Earlier this week, Marcus & Millichap and National Real Estate Investor (NREI) distributed the results of their second-half Investor Sentiment Survey.
Researchers collected data by emailing invitations to participate in this online survey to public and private investors and developers of commercial real estate. Recipients of the survey included Marcus & Millichap clients as well as subscribers of NREI selected from commercial real estate investor, pension fund, and developer business subscribers who provided their email addresses.
The survey was conducted in the third quarter of 2018, with 543 completed surveys received. Survey respondents represent a broad cross-section of industry respondents that include private investors, developers, advisors, lenders, and REITs among others.
The largest percentage of respondents are private investors at 45%. Respondents are invested in a variety of property types with a majority of 66% invested in apartments.
Tax Reform and How it Has Affected Investor Sentiment
After the Tax Cuts & Jobs Act was approved, investor confidence was high and trending upward, but the most recent survey shows that same confidence level has regressed to 150 – the same level as the second half Investor Sentiment Survey of 2017. See Figure 1 for a visual representation.
Despite the lowered confidence level, many survey participants maintain positive views of tax reform. According to the collected data, 57% of respondents think the economy will grow faster as a result of the new taxes compared to the 68% who held the same view in the first half survey. Furthermore, one-third of respondents expect growth to remain the same and 10% expect slower growth in the future.
The 60% of respondents who said they consider tax reform to be favorable for commercial real estate also reflects a drop compared to the 71% who held the same view at the beginning of the year. See Figure 2 for a visual representation.
John Chang, senior vice president of research services at Marcus & Millichap, expressed uncertainty regarding the effects of tax reform by stating, “Investors are still getting their arms around the new tax law, so it’s still a little too early to anticipate a lot of change resulting from tax reform.”
That said, over 50% of survey respondents do expect tax changes to increase the flow of investment capital and 46% think the new tax laws will raise property values.
Interest Rates
Continually increasing interest rates have become one of the biggest concerns for investors. Approximately 65% of respondents note rising interest rates as their primary concern followed by unforeseen shocks to the economy at 48%. Both political uncertainty and rising operating expenses round out the top investing concerns for respondents at 44%. See Figure 4 for a visual representation.
“The Fed has implied that it will likely raise rates again in December, although whether or not they follow through with that remains to be seen,” says David Shillington, president of Marcus & Millichap Capital Corp. He also noted that there could be some risk to the economy if short-term rates were to rise above the long-term rates, which is often interpreted as a sign of an upcoming recession.
Apartment Outlook
Investors maintain a bullish outlook on apartment performance, but the desire to increase holdings has consistently declined over the past few years. 50% of apartment owners think it is better to hold, while the other half is torn between buying and selling. Although, buying confidence has decreased since hitting a peak in 2010 when over 70% of respondents were eagerly targeting multifamily properties.
The apartment sector has performed well for a number of years now, but investors are becoming concerned about the volume of construction coming into the market. On average, developers are delivering roughly 270,000 new units per year for the past five years.
However, thanks to the robust economy, absorption of new units has been keeping pace with construction. John S. Sebree, first vice president, national director of the National Multi Housing Group at Marcus & Millichap, credits the health absorption rate to significant household formation. In addition, Sebree noted that housing demand is expected to outpace completions on a national level.
The majority of survey respondents have a favorable outlook on apartment performance. Similar to past surveys, 62% of survey responders expect the general value of apartment properties to increase. The average expected value increase is 3.5%, down from the predicted 5% in the first half survey, but still, a very healthy level compared to other property types.
Investor Strategy
Despite indications of caution, survey responders are maintaining their optimism for the economy and real estate performance. 79% of respondents believe strong job growth will continue through 2018 and into 2019.
Most respondents agree real estate continues to offer more favorable returns than other investment classes and that it is better to invest in real estate rather than the stock market. Investors are also well-resources with 56% of respondents claiming they have an abundance of capital to invest.
Overall, investors are becoming more selective at this point of the economic cycle, but remain active and confident in the market.
