Window of stronger buyer demand lifted home prices. The median sale price of an existing single-family home surged to a record high of $405,600 in January 2024, after holding under $400,000 for the majority of the past two years. That month-over-month growth was the largest since May 2022, a price escalation that was primarily a result of relatively lower interest rates encouraging some prospective buyers to move off the sidelines. The average 30-year fixed-rate mortgage fell to 6.6 percent during January, representing an eight-month low and corresponding with the number of existing home sales strengthening to its highest point since August 2023. As of late February, of this year, however, the average mortgage rate climbed back up to 6.9 percent amid the impact of stubborn inflation on long-term bond yields. The combination of all-time-high home prices and renewed upward movement in debt costs could stymie home purchases in the near term.   

 

Already the wide affordability gap extends further. Prior to January’s home price swell and February’s interest rate upswing, the difference between an average effective apartment rent and a typical monthly mortgage payment on a median-priced home in the U.S. was at a record high. That affordability gap stood at roughly $1,300 at the onset of 2024, more than tripling from just two years ago. Cost-saving benefits of renting continue to bolster the appeal of apartments. While the sector is finding balance amid historic supply pressure, net absorption from October through December of last year was positive 43,000 units. As the fourth quarter is typically a soft period for apartment demand, this increase in occupied rentals reflects recent momentum.  

Home barriers and rental concessions influence behavior. The average new lease term at an apartment in the U.S. rose to 12.8 months in January 2024, the longest on record. The challenging single-family housing market is contributing to this, prompting households to prefer longer leases at apartments. A recent supply-induced increase in concessions may also be a factor. In January, roughly 12.2 percent of national apartments were offering concessions, compared to 7.9 percent in the same month of 2023. 

Developing Trends

Multifamily construction set to decelerate. The 480,000 apartments expected to finalize in 2024 will mark an all-time high, but the rate of development should cool in the coming years. In January 2024, multifamily project starts fell 37 percent year-over-year, to the slowest annualized pace since May 2020. Starts will likely stay low for the near future as multifamily permit activity in January was also down 23 percent year-over-year. While the mass of apartments scheduled to finalize in 2024 will sustain vacancy pressure in certain areas and may produce greater concession activity near term as they enter lease-up, the sector seems to be moving past peak construction levels.
 
 Homebuilders are starting to ramp up their activity. Single-family projects started in January were up 22 percent year-over-year, aided by softer material cost inflation and easing labor pressures. Greater home construction is warranted by the national housing shortage, but development will need to further elevate to make a meaningful difference. The total number of existing and new homes for sale in January trailed the long-term mean by about 37 percent. 

 

* Home price as of January; Mortgage rate through Feb. 22
 Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association;
 National Association of Home Builders; National Association of Realtors; RealPage, Inc.;
 U.S. Bureau of Labor Statistics; U.S. Census Bureau; Wells Fargo

Resilient Job Growth with Uptick in
 Unemployment Could be the Perfect Mix

 

Rising unemployment releases pressure on inflation. Employment growth accelerated in February with 275,000 jobs created, yet the unemployment rate also rose by 20 basis points to 3.9 percent. While the highest rate of unemployment in 25 months may be interpreted as a negative signal, in this case some labor market softening could be a positive sign, especially when paired with healthy employment growth. After more than two years of sub-4 percent unemployment, the additional 150,000 people joining the labor pool last month should help ease staffing bottlenecks, and signal positive hiring momentum in the coming months. A looser labor market will also help reduce the upward pressure on inflation from personnel shortages. Core PCE inflation slowed to 2.8 percent year over year in January, below the rise in average hourly earnings, implying an increase in real incomes.   

Consumer optimism is reflected in retail spending and job growth. Inflation holding below wage growth has helped bolster consumer activity at retail stores as well as bars and restaurants, prompting increased hiring efforts. Employment at food services and drinking places climbed by 42,000 roles in February, the largest increase outside of the healthcare and government sectors, which are less tied to the business cycle. The number of retail trade positions also rose by 19,000 last month as store-based sales hover near all-time highs. The spending and hiring dynamics are having positive downstream impacts on retail property performance. The national retail vacancy rate exited 2023 at a record low 4.5 percent, and with major tenants such as Dutch Bros and Aldi planning expansions, momentum should carry through this year.   

Distribution and warehouse properties face mixed outlook. The same factors influencing hiring at bars and restaurants are at play in the transportation sector, where staff counts rose by roughly 26,000 in February. Online consumer spending as a share of core retail sales hit a new record in January, excluding 2020, fueling the need to deliver goods to customers quickly. The number of roles in warehousing and storage fell by 7,000, however, revealing divided implications for industrial properties. Companies are readjusting warehouse footprints after keeping outsized inventories during pandemic-era supply chain issues. Combined with elevated construction, this mixed demand environment will mean a second year of rising vacancy. 

Financial Market Implications

 

A higher unemployment rate could reassure the Fed. The first increase to the unemployment rate in four months, paired with less job growth in December and January than initially reported, could be the labor market softening signal that the Federal Reserve has watched for. The Fed has heavily implied that it will not lower the overnight lending rate at the March meeting, a message that Wall Street has taken to heart with only a 3 percent expectation of a cut. Yet, the loosening job market may underpin a decision to do so later in the year, especially if inflation continues to cool. The core PCE index has increased by a monthly average of 0.2 percent since August. If that pace were maintained for the rest of this year, it would produce annual inflation of 2.4 percent, very close to the Fed’s long-run target of 2.0 percent.
 
 Evidence of rate cut pattern key to supporting sales activity. While a reduction to the Federal Funds rate would somewhat ease borrowing costs, confidence that the Fed will loosen monetary policy will likely not gather until at least the second cut. A lower benchmark rate, together with the potential for lenders to bring in spreads slightly, would go a long way toward accelerating the alignment process for the pricing expectations of buyers and sellers of commercial real estate that is currently underway. The recent stability in the 10-year Treasury, which has held in the low-4 percent range since mid-January, would also aid investment sales activity if it were to continue.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.;
 CME Group; Federal Reserve; Moody’s Analytics; Real Capital Analytics

 

According to a special report from Yardi Matrix, a large amount of multifamily housing supply coming online is expected to suppress national average asking rent growth this year.

 

In many of the markets that saw explosive growth during the pandemic, new supply coming online will depress rent appreciation this year, according to a special report from Yardi Matrix.

 

While the national average asking rents grew by 1.6% in 2023, some markets could end the year with slight negative growth. Yardi anticipates stronger growth in the working-class renter-by-necessity segment, as most of the new supply comprises upscale lifestyle units.

 

There is an expectation that absorption of the new supply will continue performing well in the markets that are receiving a large amount although it may take a year or so for the new supply to be fully absorbed.

 

The pandemic rent growth boomtowns—including Las Vegas (-2.5%); Boise, Idaho (-2.4%); Phoenix (-2.2%); and Austin, Texas (-1.6%)—saw the largest rent declines in 2023, the report notes. Medium-size cities with large universities were among the top performers. The list includes Madison, Wisconsin (9.5%); Knoxville, Tennessee (8.9%); and Syracuse, New York (8.1%).

 

As expected for 2023, most of the growth in most markets happened during the first half of the year with month-over-month growth peaking in April before falling in July then dipping into negative territory by September, Yardi says. “It is worth pointing out, however, that that general trajectory is in line with what would normally happen to asking rents sans a pandemic or other black swan event, although the timeline shifted forward by one or two months,” the report reads.

 

The continued compression in the spread between in-place rents and asking rents is another key story in 2024, the report points out. Yardi notes that most markets still have a large gap between the two, but it will “continue to shrink as asking rent increases remain muted in the near term,” which also predicts that the national economy will “slow significantly for two or three quarters.”

 

Despite a bounce back in consumer confidence, Yardi says cracks are beginning to show through a decline in spending on luxury goods, falling bank account balances, record-high credit card balances, and substantial increases in delinquent credit accounts.

 

Because of higher interest rates making servicing that debt more difficult, consumers will have to cut spending to avoid default, Yardi notes. Looking ahead, as a historically large amount of supply goes online, Yardi expects modest growth of 0.8% in average national asking rents in 2024 with large variance across markets and time.

