Despite the overall consensus that commercial real estate is in the late stages of its current cycle, investors in the office sector continue to see strength in the sector. Expectations for rents and occupancies remain bullish. And while there is a general sense that cap rates will rise, respondents overall remain optimistic about the prospects for the space.
Those were among the findings in NREI’s fourth annual research survey aimed at gauging sentiment about the office sector for the coming year.
Respondents were asked to rank the relative strength of their region on a scale of 1 to 10. The West (8.2) led the way, followed by the South (7.9), the East (7.4) and the Midwest (6.8). The scores for the East, Midwest and South all rose from 2017, while the score for the West remained flat. The West has been the top market in each of the four surveys NREI has completed on the office sector.
Retail real estate’s troubles in recent years have been well-documented. Online sales continue to eat away at brick-and-mortar activity. Many chains are struggling, forced to scale back on stores or go out of business entirely.
The results from NREI’s fourth retail real estate survey reveal that the outlook from retail operators, investors and developers continues to be bleak. Sentiments on cap rates, occupancies and retail rents all declined from past years. And respondents see retail as having the dimmest outlook of any of the major property sectors.
On a scale of one to 10, with 10 being the most attractive, retail scored 5.5 in this year’s survey. The number has dropped for three consecutive years and leaves retail at the bottom of the list compared to office, industrial, multifamily and hotels. And whereas in past years the spread between the top and bottom property types was not that great, retail’s score in this year’s survey is well below the highest-scoring sector (industrial), which rose to 7.6.
In fact, the scores for those sectors are two sides of the same coin, with industrial’s prospects rising directly in concert with retail’s struggles as the ever-growing volume of online sales fuels the lackluster results at many brick-and-mortar outlets.
Single-tenant office buildings present a greater risk for loan default than multitenant assets because the sole income stream is dependent on one tenant. But there’s advice experts can offer borrowers on structuring leases to help protect their interests if something goes wrong.
In recent years, there has been a rush by investors to acquire single-tenant office buildings, because this type of asset offers better yields than Treasury bonds, says Eric Entringer, vice president of capital markets and investor relations at Dornin Investment Group, a real estate investment firm with offices in Orange County, Calif. and Las Vegas.
He notes that these assets are attracting lots of 1031 exchange investors, as well as investors pulling out of the stock market, but suggests a question they should ask themselves before investing in single-tenant office assets: “Is the risk appropriate in terms of the returns they’ll get over Treasury bonds?”
Apartment investors have been taking advantage of low interest loans through the “green financing” programs offered by Fannie Mae and Freddie Mac. “About 40 percent of our Fannie Mae and Freddie Mac business is green,” says Kyle Draeger senior managing director in the multifamily division of real estate services firm CBRE.
The loans have proven to be extremely useful to value-add investors, who typically renovate properties to improve the income produced by the apartments. So many borrowers qualified for the green incentives in 2017 that federal regulators have raised the requirements for new loans in 2018, and so far this year the green lending business still seems to be going strong.
The “green” programs often slice roughly a third of a percentage point off interest rates offered by the government-sponsored entities (GSEs).
Millennials, Millennials, Millennials. Peruse some industry trades or attend a multifamily conference, and you might get the impression that the renting population consists entirely of this generation.
The focus on Millennials in multifamily is certainly understandable. According to the Pew Research Center, in 2015 Millennials became the largest generation in the U.S. workforce. Furthermore, they are set to become the largest living adult generation next year. So, of course, they are at the very heart of the renter pool.
However, the truth is that renters are a diverse group. As Baby Boomers age, they are selling their homes and opting for the ease and convenience of apartment living. And as Generation Z reaches early adulthood, they are emerging as a sizable segment of the renting population. The post-Millennial cohort will account for 33 percent of the global population by 2020, and they already contribute $44 billion annually to the U.S. economy, according to Commscope.
Development in the Tampa Bay region is still booming. Local governments are struggling to keep pace with the influx of development activity. Land inventory is low and market demand is high. This is causing a renewed interest in rezoning property of all types, across the spectrum of uses throughout the region.
In the urban areas density is increasing and infill development opportunities are becoming more attractive. In suburban areas, large land assemblages are being rezoned to create mixed-use developments, designed to mimic the urban core by providing walkable work, live, play opportunities. The demand for single-family homeownership is outpacing the supply, which is putting pressure on the conversion of agricultural land for single-family development. Meanwhile, land previously entitled for single- family developments is converting to allow more intense housing products, such as townhomes and paired villas.
Freddie Mac and Fannie Mae lenders are providing the overwhelming majority of permanent loans to apartment properties.
“Fannie Mae and Freddie Mac are probably still the premiere lenders for leveraged apartment buyers,” says Mark Isaacson, co-founder of Redwood Capital Group, a real estate investment management firm focused on the multifamily sector. “Both are very competitive right now.”
Agency lenders are making more permanent loans than ever on apartment properties. Borrowers chose loans from agency lending programs for nearly two-thirds of the permanent financings completed in 2017 despite limits set by federal regulators (loans to certain kinds of apartment properties, including affordable housing, are not limited by the caps).
Developers opened a tremendous number of new apartment units in 2017. But the percentage of apartments that are occupied has barely shifted, despite competition for potential residents. Rents continue to grow in most markets.
That’s good news as multifamily developers look forward to another busy year in 2018 with even more new apartment properties scheduled to open. “The onslaught of new supply is certainly testing the ability of the multifamily market to absorb incoming projects,” writes Victor Calanog, chief economist with real estate research firm Reis Inc. in his “First Glance” report for the first quarter of 2018.
If the apartment markets can survive another onslaught of new construction in 2018, the next few years should be easier, as the number of new units coming on-line drops.
The city’s multifamily market displays solid fundamentals and a diverse economic profile, although it remains challenged by a substantial amount of new supply.
Miami’s multifamily market is heading into a healthy 2018. It displays solid fundamentals and a diverse economic profile, although it remains challenged by a substantial amount of new supply. While rent growth started decelerating in mid-2016, population and job gains have been cushioning the drop, producing healthy demand and ensuring that new units are slowly but steadily absorbed. The metro’s average rent climbed to $1,593 as of January, up 1.8 percent in 12 months.
Unemployment rates were lower in February than a year earlier in 319 of the 388 U.S. metro areas, according to the Bureau of Labor Statistics.
Nearly concurrent with the national employment report released late last week, the Bureau of Labor Statistics also reported that unemployment rates were lower in February than a year earlier in 319 of the 388 U.S. metropolitan areas, higher in 48 areas, and unchanged in 21 areas. That is arguably better for commercial real estate absorption than national numbers, since company growth and site selection tends to take place on a local basis.