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*All statistics, figures, and quotes accredited to Marcus & Millichap/NREI Second Half 2018 Commercial Real Estate Investor Outlook
Click here to view the Investor Sentiment Survey Report in its entirety
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Top Markets for Occupancy Growth Through April – Yardi Matrix
/0 Comments/in Blog /by Michael DumlaoEarlier this week, Multi-Housing News posted an article highlighting takeaways from a recent Yardi Matrix report pertaining to occupancy growth through the first quarter of 2019. According to the numbers, the nation’s average occupancy rate decreased by 20 points year-over-year through April to 95 percent.
Despite the step back on a national level, the five markets highlighted by Multi-Housing News are defying the odds and have emerged as frontrunners for occupancy growth through April 2019.
The occupancy growth in these markets can be accredited to beneficial market characteristics such as strong demographic trends, favorable business climates, modest development in surrounding areas, and steady employment gains.
Click here for the full Multi-Housing News article and additional Yardi Metrix statistics regarding the highlighted markets and occupancy growth.
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Traders Confident of Interest Rate Cut in July
/0 Comments/in Blog /by Michael DumlaoLast week, an unprecedented amount of traders in the fed funds futures market made bets with high expectations of an interest rate cut in the near future. The high volume of trading came as no surprise as many traders had already expressed confidence in the first quarter that a rate cut was coming. Their confidence only increased after the post-Federal Open Market Committee statement and forecasting materials pointed to a possible rate cut in the coming months.
According to CNBC’s Jeff Cox, “The market now sees a 100% chance of a rate cut at the July 30-31 meeting, up from 85% a week ago and just 15% a month ago. For the full year, the expectation for three cuts is 66% up from 59% a week ago and a mere 4% last month. ”
The record-setting volume of trading was fetched at the end of the week after the central bank concluded its two-day policy meetings. The week’s volume was tracked above 3.5 million contracts, easily topping the best week ever in May 2018 at 1.19 million contracts.
Click here to read the Traders This Week Bet on a Fed Rate Cut in Record-Setting Numbers article in its entirety
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Multifamily in 2019
/0 Comments/in Blog /by Michael DumlaoDespite some reservations before the start of the year, multifamily real estate performed well in 2018. But as we look toward the beginning of the new year, it would prudent of investors and owners to prepare for as the market is expected to shift in a different direction.
Earlier this week, Karlin Conklin, a value-add multifamily expert with a transactional volume exceeding $1.3 billion, outlined three primary factors that could shift the multifamily market in the upcoming year including “pressure from volatile financial markets, a growing housing supply, and emerging development risks.”
Interest Rates And Multifamily
With the economy cruising at a comfortable level, The Federal Reserve has had their foot on the break throughout 2018. It raised the federal funds rate to a 2 percent to 2.25 percent during its November meeting, making it the third rate increase of 2018. A fourth and final increase is expected to come during the Fed’s December meeting. But how will this affect multifamily real estate in the coming months?
According to Conklin, debt pricing “looms as the largest multifamily market mover in the coming year… And more so than any other investment, real estate class, or multifamily asset, pricing is tied to debt pricing.” Overall, as borrowing becomes more expensive, the more cap rates will have to be adjusted; and as a result, Conklin sees 2019 as more of a buyer’s market with acquisitions being motivated by assets that are “right priced” to account for rising interest rates.
Supply or Demand?
Throughout 2018, operating dynamics were favorable for multifamily real estate. The combination of increasing rents and high occupancies often resulted in operating expense surpluses. Although, that sweet spot did not last forever. In fact, the industry has started to see a decline in demand, and many markets are now over-supplied. Conklin uses Seattle and Boston has prime examples. Over the last five years, the two markets had “red-hot rent growth” and attracted plenty of developers to capitalize on the high demand and low supply.
Fast forward to November 2018. Seattle and Boston are now pushing through multifamily deliveries that ” put the brakes on rent growth to levels between 0% and 1.5% on a year-over-year Q3-2018 basis, according to Zillow. That compares with annualized rent increases from 2015 to 2017 near 7% in Seattle and 5% in Boston and Nashville.”