 

After absorption, Yardi predicts yearly growth to return to the usual 3% to 4% in asking rents experienced prior to the pandemic.

 

By Leah Draffen - Leah Draffen is an associate editor for Zonda's Builder and Multifamily Executive magazines.

The financial world is buzzing with anticipation following the Federal Reserve’s recent choice to keep interest rates steady. While market analysts largely predicted this move, the unexpected twist came from Fed Chair Jerome Powell, who hinted at a possible three-rate drop in 2024. This surprising announcement has ignited curiosity and raised questions about its potential impact on real estate portfolios, particularly for investors seeking to navigate the evolving landscape.

 

Understanding the Fed’s Decision

At its year-end meeting, the Fed chose to halt interest rate hikes, keeping short-term rates within the 5.25% to 5.5% range. Powell’s assurance of scaling back on rate increases indicates a shift in monetary policy heading into 2024.

Predictions suggest a more relaxed atmosphere for mortgage rates, offering potential relief for aspiring homeowners and investors with Debt Service Coverage Ratio (DSCR) portfolios. The positive outlook is supported by housing economists, pointing towards a favorable period ahead.

 

Optimistic Trends

Powell’s traditionally hawkish stance has taken a surprising turn, signaling a potential end to the rate hike cycle. This shift has implications across investments, causing yields on 5-year and 10-year Treasuries to contract. For investors monitoring DSCR loan pricing, these changes align with future rate trajectories that could enhance investment opportunities.

Real estate investors eager to refinance may encounter challenges due to tight inventory, affecting affordability. Despite these hurdles, a buoyant selling season is anticipated, especially for flippers, who could benefit from reduced refinance rates on investment properties.

Taking a skeptical view, Powell’s dovish turn raises questions about potential political motivations, especially considering the upcoming 2024 election. Active investors should consider this factor when speculating on medium-term market conditions.

 

Investor Sentiment

Positive sentiments fueled by Powell’s reassuring foresight may prompt previously hesitant investors to enter the market. Temporary dips in transaction volumes are attributed to elevated rates rather than distress, aided by the liquidity from COVID-era stimulus funds.

While a modest 25 basis points dip occurred, predicting a return to pre-pandemic interest rates of 3-5% seems unlikely. Investors should prepare for a new normal of higher interest rates and adjust their strategies accordingly.

 

Refinancing Opportunities for DSCR Portfolios

For investors with DSCR portfolios, the present is an opportune time to refinance and secure lower rates. The market’s desire for rate reductions could lead to unforeseen developments.

While an immediate surge in real estate sales is not expected, a potential boom may unfold in the next 60 to 90 days. The affordable housing segment is poised for price increases due to limited inventory and high demand, presenting an opportunity for buyers to act quickly.

 

Exit Strategies and Market Engagement

Pressure on flipper margins underscores the importance of robust risk management. Investors may need to reconsider their exit strategies, shifting from quick flips to potential long-term rentals.

Financial institutions are exercising caution, influencing the pace of re-engagement with the market. Investors should monitor these shifts as they can impact portfolio decisions.

 

The Bottom Line

Real estate investors must strike a balance between cautious optimism and prudent skepticism considering the recent Fed decisions. While the landscape is evolving, taking informed steps such as monitoring interest rate trends and seizing refinancing opportunities is crucial for securing investments. Armed with knowledge, foresight, and a blend of caution and courage, investors can navigate the changing real estate landscape successfully.

Symone Strong is an associate editor for Zonda's BUILDER and Multifamily Executive magazines. 

Rent price declines and quick absorption signal high demand from renters, says Realtor.com's September Rental Report.

When considering the choice between renting and buying today, the housing market balance continues to tip in favor of renters amid an uptick in multifamily construction, reveals Realtor.com’s September Rental Report.

Meanwhile, compared with pre-pandemic years, faster absorption rates of newly constructed apartments within the first three months after completion signal strong renter demand, particularly for lower-priced units.

"As rents ease and both home prices and mortgage rates continue to climb, it's become more economical to rent than to buy in nearly all major markets," says Danielle Hale, chief economist at Realtor.com. "However, even with an influx of new apartment units coming onto the market and putting a lid on rent growth, renters are claiming these new apartments faster than prior to the pandemic."

In September, median asking rents in the 50 largest metros dropped to $1,747, down $29 from the peak seen in July 2022.

Rent prices, while still significantly higher than pre-pandemic levels, dipped on an annual basis for units of all sizes. Median asking rents for two-bedroom units dropped for the fifth consecutive month (-0.7%), followed by a fourth straight month of declines for one-bedroom units (-0.3%) and a third consecutive month for studios (-0.5%).

While an influx of new apartment units is helping drive down prices, renters are absorbing these units quickly. Last month, the annual completion rate of multifamily buildings with five or more units increased 10.1% month over month and 15% year over year.

Renters are moving particularly quickly on affordable units. The absorption rate for affordable rental units, or those renting for $1,850 or lower, was 69.8% within three months of completion. Within the same timeframe, 57.2% of those priced over $1,850 were rented.

"With a record number of new units coming onto the market driving rent prices down, those who may have given up hope of homeownership may be able to leverage more affordable rental options—including downsizing to a smaller unit or considering a roommate for the near term—to help build savings for a future home," says Jiayi Xu, economist at Realtor.com.

Among the top 10 metros experiencing the fastest year-over-year rent growth, four are in the Midwest: Milwaukee (3.9%), Cincinnati (3.6%), Cleveland (3.2%), and Indianapolis (3%). The other six metros with the highest annual rent growth are spread throughout the South and Northeast: Louisville/Jefferson, Kentucky-Indiana (4.6%), Richmond, Virginia (4.6%), New York, (4.5%), Birmingham, Alabama (4.4%), Washington, D.C. (4.2%), and Boston (4%).

In the West, the median rent in September dropped by -3.1% compared with a year ago. Big metros such as San Francisco (-4.8%) and Los Angeles (-3.4%) continue to see some of the largest year-over-year declines.

The South is home to the top three metros with the most significant year-over-year rent declines: Austin, Texas (-7.3%), Dallas (-6.2%), and Orlando, Florida (-5.4%).

As 2023 draws to a close, now is the right time to start getting ready for 2024. This year was a roller coaster for those of us in the real estate game. From rising interest rates, a surge in renters, and a steady rise in inflation could lead to a recession. That’s why I created a list of five things to look out for that could shape the financial landscape in 2024.

1. Debt Crisis Looms:

The first significant issue on our list is the mounting debt crisis. The Federal Reserve has been rapidly increasing the federal funds rate, causing interest rates to soar. This directly impacts those with floating-rate debt, including credit cards, auto, student loans, and mortgages. As interest rates continue to rise, servicing such debt becomes increasingly expensive, pushing many individuals further away from saving and securing their financial futures.

2. The Challenge of Equity Investment:

With an abundance of money parked in risk-free savings accounts and short-term government securities, investors are presented with a problem. The attractiveness of earning 4-5% with minimal risk is putting pressure on traditional investment avenues, such as the stock market, bonds, real estate, and commodities. This competition for investment dollars will remain a challenge for anyone seeking to invest or raise capital in 2024.

3. Unemployment and Inflation

While low unemployment may seem like a positive sign, it poses challenges for the Federal Reserve. Low unemployment tends to lead to wage inflation, which is precisely what the Federal Reserve is trying to combat through the increasing federal funds rate. Projections indicate a rise in the unemployment rate from 3.7% to 4.4%, which could result in over 1 million workers losing their jobs. The Fed’s pursuit of its inflation-fighting goals may lead to higher unemployment.

4. The Rise of the Renter Nation

The homeownership rate in the United States has dropped from 69% to 65% in recent years, with more people opting for rentals. This shift has caused a surge in rental prices in many U.S. markets. Furthermore, homebuilders and multifamily builders have scaled back due to rising construction costs and interest rates. As a result, we can expect even more severe housing shortages in the coming years, leading to potential government interventions like rent control and rent caps.

