Author: Suraj Shrestha

Suraj Shrestha is an associate at Harborside Partners. He has been taking the lead role on research projects; to develop and implement online marketing strategies for search engine optimization and social media marketing. He is one of the core parts for helping to grow business revenue and the company’s online presence.

Capital Economics: Expect home prices to increase as mortgage rates drop

Forecasts a 3% increase in prices by end of year

For the last two weeks Freddie Mac reported 30-year, fixed-rate mortgages averaging 3.6%, a three-year low.

For reference, the 2018 average from this time last year sat at 4.53%. These low rates, combined with a low housing inventory will lead to an increase in home prices, Capital Economics said in a report on Monday. The report predicts a 3% increase.

“As with any other asset, lower interest rates will act to boost home values,” Capital Economics reported. “Other things equal, with a given income and debt-to-income (DTI) ratio, a lower interest rate raises the amount a household can spend on a home.”

At the beginning of the year, Capital Economics originally predicted a rise in prices of 2% over 2019. The economic research consultancy admits it did not forsee the 30-year rate dropping below 4% this year. With the magnitude of the drop, Capital Economics is now edging home prices up a percentage point from its original forecast.

The report goes on to state that there are many more factors that play into home prices, and concedes that the previous relationship between house price growth and changes in interest rates is weak.

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Multifamily Midyear Review Shows Good News, Bad News

Renting remains strong, but deal activity is down.

Recent reports chronicling the economic condition of the multifamily marketplace at midyear shows a mix of good and bad news. According to Berkadia’s National Trends Multifamily Report for Second Quarter 2019, the current occupancy rate is 95.7%, which is up 30 basis points as compared with 2Q 2018 while effective rent is up 3.1% for the same period. Berkadia attributes the multifamily good news to the high cost of homeownership.

“As the cost of homeownership continued to rise across the United States, renting remained the preferred housing option. At $280,200 in May 2019, the median sales price of existing single-family homes advanced 4.6% year over year. At the same time, home sales velocity decelerated 1.1%, suggesting many Americans were priced out of homeownership.”

Berkadia also notes a rise in leasing activity as residents newly occupied 330,531 net units since mid-2018, up from 323,064 units absorbed during the year prior. Developers have been responding to the need for more apartments by adding nearly 290,000 new units to the nation’s multifamily housing stock, a rise of 3.6% higher than the number of units added during the previous five years.

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Bank or Private Loan: Which Financing Strategy Should You Choose?

What to consider when choosing a lender for your real estate investment.

Borrowers looking to increase their assets and diversify their portfolios have more financing options today than ever before. Yet securing the proper financing for a real estate project can prove to be challenging, especially considering investment strategy is not a one-size-fits-all approach. Investors can choose to borrow from a traditional bank or a private lender and it’s important to note the complexities of each to see how they fit into your overall plan. Let’s take a closer look at these two popular financing methods.

Borrowing from a bank

Bank lending is the most traditional and commonly sought-after financing strategy for commercial real estate professionals. According to a recently published report by the Mortgage Bankers Association (MBA), 2018 was another stellar year for commercial and multifamily mortgage originations with a 14 percent rise in borrowing reported at the close of the year. Additionally, a preliminary measure from the 2018 fourth quarter mortgage originations survey pointed to volume that was 3 percent higher than the record-breaking $530 million reported at the close of 2017. Multifamily, industrial, offices, hotels, and retail spaces ranked as the most in-demand properties contributing to this increase.

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What Can AI Do for Commercial Real Estate Investors?

Emerging AI tools can help investors access property data and manage properties more efficiently.

As we approach the top of the real estate market cycle, commercial real estate investors are being forced to look at the bigger picture and become more adaptable to maximize their portfolios and stay ahead of the competition. The good news? Tech-enabled solutions are helping to drive strong returns and create new opportunities for investors to get the most out of their properties and access the data necessary for strong valuations.

Just looking at the sea of change being driven by new technologies across industries, it’s no surprise that artificial intelligence (AI) has quickly become the biggest disruptor in the commercial real estate industry. Numerous software platforms now use machine learning and predictive analytics to help investors ensure the profitability and sustainability of their portfolios, while reducing the often high level risk factor of top-tier investments. Unfortunately, only those who are willing to adopt these new tools will see maximized returns in a shifting real estate market. In short, staying ahead of the competition is now predicated on staying ahead of the technology curve.

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Build to Rent Still Booming

As homeownership continues to fall, the single-family rental market is picking up steam.

Traditionally, single-family homes were just that: residences for homeowners. But times are changing. Tour a single-family development and you may discover that all the occupants are renters. What’s afoot?

Changes in the tax code have made owning less advantageous, and consumers are no longer buying into the American dream of homeownership. Those two trends are fueling the growth of what’s known as build-to-rent (B2R). Today B2R is one of the fastest-growing sectors of the U.S. housing market, and demand from renters and investors is exceeding supply.

A popular new real estate asset class, B2R is attracting niche players and such high-profile operators as Toll Brothers and Lennar, which recently announced new investments in the space.

Statistics Tell The Story

· More than one-third (39%) of all U.S. rental properties are single-family homes – the highest percentage since 1965 – while homeownership is at an all-time low.
· About 16 million rental properties today are single-family homes, and another 13 million rental households are expected to be formed by 2030, the Urban Institute reports.

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Multifamily occupancy rates keep rising

More Millennials opt to rent instead of own

Apartment occupancy rates climbed in July to their highest level since in since 2000, according to a report from RealPage, which revealed that occupancy rates rose 0.4% from last year to reach 96.2% last month.

Meanwhile, rent growth held firm in July at 3.1%, as average rent prices across the U.S. rose to $1,414.