In summary, it’s important for investors, owners, and developers to realize how new deliveries are, and will, impact asset values in their current and prospective markets as demand and supply begin to invert.
Development Risks
Beyond the macroeconomic factors that consistently dictate multifamily trends, variables such as trade tariffs, labor shortages, and local government regulation will shape the path for multifamily real estate’s near future.
On a national level, trade tariffs on materials such as steel, lumber, and electronic components have bumped the cost of construction line items by more than 10 percent year-over-year. There has been a specific labor shortage in the construction sector due to a rise in labor costs. The National Association of Home Builders reported in a recent survey that 69% of its members were experiencing delays in completing projects on time due to a shortage of qualified workers, while other jobs were lost altogether.
Post-recession rent growth has put housing affordability in the spotlight, and local governments in some markets are responding with affordable set-aside mandates and rent control proposals. For example, many cities in California have seen the number of citizens vying for citywide rent control vastly increase. Fortunately for multifamily investors and professionals, rent control propositions in California have generally been unsuccessful.
Overall, Conklin still sees opportunities for new construction and renovation in 2019, but with a thinner margin of error.
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Click Here if you’d like to read Karlin Conklin’s article in its entirety.
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Marcus & Millichap/NREI Investor Sentiment Survey
/0 Comments/in Blog /by Michael DumlaoEarlier this week, Marcus & Millichap and National Real Estate Investor (NREI) distributed the results of their second-half Investor Sentiment Survey.
Researchers collected data by emailing invitations to participate in this online survey to public and private investors and developers of commercial real estate. Recipients of the survey included Marcus & Millichap clients as well as subscribers of NREI selected from commercial real estate investor, pension fund, and developer business subscribers who provided their email addresses.
The survey was conducted in the third quarter of 2018, with 543 completed surveys received. Survey respondents represent a broad cross-section of industry respondents that include private investors, developers, advisors, lenders, and REITs among others.
The largest percentage of respondents are private investors at 45%. Respondents are invested in a variety of property types with a majority of 66% invested in apartments.
Tax Reform and How it Has Affected Investor Sentiment
After the Tax Cuts & Jobs Act was approved, investor confidence was high and trending upward, but the most recent survey shows that same confidence level has regressed to 150 – the same level as the second half Investor Sentiment Survey of 2017. See Figure 1 for a visual representation.
Despite the lowered confidence level, many survey participants maintain positive views of tax reform. According to the collected data, 57% of respondents think the economy will grow faster as a result of the new taxes compared to the 68% who held the same view in the first half survey. Furthermore, one-third of respondents expect growth to remain the same and 10% expect slower growth in the future.
The 60% of respondents who said they consider tax reform to be favorable for commercial real estate also reflects a drop compared to the 71% who held the same view at the beginning of the year. See Figure 2 for a visual representation.
John Chang, senior vice president of research services at Marcus & Millichap, expressed uncertainty regarding the effects of tax reform by stating, “Investors are still getting their arms around the new tax law, so it’s still a little too early to anticipate a lot of change resulting from tax reform.”
That said, over 50% of survey respondents do expect tax changes to increase the flow of investment capital and 46% think the new tax laws will raise property values.
Interest Rates
Continually increasing interest rates have become one of the biggest concerns for investors. Approximately 65% of respondents note rising interest rates as their primary concern followed by unforeseen shocks to the economy at 48%. Both political uncertainty and rising operating expenses round out the top investing concerns for respondents at 44%. See Figure 4 for a visual representation.
“The Fed has implied that it will likely raise rates again in December, although whether or not they follow through with that remains to be seen,” says David Shillington, president of Marcus & Millichap Capital Corp. He also noted that there could be some risk to the economy if short-term rates were to rise above the long-term rates, which is often interpreted as a sign of an upcoming recession.