5. Debt Maturities and Real Estate Values

Many individuals and businesses have borrowed substantial sums of money in recent years, and now, the time has come to repay those loans. Over $1 trillion in U.S. commercial real estate loans are maturing in 2023 and 2024, with most of this debt held in local and regional banks. This could lead to significant disruptions in the commercial lending and real estate markets. Meanwhile, interest rate increases are causing credit delinquencies to rise, adding further uncertainty to the financial landscape. Real estate values are also on a downward trend due to increasing capitalization rates, resulting in lower property valuations.

These five financial challenges are likely to have a significant impact in 2024. It’s crucial to stay informed and prepare for the potential economic shifts ahead.

As the contours of real estate continue to evolve with changing times, there emerges a trend that not only resonates with the modern-day lifestyle but also unlocks doors of potential for real estate investors. The trend in spotlight is the burgeoning sector of co-living spaces. With a unique touch to the conventional housing system, co-living is quickly becoming a globe-spanning phenomenon. It encapsulates the essence of community living while offering flexibility, thus appealing to a wide demographic spectrum, especially the young adults. In this narrative, we delve into the facets that make co-living spaces a lucrative avenue for real estate investors.

1. Adapting to Modern Lifestyles: The magnetism of co-living spaces lies in their adaptability to modern lifestyles. The younger brigade, encapsulating millennials and Gen Z, are increasingly veering towards a lifestyle that prioritizes experiences, social connections, and flexibility over the age-old charm of home ownership. Co-living spaces are a perfect fit for this narrative. They offer shared, fully furnished accommodations festooned with amenities that cater to this modern lifestyle. The vibrant communities within co-living spaces present an appealing alternative to the traditional renting or buying options.

2. Meeting the Affordable Housing Demand: The real estate market in urban centers often grapples with the challenge of affordability. Co-living spaces step in as a cost-effective solution to this widespread issue. By engendering a system where common spaces, utilities, and amenities are shared, residents can enjoy quality living spaces in desirable locations without a hefty price tag. This model of living significantly reduces living costs, making it an attractive proposition for many.

3. Catering to the Global Workforce: The advent of remote work and the surge of digital nomadism have spurred a demand for flexible living options. Co-living spaces are in sync with this demand, providing fully equipped living spaces replete with all necessary amenities. They offer flexible leasing arrangements, thus accommodating the needs of professionals who work and live in different cities or even countries.

4. Community Building: One of the hallmarks of co-living spaces is the emphasis on community building and social interactions. They foster an environment that encourages collaboration, networking, and shared experiences among residents. This aspect of co-living spaces is not only a draw for potential tenants but also a significant marketing leverage for real estate investors.

5. Investment Diversification: Investing in co-living spaces offers a buffet of diversification benefits. It mitigates the risk that comes with solely relying on traditional residential or commercial properties. By spreading the investment across different asset classes and income streams, real estate investors can cushion themselves against market volatilities.

6. Technological Integration: The infusion of technology in co-living spaces has elevated the resident experience manifold. From mobile apps that facilitate seamless communication to smart home systems that ensure efficient operations, technology is a linchpin in the successful management of co-living spaces.

7. Long-Term Value Appreciation: While co-living spaces are often seen as short to medium-term accommodation solutions, there lies a potential for long-term appreciation in property value. As the co-living concept continues to gain traction and acceptance, the value of these properties is likely to appreciate over time, making it a promising venture for real estate investors.

In summation, as the housing landscape is in flux, co-living spaces have burgeoned as an attractive investment avenue. They not only align with the modern-day living preferences but also offer a solid investment platform for real estate investors. With a blend of community living, flexibility, and technological advancement, co-living spaces are indeed a real estate investor’s avenue to a promising future.

Source: The Rise of Co-living Spaces: An Opportunity for Real Estate Investors

A report that the National Association for Business Economics (NABE) published in August

showed either confident or somewhat confident that the Fed would be able to achieve their soft-

landing goal. Bulge bank analysts are beginning to publicly acknowledge the soft-landing

trajectory, and in the blink of an eye, we seem to have gone from recession to slow-cession, to

no-cession. Last month Goldman Sachs cut the odds of a recession for next year, the staff at the

Federal Reserve reversed their recession forecast call, and JPMorgan still acknowledges some

risk, but has backed off their mild contraction call. The same NABE survey has 45 percent of

respondents marking the next recession as starting the second half of next year or later.

While the path to a soft landing has become wider, it is by no means a given, and many analysts

are still considerably handicapping the possibility. If such a soft landing were to stick, then some

assumptions need to be revisited – starting with U.S. Treasury (UST) yields and mortgage rates.

In this scenario, the phrase ‘Higher for Longer’ should just be replaced with ‘Higher.’ A soft

landing means no recession, which would also imply that the 10-year UST is mispriced. It’s

commonly accepted that an inverted yield curve is a recessionary signal, and if we accept the

‘no-cession’ scenario, then the curve needs to un-invert. This would happen more by the front

end of the curve dropping as the Fed gradually cuts their overnight rate from restrictive to

neutral, but the longer end of the curve could also rise in conjunction with growth expectations

for the United States. In short, we would see a yield curve much like the 2002-2007 period, with

shorter-term rates close to neutral, and 10-year UST anchored more closely to four percent than

anywhere else – which would yield mortgage rates much like the upper and lower bounds in the

graph below.

The attempt to stick the soft landing is a laudable goal for the Federal Reserve, and bringing

inflation under control without triggering significant job losses or creating demand destruction

would be a terrific outcome from the aggressive rate hiking campaign the Federal Reserve

undertook. The reality of ‘Higher for Longer’ becoming just ‘Higher’ will have broad downstream

effects, which include elevated volatility. For commercial real estate borrowers seeking debt

financing, positioning yourself to take advantage of the volatility and capture downswings in

Treasury yields should be one factor you consider when lining up your financing options.

TIGHTER CREDIT STANDARDS AND BANK LIQUIDITY

Commercial real estate lending by banks represents one of the largest blocks of available debt financing

in the U.S. market. In the wake of the regional banking crisis, where three of the four largest American

bank failures happened in the span of a couple months and the Federal Deposit Insurance Corporation

was forced to take over, the attention of the market and regulators shifted to analyzing CRE lending and

any complicity this sector had in the collapse of regional banks.

The expectation in the immediate aftermath was that credit standards would tighten and access to

lending from bank balance sheets would dry up. While some of these expectations have come to

fruition, the extent to which credit tightening was expected has not fully materialized, especially for

multifamily products.

Key Takeaways: 

 Small domestically chartered commercial banks steadily increased their market share in

commercial real estate lending when compared to large banks over the past decade.

 All the speculation and assumptions around drastic pullbacks in bank lending have yet to fully

materialize.

 U.S. Banking regulators rolled out a proposed rule for stricter bank capital requirements

designed to ensure the stability of both top and second tier banks – called the Basel III Endgame

 Multifamily remains a preferred sector, with abundant debt financing options – including banks

– making a play for the limited acquisition and refinance activity the capital markets are

currently seeing.

The U.S. economy expanded at an estimated 2.4% annualized pace in the second quarter, confounding expectations for a slowdown. Stronger consumer spending amid slowing inflation and a tight labor market helped to propel gross domestic product growth from April to June, the Commerce Department reported Thursday. Also supporting expansion was an increase in business investment, with equipment purchases surging at a 10.8% rate — the most in over a year. Economists surveyed by Bloomberg had forecast GDP would grow an annualized 1.8% in the period, after 2% in the first quarter.

    The Federal Reserve, which raised interest rates by a quarter point Wednesday, said its staff economists are no longer forecasting a recession for this year. A recent survey by the National Association for Business Economics shows the majority of respondents see the likelihood of the U.S. entering a recession in the next 12 months at 50% or less.

Economy grew solid 2.4% in second quarter amid easing #recession fears! (Data Source: EquityRT)

     The U.S. #economy accelerated unexpectedly to a 2.4% annual #growthrate from April through June, showing continued resilience in the face of steadily higher interest rates resulting from the Federal Reserve’s 16-month-long fight against inflation.

     #WallStreet analysts had forecast a 2% increase in gross domestic product, the official scorecard for the economy. #GDP had expanded 2% in the first quarter.

     The economy is still expanding in the face of rising interest rates. Because in fighting inflation, which last year hit a four-decade high, the #Fed has raised its benchmark rate 11 times since March 2022, most recently on Wednesday. The resulting higher #costs for a broad range of #loans — from #mortgages and #credit cards to auto loans and business borrowing — have taken a toll on growth.

