back and rethinking their investment strategies,” he says.  “The question that has yet to be answered is whether the people and business that left those urban centers reflect a short-term change or whether this is a longer-term structural change,” he adds.

Although most respondents (62 percent) said commercial real estate offers favorable returns relative to other investment classes, the sentiment is slightly weaker than in 2020.  The second-half of 2020 survey showed 68 percent held that view compared with 74 percent who thought returns were more favorable in the first-half of 2020 survey.  

When investors who already own multifamily properties were asked their views on whether they think 2021 will be a better time to buy, hold or sell properties 48 percent said it is a better time to buy while 41 percent believe it is a better time to sell and only 12 percent felt it is a better time to hold.  This almost even split between buy versus sell should be beneficial to transaction activity in 2021.

Survey results show that apartment investors are confident in their outlook for improving values in 2021.  Sixty-four percent expect values to rise by 5.2 percent over the year.  This confidence is likely supported by the fact that rent collections have remained relatively strong during the pandemic.  According to the National Multifamily Housing Council Rent Payment Tracker, more than 93 percent of renter households have continued to make full or partial rent payments.  Additionally, apartment rents rose in April at the fastest pace seen in a decade and likely at the fastest pace ever.  Effective asking rents for U.S. apartments climbed 1.3 percent in April.  This upturn in rent growth arrives right at the beginning of prime leasing season.  The vast majority of household moves tend to occur in the time frame from April through September.  The country’s typical rent is now 1.7 percent above rates one year ago.  Annual rent growth has reached 3 percent or more for 2021, which was the national performance level seen prior to the pandemic.  

“More apartment dwellers are likely to stay put this year as single-family home affordability declines.  Rising material costs and supply shortages along with expected increases in mortgage rates are expected to keep a growing number of potentially prospective home buyers in multifamily rentals despite economic growth at the highest rate since 1984 and a continued improvement in the labor market,” according to National Association of Home Builders Chief Economist Robert Dietz.  

New and existing homes sold in the first quarter of this year were affordable to 63.1 percent of families as the U.S. median income was $79,900, dropping from the 63.3 percent of families able to buy in the fourth quarter of last year when the median income was $78,500 according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) recent report.  The HOI shows that the national median home price held steady at $320,000 in the first quarter of this year, unchanged from the fourth quarter of last year.  Meanwhile, average mortgage rates increased by 11 basis points in the first quarter to 2.96 percent from last year’s fourth quarter previous all-time low of 2.85 percent

“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 

Email: rickbakermultifamily@gmail.com

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