Of the nation’s 50 markets, each one saw at least 1% growth, RealPage said. Of the nation’s 150 major markets, 91 of them met or exceeded the national norm for occupancy and hit the effectively full mark of 95%.

Rental occupancy rates in the Northeast hit 97% last month, followed by the Western region at 96.5% and the Midwest at 96.4%. In all, each region saw their occupatncy rates rise by 0.2 to 0.5 points from a year ago.

“Millennials are a large reason why the current rental market is thriving,” said Ten-X Chief Economist Peter Muoio. “Though we expect homeownership in this important age group to increase over the long term, so far they remain focused on renting.

“At the same time, there continues to be new rental properties hitting the market,” Muoio added. “However, construction is expected to scale down next year, causing vacancies to rise to a predicted 5.7% before quickly being absorbed due to the continuing increase of household formations.”

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Yardi Matrix Outlook: Rents Rise 3% by Midyear 2019

Despite strong fundamentals, Yardi notes a rise in trade tensions and slowing economic growth.

Rent growth has stabilized at 2.6% in the first half of 2019 and 3.3% year-over-year, with 2.6% rent growth expected over the full year, according to the Yardi Matrix Multifamily Outlook for summer 2019.

Based on this prediction, 2019 would mark the seventh year in a row that rents have risen above the 2.5% long-term average.

South and Southwest metros are leading the nation in rent growth, due to their fast-growing economies and existing affordable housing, but most metros are seeing strong gains. Rent growth is strong across most markets as of midyear; only a handful saw rent growth of 2.5% or less. Apartments aimed at the middle and lower end continue to lead in rent growth, as new supply is still concentrated in the luxury sector.

However, with the national average rent rising to $1,465 as of June 2019, cost burdens have led to accelerated migrations from high-cost metros in the Northeast and Midwest out to the Southeast and Southwest. According to U.S. Census data, the populations of Austin, Texas; Dallas; California’s Inland Empire; Las Vegas; Orlando, Fla.; and Phoenix have risen at least 300% since 1970. Rents in many of these markets are among the fastest growing in recent years; Las Vegas tops the nation in rent growth at 8.4% YOY, followed by Phoenix at 8.1%.

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Apartment Turnover Rate Continues to Fall

Fresh data shows tenants staying put longer.

A recent brief published by CBRE shows the turnover rate for multifamily housing has fallen to 47.5%, which is the lowest level in two decades. CBRE quotes numbers from RealPage that show a drop of 80 basis points. The decline is confirmed by additional evidence culled from six major real estate investment trusts (REITs). AvalonBay, Camden, Equity Residential (EQR), MAA, and UDR all show a lower turnover rate in Q1 2019 as compared with 2018 with an annual average drop of 2% to 42%. Essex showed a 1-point rise to 41%.

The drop represents an overall trend that has been happening since at least 2000, when the rate was clocked at 65%. According to CBRE, “lower turnover rates are generally interpreted as positives for the industry and a sign of favorable market strength at this point in the cycle.” Turnover ticked up a bit in the mid-2000s but then tumbled again during the Great Recession.

CBRE quotes the National Apartment Association’s estimates that turnover costs are at least $1,000 per unit and can easily rise to over $3,000. Yet owners often achieve more rent growth when units turn. Short-lived seasonal effects on the turnover rate take effect in fall and winter months as the rate trends down. The highest rates happen in the second and third quarters of the year.

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Apartment Cap Rates Creep Higher in the Country’s Top Markets

Cap rates on apartment buildings in the nation’s top markets have been creeping higher, but lower interest rates might yet change the trend.

Multifamily investors continue to pay high prices for new acquisitions and accept historically low yields. Average multifamily cap rates have been historically low for some time and fell even further in the first half of 2019.

There are a handful of markets, however—New York City, San Francisco, Los Angeles and Chicago—where multifamily cap rates have inched higher. These are some of the same markets where developers have built the most new apartment units in recent years. Housing advocates have also pressed lawmakers to pass new rent control laws in New York City, California and Chicago, worrying some investors.

Cap rates are definitely moving up in some of the top markets of the country,” says Jim Costello, senior vice president with research firm Real Capital Analytics (RCA).

Lower interest rates may have already begun to push cap rates back down—even in these top markets.

“Cap rates did move up move up in the latter part of 2018 and early part of 2019 in prime urban submarkets in the top six markets… But CoStar data shows a decrease in multifamily cap rates since the first quarter of the year, for all markets, including the top six,” says Andrew Rybczynski, senior consultant with research firm CoStar Portfolio Strategy.

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The Fed’s Interest Rate Cut Could Boost Industrial Sales. Or Disrupt Them.

While the rate cut will lower hedging and borrowing costs, it can also drive values even higher in an already highly valued sector.

Can the new interest rate cut lead to an asset bubble in the industrial sector? Or will it result in more sales?

The Fed cut the federal funds interest rate Wednesday by a quarter of a percentage point to about 2.25 percent to protect the U.S. economy from an economic slowdown. As justification for the first rate cut since the height of the Great Recession, the Fed cited concerns over the slowing global economy and trade war with China.

In the short term, “commercial real estate investors will likely take the decision as a signal to continue buying property, even at lofty valuation levels,” says Ryan Severino, chief economist with real estate services firm JLL. “This could extend the trend real estate markets worldwide have seen during the last decade, with investors piling into the (industrial) asset class amid a hunt for higher yields and stable returns.”

The rate cut will also likely decrease the cost of construction and give REITs a boost, notes Byron Carlock, national real estate leader with consulting firm PWC.

In the longer term, however, Severino says the rate cut “risks widening the rift between market expectations and the underlying economic reality, which could form the seeds of an asset bubble. Since we did not see a strong chance of the economy backsliding into negative growth over the rest of this year, if there was no cut, the risks associated with the Fed’s decision may be greater than any boost to the market.”

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