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Major Takeaways: Yardi Multifamily Report – October 2019

The extended period of good performance has produced one bad side effect: legislation enacted in three states to limit rent growth and pressure to act in more states. After a period of below-par growth in housing stock, the U.S. needs more units built, but rent control moves the needle in the opposite direction.

Earlier this week, Yardi Matrix issued its National Multifamily Report for October that highlighted supply and demand, rent growth trends, and political activity as we approached the end of Q4.

Yardi

 

According to the report, multifamily rent growth inched upward in October, as the average U.S. multifamily rent increased by $1 to $1,476. Year-over-year rent growth remained at 3.2%. Despite the expected slower month during the fourth quarter, Yardi expects continuous demand a slowly growing economy to keep rent growth above its long-term average.

The multifamily sector’s continuous strength over multiple years has resulted in an elevated number of rent-burdened households. In consequence, an increase in political pressure has yielded new rent control laws in three states: New York, California, and Oregon.

According to the Joint Center of Housing Studies at Harvard University, “More than 20 million renter households spend over 30% of income on housing, and 80% of renters and 63% of owners making less than $30,000 are cost-burdened.”

Yardi dubs rent control as counterproductive as it reduces investment, limits new development which perpetuates unaffordability, increases the cost burden on those who move or enter a new market, and reduces the incentive to make capital improvements which leads to degradation of already existing stock. Outlined affordability solutions include reducing exclusionary zoning, allowing more density, and more subsidized new developments.

Click here to view Yardi Matrix’s October Multifamily National Report in its entirety

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Statewide Rent Control in California

The California legislature recently passed a bill called Assembly Bill 1842 designed to enact rent control and protect tenants. Despite its intended purpose, many believe the new law will be detrimental to tenants, owners, developers, and the national apartment industry.

California Statewide Rent Control

The new law, Tenant Protection Act of 2019, outlines a cap on annual rent increases at 5 percent plus inflation for any and all buildings 15 years or older, determined by the property’s initial certificate of occupancy. An estimated two million additional apartments are expected to be impacted by rent control as a result of Assembly Bill 1842 passing.

Other key provisions include:

  • Does not contain vacancy decontrol provisions, so units can return to market rent prices when vacated
  • Beginning January 1, 2020, requires landlords to have just cause in order to evict tenants
    for tenants who have occupied a unit for at least 12 months, or up to 24 months when an
    adult tenant adds onto a lease (change in roommates)
  • Requires landlords to provide relocation assistance via one month’s rent or rent waiver for no-fault evictions within 15 calendar days of serving notice, and to notify tenants of the relocation assistance.
  • Contains a 10-year sunset, so the requirements in the bill will expire in 2030.

See this California Rental Housing Association Rent Control Fact Sheet for more information on Assembly Bill 1482.


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Multifamily in 2019

Despite 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?b1da3076093b404ea90f5996c18540df.jpgAccording 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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Rent Control Battle in California and Beyond

“Certainly there is a housing shortage, so we need to be building housing, but what we are also seeking to address is the crisis of displacement…We’re seeing vulnerable communities — people of color, elderly folks, people with disabilities, single parents, low-income people and the middle class — being pushed out of California and becoming homeless.”

One 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,

“A whopping 60 percent of likely voters say they will vote against Proposition 10, a measure on the Nov. 6 statewide ballot that would repeal the state Costa-Hawkins Rental Housing Act, which strictly limits rent control in cities across California. Repeal would restore broad authority to cities to enact any rent control law they choose.”

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

“Demand for 106,716 apartments in the third quarter well surpassed completions that totaled 83,170 units, RealPage reported. Year-to-date, the country’s occupied apartment count has increased by 295,750 units compared to new project deliveries totaling 232,911 units.”

In 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. RealPage -EPIC Asset ManagementAccording 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

At 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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AXIOMetrics – Market Trends

Last week, AXIOMetrics, a market research company that provides strategic insight reports for real estate professionals, published research detailing November market trends for apartments.

According to the report, “A signal that the national apartment market may be on the road to strengthening in 2018 was sent by November’s performance figures, which showed that annual effective rent growth increased by 21 basis points (bps) to 2.3%. ” This figure stands out because it is only the third time in the past seven years rent growth increased from October to November.

New York, Seattle, and Dallas are metros we are used to seeing toward the top of performance lists, but it is their smaller, surrounding sister cities that have been demonstrating strong numbers. For example, when comparing New York and Long Island, the difference in annual effective rent growth is very apparent. Long Island has averaged 3.8% annual rent growth since 2015. Even though that is middle-of-the-road performance on a national level, it is 250 base points (bps) above New York’s  1.3%. A similar pattern is found when comparing Dallas to Fort Worth and Seattle to Tacoma. 

“To use an age-old axiom in the real estate industry, location certainly does matter. And while not every company’s strategy best aligns with locating in adjacent markets such as these, it should also not be discounted either, as there is potential there for success on a property-by-property or a portfolio-by-portfolio basis.”