    Yet the economy is unlikely to speed up much until #inflation falls toward the Fed’s 2% target, the #centralbank cuts interest rates and businesses increase spending again. It could be a year or more before that happens.

 

US economy defies recession fears with strong second-quarter performance.

 

    The U.S. economy grew faster than expected in the second quarter as a resilient labor market supported consumer spending, while businesses boosted investment in equipment and built more factories.

    But headwinds remain. Wage growth is slowing as the employment gains cool. Higher borrowing costs could eventually make it harder for consumers, especially low-income households, to fund spending with debt. Banks are tightening credit and excess savings continue to be run down. (Find out more at Reuters: https://reut.rs/3DCffZ2)

 

Economics Reporter at Quartz Economics Reporter at Quartz (Nathan DiCamillo)

     Businesses have been trying to front-run federal government spending that’s being funneled to various parts of the US economy. This resulted in a 7.7% increase in business investment in the second quarter, with the majority of those new funds heading to equipment and structures.

     What's more, there's evidence that the weak parts of GDP (consumption and residential investment) are going to rebound in the second half of 2023. This means Q3 and Q4 are also going to see a surge in growth. Analysis in Quartz:

US GDP growth sped past expectations as business investment surged. (🧱THE Q2 GDP REPORT 🧱)

🌍The US economy grew at a 2.4% annualized pace last quarter

💪Consumer spending led growth once again 🏦Business spending grew the most in 6 quarters

😎Hard to have a recession with GDP prints like this 🔥But re-ignited inflation could be a new risk

The US economy is still growing at a healthy pace, and investors are starting to believe it. (https://lnkd.in/e3-t6kzC)

 

Consumer spending helped carry US GDP, and businesses actually ramped up their investments last quarter. It’s hard to say we’re in – or even near – a recession with this kind of GDP print.

 

Decent economic data is a reason to feel good about the future, so remember that if you’re doubting this stock market rally.

 

But now, the risk of higher inflation is becoming more real if consumer spending is as strong as it looks.

 

It's like a game of whack-a-mole. One mole disappears, another mole pops up.

 

Stay alert and cautious with prices this high but try not to get over-exposed in either direction.

U.S. #GDP grew at a healthy 2.4% rate in Q2, according to the BEA’s advance estimate. (Tuan Nguyen PhD)

During the period, personal #consumption increased at a 1.6% clip.

These developments have been surprising to those who've been listening to the #economists that had been warning of an impending #recession over the past year.

To be fair, not all economists have been bearish. Some have been pointing to the various forces that have been bolstering growth in the #economy over the past two years.

Three massive forces have fueled the economic expansion for the past two years 💪

U.S. #GDP posted robust growth in Q2, while inflation cooled further. (Theresa Sheehan

Economic Analyst at Econoday)

⚠ Today's data supported a higher chance of a soft landing. Real growth, after being adjusted for #inflation, was 2.4%.

🧊 At the same time, the key inflation metric - core PCE - fell to 3.8% from 4.9% on a quarterly basis, lower than forecasts.

🔈 While the data is backward-looking, what should encourage the proponents of a soft-landing outcome is how robust the spending on equipment/capital goods component was in Q2. The component grew 10.8% in the quarter after declining 8.9% previously.

🔧 That means, despite higher borrowing costs, businesses were not afraid to invest in important capital goods, which should help boost productivity in the longer run.

The upward swing in inventories was also a big driver for GDP growth in Q2. Inventories grew 4,831% after falling 100% in Q1. Residential investment continued to be a drag on GDP, dropping 4.2% in the quarter.

🔺 Compared to the CBO's potential GDP forecasts, we were only about $100 billion away from reaching the goal in Q2.

     The advance estimate of second quarter GDP for 2023 is up 2.4% after up 2.0% in the first quarter. The reading is above market expectations and extends a string of GDP reports consistent with moderate expansion begun in the third quarter 2022. The US economy remains resilient and healthy despite the rapid increases in interest rates imposed by the Fed beginning in March 2022. The brief recession in housing has bottomed out and settled down to a sluggish pace. Higher financing costs have not deterred businesses from investing in infrastructure. Consumers continue to spend, in part from less concern about job losses and more confidence in rising household incomes with inflation under better control, at least for food and energy.

    An economy cruising along just above the Fed’s longer-run forecast of up 1.8 percent will help Fed policymakers justify the 25-basis point increase in the fed funds target range on July 26. Depending on the tone of the economic data in the intermeeting period until September 19-20, FOMC participants could well be considering the next hike in eight weeks.

     The largest positive contribution was from a 1.6 rise in personal consumption expenditures (contribution 1.12) where spending on durables was up 0.4%, nondurables up 0.9%, and services up 2.1%. Spending on services includes rising prices, but also consumers getting out more to shop and travel and enjoy amenities.

     The second largest positive contribution was from a 5.7% increase in gross investment (contribution (0.97). Despite higher financing costs, businesses are spending on fixed investments which are up 4.9% in the second quarter. Spending on nonresidential properties was up 7.7% while residential spending was down 4.2%. The housing market remains soft but has recovered from the depths of the slowdown in the third and fourth quarters 2022.

 

Joseph Hadobas Financial Advisor at Cambridge Investment; Research Financial Advisor at Cambridge Investment Research

The never seems to materialize recession does not deter our brightest economists from assuring us it will arrive and soon. Back half 2022, front half 2023, back half 2023, front half 2024. As sure as night follows day it’s a comin’ around the bend.

Recession, Bull Market, and What Lies Ahead - A Closer Look

     In today's financial media, recession-related articles are abundant, warning of an "impending" recession. The interesting part is, we've already experienced a recession, at least technically.

     Traditionally, a recession is defined as two consecutive quarters of declining gross domestic product (GDP). Last year in the U.S., this happened early on.

     During the first quarter of 2022, U.S. GDP dropped by 1.6%, followed by another 0.9% decrease in the second quarter. According to the standard definition, that qualifies as a recession. However, the government chose a more nuanced perspective, stating that the situation was much more complex than a simple technical recession.

     Various factors contribute to a recession, but it remains a fact that two quarters of falling GDP have long been regarded as a recession by financial experts. You can even refer to the Financial Industry Regulatory Authority ("FINRA") for clarification.

     Amid the ongoing confusion surrounding this definition, it's crucial to acknowledge that the experts seem to be divided, leaving consumers and businesses in a state of uncertainty. This chaos often distracts from the possibility of a newly born bull market, which could be underway. So, instead of wondering "when" a recession will happen, let's consider the possibility that it may have already occurred. Markets have shown significant growth since then, indicating a positive trend. When risk tolerances go up for companies, the reality will set in that people are still very difficult to find. Instead of waiting for the other shoe to drop, we are planning for what is next with our clients.

     The media might continue to fuel confusion and project numerous reasons for an upcoming recession. My advice is to tune out the noise. History tells us that the recession is now in the rearview mirror, and the market is validating this stance.

Let's stay optimistic, as good times may very well be ahead.

They think there is still a 60% chance of recession but a lot of hedging going on.

     "Deutsche Bank Vice Chair of Research Peter Hooper and Fannie Mae chief economist Doug Duncan now say it’s essentially a toss-up whether the economy suffers a recession or enjoys a soft landing and keeps growing, though both still believe a downturn is more likely than not.

     Nomura Securities International senior economist Aichi Amemiya is also sticking by his firm’s recession forecast, though he added, “it’s getting to be a close call.”

    The sentiment was echoed in Bloomberg’s July survey of economists, in which estimates for gross domestic product were revised higher for the second and third quarter. However, forecasters still say there’s a 60% chance the US will fall into recession in the next 12 months."

Average U.S. asking rents increased $5 to $1,709 in April, according to Yardi Matrix.

Multifamily rents increased for a second straight month in April, despite economic headwinds.

According to the latest Yardi Matrix Multifamily Report, U.S. asking rents saw a $5 increase last month

to $1,709, while year-over-year growth decelerated to 3.2% nationally, 80 basis points less than March.

The latest report shows that solid demand has kept rents rising this year; however, it’s been at a

slower rate than previous years. In addition, according to Yardi Matrix, early indications at the start of

spring confirm its annual forecast for moderate rent growth.