Apartment Outlook
Investors maintain a bullish outlook on apartment performance, but the desire to increase holdings has consistently declined over the past few years. 50% of apartment owners think it is better to hold, while the other half is torn between buying and selling. Although, buying confidence has decreased since hitting a peak in 2010 when over 70% of respondents were eagerly targeting multifamily properties.
The apartment sector has performed well for a number of years now, but investors are becoming concerned about the volume of construction coming into the market. On average, developers are delivering roughly 270,000 new units per year for the past five years.
However, thanks to the robust economy, absorption of new units has been keeping pace with construction. John S. Sebree, first vice president, national director of the National Multi Housing Group at Marcus & Millichap, credits the health absorption rate to significant household formation. In addition, Sebree noted that housing demand is expected to outpace completions on a national level.
The majority of survey respondents have a favorable outlook on apartment performance. Similar to past surveys, 62% of survey responders expect the general value of apartment properties to increase. The average expected value increase is 3.5%, down from the predicted 5% in the first half survey, but still, a very healthy level compared to other property types.
Investor Strategy
Despite indications of caution, survey responders are maintaining their optimism for the economy and real estate performance. 79% of respondents believe strong job growth will continue through 2018 and into 2019.
Most respondents agree real estate continues to offer more favorable returns than other investment classes and that it is better to invest in real estate rather than the stock market. Investors are also well-resources with 56% of respondents claiming they have an abundance of capital to invest.
Overall, investors are becoming more selective at this point of the economic cycle, but remain active and confident in the market.
—–
*All statistics, figures, and quotes accredited to Marcus & Millichap/NREI Second Half 2018 Commercial Real Estate Investor Outlook
Click here to view the Investor Sentiment Survey Report in its entirety
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Rent Control Battle in California and Beyond
/0 Comments/in Blog /by Michael DumlaoOne of the hottest items on California’s November voting ballot is a rent control initiative called Proposition 10. The proposal intends to repeal a 23-year-old state law that tightly limits all forms of rent control within California. The desire for rent control in California has coincided with the rising cost of living throughout the state.
According to The Sacramento Bee, the nonpartisan Legislative Analyst’s Office (LAO) reports “Soaring housing costs have led to a net loss of 1 million citizens who have fled California from 2007 to 2016…and homelessness is higher here than any other place in the nation.”
Despite the widespread support from community groups like the AIDS Healthcare Foundation, California Teachers Association, California Nurses Association, and many others, the latest poll by the Public Policy Institute of California reports,
According to the LAO’s analysis of Proposition 10, the proposed repeals could result in more harm than good. LAO analysts warned of declined new rental construction, removal of units from the market, and the value of housing possibly dropping. Any of these factors would directly affect local government property tax revenue, which equates to ~$60 billion every year. Furthermore, enacting new rent control laws would require millions of dollars per year to enforce, and result in a decline in income tax revenue, especially from the newly-affected property owners and investors.
It is important to consider how these restrictive laws and proposals affect citizens, property owners and investors, and a state’s overall economy. And while Proposition 10 is exclusive to California, and rent control laws vary from state to state, the negatives effects outlined in the LAO analysis showcases how impactful the ongoing battle of rent control is from a real estate professional, owner, or investor standpoint.
Click here to learn more about Proposition 10 and rent control.
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Accelerated Rent Growth and Projecting Occupancy
/0 Comments/in Blog /by Michael DumlaoIn a recent article for MBA Newslink, author Michael Tucker highlighted recent rent growth trends and expected occupancy rates as we approach the end of the year. This article provides statistics reported by RealPage, Richardson, Texas.
According to RealPage’s statistics, U.S. apartment rent growth accelerated to a 2.9 percent annual pace in the third quarter. RealPage chief economist, Greg Willett, said this step up from the second quarter’s rent growth percentage has reversed the slowing pattern of apartment price increases recorded since late 2015.
Despite the momentum surpassing expectations in the third quarter, it remains to be seen how it has affected the overall picture. That said, Willett did note that apartment owners “gained a little more pricing power” during the quarter as occupancy increased from 95.4 percent to 95.8 percent.
