Month: February 2020

Record number of renters believe renting is more affordable than owning

42% of renters pay more than a third of their household income on rent

A recent report from CoreLogic showed that home prices increased 4% year over year in December, and projected the U.S. price index will rise by 5.2% by December 2020.

As home prices continue to rise nationally, it’s little wonder that Freddie Mac’s latest “Profile of Today’s Renter and Owner” found that the majority of current renters believe renting is more affordable than owning.

However, the percentage of renters who hold that belief has increased dramatically in the past year.

A whopping 84% of renters said they believe renting is more affordable than owning – an all-time high for the survey. For comparison, this number is up 17 percentage points from February 2018.

The survey also found that affordability issues affect the average renter more than a homeowner. Freddie Mac said there are 42% of renters who paid more than a third of their household income on rent.

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Retail Investors Fuel a Surge in Non-Traded REIT Fundraising

Most recent fundraising has gravitated to non-traded NAV REITs, which provide additional transparency and liquidity than traditional non-traded REITs.

After weathering a rocky patch that sent many investors to the sidelines, non-traded REITs appear to be back on track with steady gains in capital flowing into the sector.

Non-traded REITs raised $11.8 billion in 2019, which is the highest fundraising total since 2014, according to industry data from Robert A. Stanger & Co. Inc. The firm is predicting another strong year of fundraising ahead with a further 27 percent jump to $15 billion for 2020.

Certainly, there are any number of unforeseen events that could derail that prediction, such as an increase in interest rates that would dampen investor appetite. But, for now, the industry appears to be on solid footing with a number of factors contributing to strong fundraising. Part of the credit is due to continued evolution within the sector that is resonating with its core base of retail investors.

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Labor shortages are hitting multifamily, too

A lack of construction workers has led to slowing unit delivery

Despite a prolonged multifamily growth schedule, there is still room for rent prices to go up, according to Yardi Matrix. A healthy job market means that economic growth will remain moderate, so rent gains should remain healthy in most metros.

Nationally, rent growth only dipped below the 2.5% long-term average early in the cycle. The report attributes the growing rent prices to a high occupancy rate and growing wages.

Construction workers needed

More than 1.5 million units have been delivered over the last five years, with an expectation of 300,000 units to be delivered in 2020.

Deliveries have slowed recently due to the labor shortage, slowing down housing and multifamily starts in 2019. However, Yardi Matrix says there is a growing supply of apartments in tech-heavy centers like Seattle, Denver, Raleigh and Nashville.

And across the nation, when new multifamily is built, it’s not staying empty long. Yardi Matrix says absorption remains robust in most markets, and the latest national occupancy rate of stabilized properties is near 95%. Rent growth is slowing in some markets as new supply gets digested.

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Libor Transition Hits Hurdle as SOFR-Linked Bond Sales Slump

Market watchers say the change of tack is unlikely an indictment of SOFR itself.

(Bloomberg) — The biggest issuers of bonds tied to the benchmark tapped to replace U.S. dollar Libor are suddenly pulling back. That’s a potential blow to efforts by regulators to wean America’s financial system off a much-maligned reference rate.

The Federal Home Loan Banks, which have priced about $170 billion of debt tied to the Secured Overnight Financing Rate since its inception in 2018, have virtually turned off the spigot in recent months. They’ve sold roughly $13 billion of SOFR-linked notes since the start of November, down from more than $70 billion over the preceding three months, according to data compiled by Bloomberg.

Market watchers say the change of tack is unlikely an indictment of SOFR itself. Rather it may simply be the lenders capitalizing on shifts in investor demand. But they also note the vital role these banks — which support housing, economic development and infrastructure projects — have played as standard-bearers in the nascent SOFR market. And there is a risk to wider adoption among issuers should they keep retrenching.

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Industry Leaders Expect Strong Apartment Demand Through 2020

Experts predict 1% rise in rental starts through 2020, and 4% through 2021, at International Builders’ Show conference.

While apartment vacancies are low and production has returned to pre-recession levels, more new homes will be needed to meet demand in 2020 and beyond, according to industry experts during a press conference at the National Association of Home Builders’ International Builders’ Show in Las Vegas in January.

“Research shows that 22% of young adults—ages 25 to 34—still live with their parents, a trend that will continue to create a drag on household formation in 2020-2025,” says Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at NAHB. “That group’s challenges in looking for an apartment can be attributed to student debt, rising rents, or even competition with seniors who opt to downsize to a smaller home or apartment.”

According to the conference panelists, multifamily housing starts leveled off in 2018 due to material costs, regulatory costs, and the need to pay higher wages to attract and keep workers. This led to a rise in rent, which resulted in fewer affordable apartments and a rise in luxury communities.

However, ongoing demand means developers are continuing to build, predominantly in urban areas. In 2017 and 2018, most new rentals were in communities with more than 50 units, and in 2019 multifamily starts stood at 116% of the national average.