“Rent growth is broadly positive nationally, but regional differences are emerging,” stated the report.

“High-demand Sun Belt metros are feeling the impact of reduced affordability and robust deliveries,

while primary metros have less supply growth and some benefit from rebounding immigration."

Rent gains were positive year over year in most of Yardi Matrix’s top 30 metros, except for Las Vegas

and Phoenix. Indianapolis and Kansas City, Missouri, were the top performers, seeing increases of 7.7%

and 6.4%, respectively. New York, with a 6.2% increase; Boston with a 5.2% increase; and Chicago with a

5% increase round out the top five markets.

An indicator that demand is holding up, the national occupancy rate was unchanged in March at 95%.

Year over year, occupancy rates fell 100 basis points, with Las Vegas and Tampa, Florida seeing the

largest declines. According to the report, New York, with a 97.9% occupancy rate in March, was the only

metro without a decline compared with 2022.

Month over month, asking rent growth was seen in both the renter-by-necessity and luxury lifestyle

segments in April. Out of the top 30 metros, 22 recorded gains in renter-by-necessity rents and 20 in

lifestyle rents.

However, the report stated that a bifurcation between renter-by-necessity and luxury lifestyle rent

growth is developing, particularly in metros in the West and Southwest, which suggests that demand is

concentrated in more affordable products.

The single-family rental (SFR) sector also saw month-over-month gains in April. National asking rents

for single-family rentals increased last month by $6 to $2,089; however, year-over-year growth declined

by 60 basis points to 2.3%. Occupancy rates were flat in March at 95.5%.

“Single-family rents are growing modestly, while rents continue to decelerate year over year,” stated

the report. “Rents nationally have increased for three straight months and reached an all-time high of

$2,089 in April.”

The report also noted that build-to-rent single-family stock also reached a new high in 2022, with

home sales becoming more difficult due to rising rates and prices. Last year, 14,581 SFRs in communities

of 50 units or more were delivered, a 46.9% increase over 2021’s 9,928 SFR units.

“While it is early, 2023 volume is on track to match last year’s,” according to the report.

By, Christine Serlin editor for Affordable Housing Finance, Multifamily Executive, and Builder.

Bipartisan agreement avoids potential catastrophe. President Biden and House Speaker McCarthy

reached a tentative agreement on May 27 to suspend the debt limit until January 2025. This bill, known

as the Fiscal Responsibility Act of 2023, was approved by the House of Representatives on May 31, and

the Senate on June 1, before going to the president for his signature. Treasury Secretary Yellen provided

an estimated date of June 5, at which point reserve funds would be exhausted and the government

would need to cut costs elsewhere to maintain debt service payments. Every day closer to this key date

without a formal resolution expanded the potential for negative consequences. If a deal had not been

officially passed in time, veterans’ benefits, social welfare programs and government agencies could

have been suspended or scaled back. If the impasse had lingered and the nation defaulted, it would

have sent a shock through global markets, as U.S. debt is a benchmark for many financial instruments.

The agreement should avert the worst-case outcomes.

Debt ceiling deal reduces the most pronounced CRE risks. If the agreement had stalled beyond June 5,

the government would have begun to cut costs, straining consumer spending and household formation.

Retailers, hotels and medical offices could have been impacted by a decline in spending, while a

reduction in government operations and Medicare payments would also have weighed on apartment

demand and senior housing. These direct risks to commercial real estate appear to have been avoided;

although, as seen in prior last-minute resolutions, there may still be adverse consequences from this

photo finish.

Previous close calls still had ramifications. In 2011, lawmakers also reached a last-minute agreement,

which led Standard & Poor’s to downgrade the U.S. government’s credit rating. That action led to a

reduction in consumer confidence that lasted for several months, while the government’s borrowing

costs increased during that year. This year in May, Fitch placed a negative watch on the nation’s credit

rating. Finalizing the agreement before the critical deadline should negate the prospect of a downgrade.

Elements of the Agreement:

Expiration of student loan pause has real estate implications. One component of the Fiscal

Responsibility Act agreed to by President Biden and House Speaker McCarthy is legislation that will

restart federal student loan obligations in August. Repayment and interest accumulation on these loans

has been paused since the early part of the pandemic, contributing to strong retail spending and

household creation among borrowers. It has been estimated that the federal government holds roughly

$1.6 billion in student loan debt distributed among 44 million borrowers, with an average monthly

payment of around $267. The reintegration of this fixed cost into monthly budgets could reduce

borrowers’ spending on discretionary goods and services, impacting retailers and hotels, among other

segments. Amid steep homeownership barriers both in saving for a down payment and qualifying for a

mortgage, more renters could opt to stay in apartments for longer.

Environmental provisions could expedite energy projects. The Fiscal Responsibility Act also includes

amendments to environmental analysis, which could reduce the amount of time it takes for new energy

projects to be approved. Permitting reviews under the National Environmental Policy Act will now be

limited to two years for federal projects. This could accelerate wind, solar, electric and gas production in

the U.S., ultimately creating new jobs.

Sources: Marcus & Millichap Research Services; Experian; Federal Reserve; Moody’s

Effective December 15, Freddie Mac will begin accepting ownership of two- to four-unit properties – a.k.a. duplexes, triplexes, or quadplexes – as relevant experience for all loans in its Optigo® Small Balance Loans (SBL) program. Previously, Freddie Mac defined multifamily experience as controlling ownership of a property with at least five units or more and excluded two- to four-unit properties.   

By expanding their borrower experience definition, Freddie’s SBL program increases opportunities for investors who focus on small multifamily housing to grow their portfolios by accessing financing outside of banks.    

 

What Qualifies as Experience?  

Here’s what you should know. Freddie Mac expanded their definition of multifamily experience to include borrowers who have a portfolio of two- to four-unit properties that meet the following criteria: 

1.The borrower must own at least 10 units total

2.The borrower must have owned each property for at least two years

3.The borrower must have a controlling interest in all 10 units

4.The 10 units do not need to be contiguous or located in the same county

 

The new requirements provide investors access to agency debt when beginning to invest in larger properties such as those with 5-50 units, rather than continuing to rely on a bank. Non-recourse financing provided by Freddie Mac allows borrowers to only put up the property as collateral, unlike banks which regularly require personal assets in addition to the property as collateral. This allows borrowers the ability to scale their portfolios faster as they do not have contingent liabilities on their balance sheet and free up access to capital. 

 

Freddie SBL expands financing on two- to four-unit properties under its Link Loans Program

 

Freddie Mac has financed duplex, triplex, and quadplex properties in the past under its Link Loans program. Under the old rules, however, all the units had to be contiguous. Few investors acquire properties right next to each of their other properties and, unfortunately, were unable to take advantage of Link Loans. 

Additionally, Freddie Mac is opening its Link Loans program to all its designated market tiers – Top, Standard, Small, and Very Small. (These are roughly analogous to commercial real estate's traditional primary, secondary, and tertiary market tiers.) 

With these additional tweaks to their programs, Freddie Mac is now accepting a bundle of non-contiguous properties – with at least 10 total units if the following conditions are met: 

1.Minimum loan amount of $2 million 

2.Buildings are within 3 miles of any other building included in the loan (exception up to 5 miles may be considered) 

3.Buildings are in the same county 

3.No owner-occupied units 

4.Non-contiguous single-unit buildings are not allowed 

5.All the properties must use common property management and provide common financials after closing 

 

ALLISON HERRERA

Senior Director

Walker & Dunlop

Inflation trend may be turning corner. The headline Consumer Price Index in July was up 8.5 percent compared to a year prior, a deceleration from the 9.1 percent year-over-year jump recorded in June. This slowdown was driven predominantly by a month-over-month decline in energy prices, led by a 7.7 percent drop in the gas price component of the index. The costs of other items, most notably food, continued to rise however. Setting aside energy and food, core CPI advanced 5.9 percent year-over-year in July, matching the pace set in June but below the 6.4 percent year-over-year increase reported in March. Stability in the core index paired with a smaller rise in the headline rate suggest that inflation may have peaked, likely a reflection of less impeded supply chains and tightening monetary policy.