AXIOMetrics’ market trends report is filled with useful statistics and visual aids that could affect property and investment strategies, so a personal analysis of the information is advised.

Click here for the full report: AXIOMetrics November 2017 Market Trends

 

Largest San Fransico Landlord Partners with Airbnb

Not long after inking a deal with Florida landlord, Newgard Development Group, Airbnb has signed a deal with San Fransico’s largest landlord, Veritas Investments, and Pillow Residential, a San Fransico-based startup that helps apartment owners turn units into short-term rentals.

According to the partnership, Pillow will now become the preferred partner for landlords enrolled in Airbnb’s Friendly Buildings Program, which allows landlords and tenants to share the revenue generated via home sharing.

Pillow’s services have made short-term renting a more mutually beneficial option for landlord and tenants than ever before. This is achieved by providing tools to each party that helps automate the home sharing process.

For tenants, Pillow’s tools help create Airbnb listings that automatically inputs specific building information such as access codes, emergency contacts, and shared amenities.

For landlords, Pillow automates onboarding tenants and educating them on home sharing, and also provides information about creating and executing home sharing lease addendums.

In addition, landlords are given a dashboard that monitors short-term rentals throughout their properties and indicates if a unit is occupied or available to rent.

It will be worth monitoring how much skin in the multifamily game Airbnb gains as short-term renting become more prevalent via home sharing.

Click on the links below for more information on Airbnb and their transition to the apartment game.

Airbnb Florida

Airbnb San Fransico

Hub by Amazon

Amazon Innovating Apartment Parcel Delivery Process

Anyone who has ordered a product online understands the anxiety that comes along with any shipping process. Despite provided tracking systems, it’s hard not to wonder if a package will arrive on time, is it going to be damaged, will someone be available to receive the package upon delivery, and if not, will the package be stolen? These are all legitimate, but expected concerns any online shopper has to consider, but Amazon has devised a solution to provide customers more peace of mind, especially for customers living in apartment communities.

Earlier this year, Amazon launched the “Hub” program, a parcel-delivery locker service designed for multi-tenant dwellings so residents can receive larger packages and pick them up at flexible times. And the best part it is, Hub by Amazon is NOT exclusive to Amazon purchases. Residents can use Hub for any package that fits in the locker, from any major sender, any retailer, at any time. Hub is a sister service of Amazon Lockers, which is a delivery option for any amazon customer, but only for select items and in select cities.

This is how the locker system works. Upon checkout, the customer selects a specific locker location for delivery instead of a home or business address. Once the package is delivered to the locker, a confirmation email is sent to buyer, along with a unique pickup code that will grant access to their specified locker. When arriving to collect the package, it’s as simple as entering the locker combination or scanning the provided bar code to unlock their locker and obtain their order.

From a resident’s standpoint, Hub provides a level of security and flexibility standard delivery options don’t provide. Residents can know when their package arrives, take comfort it’s in a secure location, and enjoy the flexibility of picking up the package whenever convenient. And on the managerial side of things, employees will spend much less time handling package-related queries and problems from residents. In addition, offices, lobbies, and mail rooms will regain some appeal that has been diminished by an ugly stack of deliveries waiting to be picked up by residents.

Like every other convenience, Hub comes at a cost. The unit measures at approximately 7 feet by 7 feet with 42 lockers varying in size, so it’s not a small footprint. Furthermore, Hub will cost managers and owners a pretty penny with the price landing somewhere between $10,000-$20,000 with no further monthly fees. Considering the large footprint and even larger price tag, installing a Hub is certainly not ideal for every property. Having said that, Hub’s cost might not be as daunting as it appears.

It’s important to view the locker unit for what it really is: an amenity. Comparatively speaking, the Hub cost is similar to other amenities such as a dog park, laundry room renovations, or a children’s play place among others. It comes down to the demographic of each property, what that demographic desires, and if the property’s budget allows for such an amenity. With all factors considered, it’s hard to deny the convenience and allure of having such an amenity like Hub available to your tenants and employees.

 

Extra Heads-Up for Colorado’s Short-Term Tenants

Last week, Colorado legislature officially implemented a new law – Senate Bill 17-245 – requiring landlords to provide their short-term tenants at least 21 days’ notice before increasing rent rates or terminating their leases. Tenants now also must give at least 21 days’ notice before terminating their own short-term lease.

According to Colorado law, short-term leases run on a month-to-month basis or last no longer than six months.  Before the new law was enacted, either party could terminate a short-term lease with just seven days’ notice, one of the fastest turnaround times in the country. Colorado State Representative Dan Pabon described reasons for the law passing in a written statement:

“In this overheated housing market, more and more people are facing rent increases and having to find short-term accommodations. This new law will relieve some of the pressure on renters when faced with these situations, and give them more time to find an alternative if needed.”

With Senate Bill 17-245 in effect, tenants and landlords should feel less pressure and more equipped to adjust to an unforeseen lease termination or rent increase.

Click here to read more from The Denver Post