To view this article in its entirety, click here.
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Multifamily Holds Strong in First Half of 2018
/0 Comments/in Blog /by Michael DumlaoAt the halfway point of 2018, the U.S. multifamily market has held strong despite projected hurdles in the form of elevated supply levels, decelerated rent growth, and lack of affordability in major metros. As of June, the national average rent has risen to an all-time of $1,405 and year-over-year rents are up 2.9%, a 20-basis point jump from May.
With rents increasing by $29 in the second quarter, it is the highest quarterly rent growth percentage (2.1%) since the second quarter of 2015 when rents grew by 2.3%. The strong showing from the multifamily market should temper some fearful projections of decelerated rent growth turning into flattened or regressive rates after the peak years of 2015 and 2016.
The spring season is not a stranger to seeing elevated rent growth and is not necessarily a reliable indication of future trends but considering the doubts and reservations of the multifamily market’s strength entering 2018, the first-half numbers for the year are reassuring.
From a market standpoint, Orlando continues to lead the nation with 7.4% year-over-year rent growth. Markets in the Southwest such as Las Vegas (6.5%) and Phoenix (5.0%) have experienced rent growth as southern and western Californians look for more affordable living costs. Tech-based markets like Seattle, Denver, and San Francisco rebounded with favorable rent growth in the second quarter of 2018 after experiencing some sharp deceleration in previous quarters. View the chart above to see how job growth, occupancy rate, rent growth, and supply levels are interacting with each other.
*All statistics are credited to Yardi Matrix
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Projected Strong Market Performance Despite Higher Interest Rates
/0 Comments/in Blog, News /by Michael DumlaoDespite a tightening cycle resulting from increased interest rates and high supply levels, Yardi Matrix is projecting the multifamily market to remain strong through the 2018 Spring season.
These projections are largely based on the strong growth of the nation’s economic growth, positive demographic drivers, falling unemployment rates, high job growth, and increased consumer confidence levels.
In a recent article for Multifamily Executive, author Mary Salmonsen provides a detailed breakdown of Yardi Matrix’s U.S. Multifamily Outlook for Spring 2018 and highlights the positive takeaways in a tightening cycle.
Click here to read the U.S. Multifamily Outlook for Spring 2018 breakdown in its entirety.
Apartment List’s Renter Confidence Survey
/0 Comments/in Blog /by Michael DumlaoRecently, Apartment List, a home-finding service that offers apartment recommendations based on personal experiences and preferences, released results from its third annual Renter Confidence Survey. According to Apartment List, the Renter Confidence Survey “is the largest survey focused exclusively on renters, providing unique insight into what states and cities must do to meet the needs of America’s 111 million renters.”
The survey is based on 45,000 survey responses gathered between October 1, 2016 and December 6, 2017, to determine the best/worst cities for apartment renters. Survey respondents gave their cities an overall score based 11 rating factors such as safety, affordability, job opportunities, weather, taxes, and more. Below is a graphical representation of overall renter satisfaction by state:
Click here to interact with the graphic above
Here are some key overall findings from the Renter Confidence Survey:
In addition to overall ratings, renters rated specific factors that have a direct impact on their renting experience. Important takeaways include:
Other important findings:
Major Takeaways from the NMHC Apartment Outlook for 2018
/0 Comments/in Blog /by Michael DumlaoDigested from National Real Estate Investor
With demand holding strong, 2018 is expected to be a fruitful year for the multifamily industry. That is the general consensus at the National Multifamily Housing Council (NMHC) Annual Meeting in Orlando, FL., being held this week. Having said that, there is a feeling of reserved optimism among attendees and experts of the NMHC Outlook Meeting due to expected interest rate increases, more supply coming to market, and the market naturally moving to the mature/declining stages of the industry cycle. Here are some major takeaways from the opening-day events.
Click here for more information on the NMHC Annual Meeting: National Multifamily Housing Council