Employment Chart Supply chains factor into inflation, industrial space demand. While the collective 225-basis-point increase in the federal funds rate so far this year is weighing on borrowing activity, it is not the only factor contributing to decelerating inflation. Supply chains are also showing improvement. The transit time between shipping goods from China to the U.S. has declined from a pandemic peak of 83 days to 63. While still above the pre-2020 norm of 48 days, this shift is nevertheless helping supply better meet demand, softening upward pricing pressure. Adapting to these challenges has translated into a robust uptake in industrial space. Absorption has been elevated since mid-2021, driving the national vacancy rate down 120 basis points year-over-year in June to 3.7 percent, its lowest level since at least 2000. Record construction should help stabilize availability this year, with competition by tenants propelling asking rents up by double-digit percentages.

Additional quantitative tightening still on the docket. While slowing, inflation is still high, which will likely prompt the Federal Reserve to raise the overnight lending rate again in September. Next month the Fed will also double its level of balance sheet reductions to $95 billion in monthly volume. Long-term interest rates, such as the 10-year Treasury, will likely feel upward pressure as a result. The combination of elevated inflation and climbing interest rates will be a challenge for investors, however, the market has already begun to recalibrate. In some cases, prices are being adjusted or buyers are reducing leverage. Investors may also be considering new locations or asset types. Overall, the market is liquid, with investors holding favorable long-term outlooks.

Additional CRE Trends:

Multifamily outlook largely unfazed. The impact of high inflation and rising interest rates is so far not having a substantial impact on the underlying need for housing. Demand for apartments surged in 2021, with net absorption eclipsing 650,000 units, nearly double the previous peak. That metric has been more tempered in the first half of 2022, due in part to delayed eviction proceedings, as well as limited options for prospective tenants. June’s 3.2 percent national vacancy rate was a three-decade-plus low for that time of year. Tight availability aids rent growth in the near-term, while a structural housing shortage also lends strength to the outlook for the next three to seven years.

Lower fuel costs boost hospitality outlook for rest of year. The energy component of CPI, which was up 43.5 percent year-over-year in June, took a notable step down last month, with prices falling across oil, gasoline and natural gas. This shift bodes especially well for travel. Hotels have already seen increased bookings throughout the year, despite higher fuel costs. June occupancy was just above 70 percent, a pandemic-era first, even with an average daily room rate more than 15 percent above the same point in 2019, that helped compensate for higher costs. The ability to reprice rooms on a daily basis can also appeal to investors concerned about short-term cash flow during elevated inflation.

 

Change in CPI from June 2022 to July 2022:  0.0%

Year-over-Year change in CPI as of July 2022:  8.5%

* CPI as of July, 10-year Treasury as of August 10

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; RealPage, Inc.; Federal Reserve

Apartments offer relief from housing shortage. The fight against inflation derails single-family housing. The pandemic and ensuing lifestyle changes dramatically impacted the single-family market. A rush of people sought larger living options to accommodate at-home work and education. Exceptionally favorable financing fueled the market, resulting in a massive squeeze of listing inventories. With more people seeking homes than the market could service, prices rose at a staggering pace.

 When the Federal Reserve stepped up its fight against inflation by aggressively raising the overnight rate by 225 basis points through July, however, it triggered a mortgage rate surge, and the housing market took a hit. The average rate for a 30- year fixed-rate mortgage surpassed 5 percent in the second quarter, the highest mark since the Global Financial Crisis. Additional Fed rate hikes may put even more pressure on the cost and criteria to obtain a home mortgage, condensing the buyer pool and cooling the hot sector. 

Slowdown in home purchasing does not signal a bursting bubble. Potential buyers of single-family homes are facing lofty prices, simultaneous with decade-high mortgage rates, making entry challenging for first-time buyers. At the same time, many existing owners are locked into more favorable mortgages established when rates were very low in 2020-2021, reducing their incentive to move up the quality stack. As purchase activity wanes, some markets may endure a near term price softening. However, in most metros the number of homes available for purchase remains well below historic norms, serving as a buttress for values. These dynamics and a healthy labor market imply that recent trends are not indicative of a bubble ready to burst. 

Extreme affordability gap emphasizes multifamily appeal. Prior to the mortgage rate jump, homebuying was mostly constrained by the limited for-sale inventory. Now, more homes are being listed, but fewer are selling. Much of the housing demand is funneling to the rental market, resulting in very tight vacancy and historic rent growth. The average effective rental rate in the U.S. grew almost 17 percent year-over-year in the second quarter of 2022. Despite this leap, apartments remain a markedly less-costly option than home ownership. The affordability gap in the U.S., or the difference between an average monthly mortgage payment on a median priced home compared to an average rent obligation, was about $280 before the pandemic. At the end of 2020, it was roughly $375. Halfway through 2022, the gap is a striking $1,000. As a result of this elevation, the estimated minimum annual income to afford a house in the U.S. eclipsed $120,000 in June, a threshold that 73-plus percent of households cannot afford. By comparison, that average was close to 50 percent between 2010 and 2019.

 Relational value of apartments is a major consideration. Renting an apartment is especially attractive for the cost-saving benefits they provide, and for a variety of lifestyle elements. In most cases, apartment complexes are in better locations than the type of entry-level homes that align with the financial capabilities of a first-time buyer. Additionally, some apartments offer amenities, such as pools and workout facilities, services, and community-based activities. Furthermore, rentals offer greater flexibility in the form of short-term leases and require little maintenance or upkeep by the tenants themselves.  

Affordability limitations will extend the renter lifecycle. Population dynamics suggest longer-term rental tailwinds. The millennial cohort is the largest generation in the U.S., with an estimated 72.2 million Americans spanning the ages of 26 to 41 as of 2022. This demographic is important to the housing market, as the age range correlates with a period when people typically begin to grow their households and seek out larger living spaces. Historically, single-family homes have been a practical and affordable vehicle to achieve this, but the landscape has changed dramatically. Given that the minimum annual income needed to buy a home is now well above $100,000, doubling in a span of just six years, a sizable portion of millennials will rent longer than past generations. It is increasingly likely that Gen Z will follow suit. These circumstances reinforce the imperative need for historic levels of multifamily development to help relieve excess demand. 

Record apartment construction only puts a dent in the shortage. Builders have been unable to keep pace with demand during the pandemic, due to various factors. On the materials side, key products — including concrete, lumber, gypsum, copper, and steel — all became significantly more expensive amid supply chain headwinds. The pace of growth retreated recently, however, each of these products were 20 to 120 percent more expensive in June 2022 than at the end of 2019. Labor constraints have also stunted development, with the industry boosting wages to attract workers in a competitive market. This headwind appears to be easing as well, with the U.S. construction sector job count surpassing the pre-pandemic peak in March 2022. Nonetheless, many developers are hesitant to step on the gas, with lingering fears of the impact that overbuilding prior to the Global Financial Crisis had on the industry.

 Multifamily builders are helping to fill the gap, with project starts hitting a four-decade high earlier this year. Despite this, population dynamics show that developers need to take it up another gear if there is any hope of meeting demand. Housing conditions garner attention from the White House. The Biden administration announced the Housing Supply Action Plan this May, responding to intense home price run-ups during the past two years, which has added to inflation. The plan primarily focuses on building affordable dwellings, including manufactured housing, and re-evaluating zoning to permit greater density. Increased development should help alleviate the demand backlog in select segments servicing lower-income residents, a step in the right direction, but the housing shortage will persist. 

Meanwhile, a spillover from the single-family market to upper-tier apartments is driving up rent costs in this segment, pushing demand down to mid- and lower-tier rentals. 

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. This is not intended to be a forecast of future events, and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Capital Economics; CoStar Group, Inc; Federal Reserve; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; Pew Research Center; RealPage; Real Capital Analytics; U.S. Bureau of Labor Statistics; U.S. Census Bureau.

In 2022, the real estate markets have been fairly turbulent. In such uncertain times, it can be difficult to predict exactly where the real estate market is headed. After all, no one has a crystal ball. However, savvy real estate investors can make money in any market, and this market is no exception. Here are some tips for how to keep multifamily properties profitable in today’s economy.