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Fed’s Leveraged-Lending Stress Test Is a Start to Easing Fears

Fund managers are increasingly concerned about excessive debt on company balance sheets.

(Bloomberg Opinion) — Ask just about anyone on Wall Street what worries them the most, and corporate leverage will most likely rank among their top fears. In August, Bank of America Corp. surveyed 224 fund managers with a combined $553 billion in assets and found that a record 50% of them were concerned about excessive debt on company balance sheets.

It’s not hard to see why that’s the case. For one, a growing number of well-known U.S. companies are now rated triple-B, potentially just one economic downturn from becoming junk and facing a spike in borrowing costs. But at least that’s more or less out in the open. More ominous is the explosive growth in the market for leveraged loans and collateralized loan obligations. Global regulators haven’t found a way to quantify the threat they may pose to the financial system in a worst-case scenario. At least not yet.

The Federal Reserve is apparently ready to take a stab at measuring that risk itself. It announced last week that as part of its annual stress tests, Wall Street’s biggest banks must prove they can withstand a “wave of corporate sector defaults” and outflows from leveraged-loan funds that cause steep enough price declines to flow through into CLO tranches. The scenario anticipates that such a sell-off would also spill over into other types of risky credit and private equity.

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Highlights from Cushman & Wakefield’s North American Industrial Outlook

C&W expects the North American industrial market to remain one of the leading product types to watch.

Cushman & Wakefield recently published its 2020 North American Industrial Outlook report.

The brokarge firm forecasts North American industrial absorption in 2020-2021 will be a healthy 459.9 million sq. ft.

Industrial has arguably been the hottest commercial real estate sector in recent years. And signs point to that run continuing at least in the short term of the next two years.

Some highlights from C&W’s findings include:

  • Supply levels are projected to reach 573.4 million sq. ft. from 2020 to 2021. Nonetheless, vacancy will remain anchored around the 5 percent mark.
  • Asking rents are expected to increase by 6.8 percent and reach a new nominal high of $6.95 per sq. ft. by year-end 2021.

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These markets will see dramatic multifamily supply hikes this year

Multifamily supply to the rescue

Just a few weeks ago, RealPage revealed that the multifamily residential market will see the most starts it has seen in nearly 30 years in 2020.

Out of the nation’s 50 largest apartment markets, all but six will have more units completed this year than the last, RealPage said.

The most drastic supply hike is predicted to be in Los Angeles. In 2020, there are an expected 17,600 units coming in the City of Angels, the largest supply it has seen in more than 20 years. It’s also about double the average from the past decade.

This supply is much needed, as occupancy rates in Los Angeles have been at 96% for the past five years. Despite this, rent growth in Los Angeles has fallen to its lowest point since the start of this economic cycle, in 2019.

Washington, D.C. will gain 16,000 units in 2020, about 7,800 more than in 2019. Occupancies are at 96%, while rent growth has been below 2% for the past five years.

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Breaking Down CBRE’s 2020 Market Outlook

CBRE provided NREI with an exclusive sneak peek at its 2020 Real Estate Market Outlook report.

CBRE sees more growth ahead for the U.S. commercial real estate industry in 2020, although the pace of expansion could slow thanks to already strong fundamentals that will be tough to improve upon combined with some broader economic headwinds as part of its 2020 Real Estate Market Outlook. Specifically, uncertainty surrounding trade negotiations, weakness in manufacturing and the approach of the presidential election season will hang over the industry in 2020.

Still, the report predicts a “very good year” for the industry.

CBRE provided NREI an exclusive first look at the outlook report. Investment sales volumes should remain near peak levels and industry fundamentals in most sectors will remain strong as well, according to the forecast.

“Next year will bring deceleration on a few fronts, but this still is an expanding economy and a flourishing property market benefiting from a robust job market, solid consumer confidence and low interest rates,” Richard Barkham, CBRE’s global chief economist and head of Americas research, said in a statement. “We’ll see resilience across asset classes such as office, retail and multifamily as demand continues to buoy those sectors. And we see transaction volumes and capitalization rates staying relatively stable.”

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Better walkability means higher home prices

Put on those walking shoes

Across the U.S., homes that are built within walking distance of schools, shopping, parks and other urban amenities sell for an average of 23.5%, or $77,668, more than comparable properties that are car-dependent, according to a study from Redfin. (There’s a similar premium for proximity to public transportation.)

To determine walkability and what it’s worth, Redfin compared sale prices and Walk Score rankings for nearly 1 million homes sold last year across 16 major U.S. metropolitan areas and two Canadian cities.

As it turns out, walkable homes are a hot commodity. Redfin found that only about a quarter of active listings are considered walkable, or have a Walk Score ranking of 50 to 100.

“Properties that are more affordable are seeing the most demand and price growth right now, and homes in less walkable neighborhoods often fall into this category,” Redfin chief economist Daryl Fairweather said. “There just aren’t as many people who can afford walkable neighborhoods. Many house hunters are also willing to move to less walkable neighborhoods in order to get single-family homes.”

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