 

 

One of the most important things that we do know is that housing is grossly undersupplied at the moment. In fact, the U.S. housing market is short 3.8 million housing (paywall) units to keep up with new household formation. Because housing is so undersupplied, it means that single-family home prices will most likely continue to remain high, resulting in large droves of people continuing to flock to multifamily housing. Regardless of where we are in the economic cycle, multifamily is a great place to be. Period.

So, if you are feeling stressed about all of the uncertainty in the housing market, just remember that demand is likely to stay very strong for some time to come. It is unlikely that the supply of houses in the U.S. will catch up to demand for years. This indicates that multifamily property should be a good place to invest your money and build your wealth for the foreseeable future.

 

 

The market is currently going through a “value discovery” period in which the true value of the assets is being realized. Rising inflation has caused some confusion over real estate prices. As a real estate investor, you will have to choose between fixed-rate loans vs. floating-rate loans if you are going to use debt to finance your investments. Each of these options has both pros and cons. Here is a look at the advantages and disadvantages of each type of loan.

 

• Fixed: Fixed-rate loans are ultimately more expensive because the buyer is going to push the risk burden onto the lender and hedge their bet. However, it is likely more predictable. So, fixed-rate loans are more expensive on a month-to-month basis, but they are more predictable and thus less risky for the buyer in some ways.

 

• Floating: The risk of floating is in how high the rates go and how much you must pay for a rate cap. With floating rate loans, it is harder to project costs, but it might be more cost-effective than overpaying at a fixed rate. Also, many floating mortgages, or adjustable-rate mortgages (ARMs), have entry-level rates that are very low. So, this can be attractive to many real estate investors, especially those who do not intend to keep the properties on a long-term basis.

 

If you are going to finance your real estate investments, you need to make sure you choose the loan type that is best for your situation. If you need predictability, then you should go with a fixed-rate mortgage. If a sudden rise in monthly payments does not intimidate you, and if you have the funds to deal with it, a floating-rate mortgage could be good for you. Whichever route you take, just make sure that you can properly afford the payments before you give the investment the green light.

 

 

Keeping cash flow strong is absolutely crucial for real estate investors during times of uncertainty. In order to keep your cash flow strong during periods of high volatility, there are three critical factors you should focus on that you can control.

 

• Occupancy: Occupancy is the number one priority. It drives all cash flow for the profitability of the property and keeping cash flowing is more important now than ever. There are a number of things that you can do to keep occupancy high. First, make sure to screen tenants properly. Second, you can carry out exit interviews with your tenants to see why they are leaving. If you discover a problem, fix it. Finally, make sure you only invest in properties that are in desirable locations. Location alone can solve a large percentage of occupancy problems.

 

• Renovations: Many multifamily investors implement a “value add” strategy by renovating apartments to justify rent increases. If units are offline (vacant) while being renovated, they are not generating cash. Be conservative and pace the renovation plans to have a minimum impact on the overall cash flow of the asset. Essentially, you should do your renovations at a more moderate pace to avoid diminishing your cash flow too much at once. Also, consider prioritizing high-impact renovations that can boost profitability significantly but do not take very long to complete. For example, adding a “smart package” by swapping out typical electric outlets with upgraded USB ports and smart thermostats is easy and effective.

 

• Reduced Expenses: Make sure operations are running as tightly and efficiently as possible. Assess net operating income (NOI) regularly and address any and every area where there is room for improvement or cost reduction. You can reduce expenses and improve NOI by getting new bids on services, improving energy efficiency by installing new lights and bulbs and reducing water usage. For example, LED lights use 80% less electricity than standard lighting. Water is one of the single largest expenses for most properties, but you can get your water usage down by installing low-flow toilets, showerheads, and aerators. Doing this can lead to a 30% reduction in water usage by tenants.

 

Good investments can still produce passive income in any economic cycle. Don’t panic, and ride through the more challenging times with confidence. Focus on factors within your control to maintain your success over time, and always remember to be smart about your financing and risk. Prioritize cash flow and fiduciary responsibilities first and foremost. Remember the fundamentals and believe in your multifamily real estate investment.

Skyrocketing rents are continuing to drive interest from investors of all types towards multifamily properties across the country.

 

     On the heels of record investment sales volume on multifamily properties in 2021, early indications are that deal volume continued to flow during a busy first quarter of 2022.

     Last year, the rents residents paid for apartments rose by a whopping 13 percent on average across the U.S., according to the economists the CBRE Capital Markets. That kind of rent growth offset any hesitation by investors due to uncertainties caused by the pandemic or the highest rate of inflation in more than 40 years.

     In 2022, investors have even more reason to worry about inflation, but there are also expectations rents will keep rising as well. A new war threatens to push rising prices higher more quickly as Russian oil and Ukrainian grain vanish from the world markets.

     But the demand for rental housing in the U.S. remain very strong in the first quarter of 2022. And investors seem grateful to have a safe haven from economic uncertainty as they paid high prices—and accepted low investment yields—for apartment properties.

     “We do still expect 2022 to rival 2021,” says Matt Vance, senior economist with CBRE Econometric Advisors and head of multifamily research for CBRE.

 

     Investors of all types spent more than they had ever spent before—a total of $335.3 billion—to buy apartment properties in 2021, according to Real Capital Analytics (RCA), a data company based in New York City. That is more than twice what they spent in 2020, the first pandemic year. It is also much more money than they spent in the years before the pandemic, which set records at the time, but never totaled more than $200 billion in any given year.

     “Multi=housing reigned as the most liquid asset type in the U.S at year-end 2021, underscoring the defensiveness of the sector”. says Geraldine Guichardo director of Americas Living Research for JLL, working in the firm’s Chicago offices.

     The incredible growth in apartment rents made many of these deals possible. Effective apartment rents grew nearly 14 percent in 2021 on average in the U.S., according to JLL, as suburban rents continued to rise quickly… while rent concessions also burned off in recovering downtown submarkets that had been hurt by the coronavirus pandemic. W

     Strong demand for apartments continued in the first quarter of 2022. “We are already observing strong lease trade-outs, ranging from 15 percent to 25 percent in major metros,” says Guichardo, who expects apartment rents to grow another 10 percent on average in calendar year 2022.

     Rents are likely to keep growing as high demand for apartments filled hundreds of thousands of new apartments. The percentage of apartments occupied in 2022 is expected to stay at the high-level set in 2021 of about 97 percent, according to JLL. Developers are expected to open 300,000 new apartments, compared to the average of about 200,000 per year since 2010. But high demand for apartments is expected to absorb those new apartments.

     Rent growth helped investors make deals in 2021—and should continue to help in 2022. “That rent growth obviously was a significant driver to transaction activity and being able justify higher property values,” says Brian McAuliffe, president of multifamily for CBRE Capital Markets. “That benefitted sellers and investors, because they were able to put money to work.”

     Strong demand for rental apartments attracted investors who had piled up capital to investor during the coronavirus pandemic. “There has been a big ramp up in the global saving rates and capital accumulation—the wall of capital grew even larger in 2021,” says CBRE’s Vance. 

     The threat of inflation may draw even more investors to spend money to buy apartment properties—as inflation also threatens to disrupt other parts of the global economy. “Multifamily offers considerable inflation hedging… annual leases allow for rapid adjustment compared to, say, the office sector,” says Vance.  

     Prices inflation also threatens to bring higher interest rates, however. Federal officials have already promised to raise their benchmark interest rates, in an attempt to slow inflation down and cool an overheated economy, and long-term interest rates, like the benchmark yields on Treasury bonds, are already rising.

 

     The rise in interest rates in the last 30 days, both fixed-rates and short-terms variable rate, has definitely put a stress on transaction activity. Buyers of apartment properties are trying to adapt with strategies like floating rate, to finance deals to buy buildings. And even the threat of rising interest rates may even be helping at least some deals get done. “Sellers may bring properties to market if they perceive that the first half of the year might be better than the second,” says McAuliffe. “They may be flexible on prices in their eagerness to transact in an environment where interest rates are still low.”

Rapid rent increases are helping offset increasing debt costs, keeping the sector in favor among buyers.

Bendix Anderson

 

     The Fed plans to continue to raise interest rates to help stem inflation and that’s changing the math for apartment investors looking to make deals, but so far it’s not leading to any drop in interest in the multifamily sector.  

     Other factors—most importantly, rising rents—are offsetting the interest rate risk and keeping property prices at lofty levels. And instead of fleeing the market, leveraged investors are sharpening their pencils. Some are turning to fixed-rate financing to protect themselves from increases in variable rate debt.

    "We are not seeing widespread repricing and bidder pools remain robust,” per Matt Vance, senior director and Americas head of multifamily research for CBRE, working in the firm's Chicago offices. “There isn’t enough evidence suggesting the market has made a hard turn in a new direction.”

 

Interest rates are rising, and likely to keep rising

 

     Long-term interest rates have risen considerably since the start of 2022. The benchmark yield on 10-year Treasury bonds hit 2.9 percent on April 22. That’s up about 140 basis points from 1.5 percent at the end of 2021. It’s also much, much higher than the chaotic first year of the pandemic, when the yield fell as low as 0.5 percent. (The interest-rates for many permanent loans are based on Treasury bond yields.)

     Lenders are passing these higher, fixed-rate interest rates onto borrowers. They have not cut the spread between their fixed interest rates and Treasury yields.

     “Typically, when treasuries increase, spreads also compress,” says Charles Halladay, senior managing director and co-leader of the National Multi-Housing Group for JLL Capital Markets, working in the firm’s San Francisco offices. “Due to geopolitical turmoil and other factors, we have not seen spread compression.” 

     Short-term, floating-rate interest rates have not risen much so far. The Secured Overnight Financing Rate (SOFR), calculated by the New York Federal Reserve, was still just 0.27 percent at the end of April. But investors and economists expect them to rise quickly. The “forward curve” of expectations for SOFR puts the rate at nearly 3 percent by April 2023, falling back towards 2.5 percent by 2025, according to Chatham Financial. These expected higher rates would be passed on to floating-rate borrowers instantly.

     The likelihood that short term rates will rise has changed the math for many apartment investors, especially for properties with limited potential for growth. “This has resulted in buyers taking less leverage and/or looking at fixed-rate programs,” says Halladay. 

     Borrowers can buy swaps or caps that limit how high their floating interest rates can rise—but those are also getting more expensive. “Cap costs and hedging around these floating-rate executions have also increased 10 times since the beginning of the year,” according to Halladay.

 

Higher interest rates mean smaller loans, lower investment yields

 

     These higher interest rates will force many apartment buyers to take out smaller loans for their apartment properties. And that means smaller leveraged returns on their investments.

     Most lenders won’t make a loan if the monthly income generated by the property isn’t significantly more than the monthly mortgage payments. As interest rates rise, the amount of debt a property can support becomes smaller and smaller.

     “Capital markets volatility, with upward trends on interest rates, has put limitations on loan proceeds,” says Brian McAuliffe, president of multifamily for CBRE, working in the firm's Chicago offices. That will cut into the yields of many apartment investments.

     “Capital appreciation returns will be negatively affected by rising rates—obviously for leveraged investments,” says CBRE’s Vance. “It isn’t clear yet whether buyers will be willing (in the near-term) to accept lower returns and maintain current underwriting standards or if they’ll have to lower their offer prices on particular assets.”

 

Apartment investors keep buying, even as rates rise

     So far, the sharp rise in interest rates in March had little visible impact on apartment sales activity in the first quarter of 2022, according to CBRE.

     Investors spent $63 billion to buy apartment properties in the first quarter of 2022, according to data firm Real Capital Analytics (RCA), a data firm based in New York City and a part of MSCI. That’s 56 percent more than they spent the year before, and one of the biggest first quarters ever—and the pace of sales got faster interest rates rose in March.

     “If anything, the rising rates are causing a surge in owners to market their deals ahead of schedule,” says CBRE’s Vance.

     Prices continue to rise relative the income produced by apartment properties. Cap rates averaged 4.4 percent, down 40 basis points compared to the year before. “Cap rates remain remarkably low despite rising interest rates,” says Vance.

     If the apartment rents continue to rise quickly in 2022, that will solve many of the problems caused by rising interest rates.

 

“The big debate today is whether the fundamentals—renter demand and rent growth—will remain strong enough to overcome the rising cost of capital,” says Vance. “So far, it appears so.”

     Beauty is in the eye of the beholder, even when it comes to property investments. And focusing too much on looks could ultimately decrease your returns. The biggest misconception I see inexperienced investors make is treating the acquisition of a multifamily investment like buying a house. They think about investing in neighborhoods in which they would want to live or would have wanted to live when they were younger. Think Atlanta’s Virginia Highlands or Washington D.C.’s Georgetown neighborhood. These investors want 15-unit buildings where the cool kids live, near the bars, restaurants, and shopping. So, think like an investor; you are not the one living there. You are now the one investing.

 

Do not Fall in Love with a Neighborhood

 

     There will always be investors out there willing to pay more for assets located in prime neighborhoods. Some want to be able to point out to friends and colleagues that they own that trophy asset. There are also owners/operators that already own three other properties in the area. They gain efficiencies of scale with the landscaping and other services for their existing properties. Whether for the karmic return or lower operating costs, each is willing and able to pay more than you should pay.

     You should even avoid “up and coming” neighborhoods that are about to “pop.” The true value was taken out of them years ago by speculators now seeking to pass properties on to second wave investors. Instead of reducing margins to compete with them, invest in neighborhoods that are attractive to a different audience: underwriters.

 

Finding Deals in The Right Places

Invest in target secondary and tertiary markets surrounding big cities.

 

     The workforce needs apartments in these secondary and tertiary markets and there is a shortage of new inventory being injected into the market. Inventory is limited and tenants in these markets have to rent. They appreciate having appliances, two bedrooms, and utilities. Tenants in the hotter, hipper markets view apartments with more frills as a choice. Many primary market renters could afford to buy a home, but they like having a door attendant. Investors in secondary and tertiary markets often face less competition, with higher cap rates and the ability to negotiate an off-market deal.

     Better still, Fannie Mae and Freddie Mac (often referred to as the “Agencies”) offer some of the most competitive non-recourse financing. They are mandated by their charters to be more competitive in these markets. The agencies are required to dedicate a sizeable portion of their annual lending budget to financing housing that is affordable to renters earning at or below the area median income. They will even lend at a significantly lower interest rate on properties meeting that criterion. Secondary and tertiary markets are, by nature, typically more affordable.

     You do not have to present the agencies with a property tailored to Section 8 or other housing subsidies. Instead, simply having rents that are in line with an area’s median income can get you the best rates and loan terms — and the same is true for properties in primary markets, if you can find the right deal. Learn more about Walker & Dunlop’s small balance lending options

 

Additional Considerations

 

     Beyond location and affordable rents, what else constitutes a quality asset to an underwriter? A well-maintained property.

     Ask a seller when the roof and HVAC systems were last replaced. Request the maintenance records. Remember that you are buying an income stream just as much as you are buying real estate. Make sure to protect that income from unexpected future costs.

     Most lenders will also typically require a property condition assessment (PCA) to identify deferred maintenance issues or future maintenance needs for your prospective investment. Properties that have not been maintained as well may require the lender to underwrite higher replacement reserves or even withhold loan proceeds at closing. Bottom line: well-maintained properties achieve better loan terms.

 

Expenses are another item to pay close attention to.

 

     Property tax, for example, is one expense that can increase dramatically after you purchase the property, sometimes doubling or tripling after a sale. This will differ by state and county, so make sure you know how reassessments are handled for a prospective purchase. Be mindful of insurance as well, especially if the property is located near the coast or a flood plain or has certain types of plumbing or wiring.

    Avoid the common pitfalls of judging an asset by looks and location alone and do not be fooled into thinking you need something that looks brand new. Most underwriters would prefer a stable, well-maintained 1980s vintage asset over a brand-new Class A deal in an overbuilt market all day long. Place more value on the fundamentals of a deal over looks and location. Then you will be sure to build a portfolio of high-return-generating assets.

 

Source:  Matt Baldwin Senior Director, Walker & Dunlap

 

     At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all the due diligence done for you. Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs. We realize the world of real estate can be complex and intimidating. Our proven processes and systems take away those barriers, so our investors become successful real estate investors.

    Wealthley is a privately-owned investment firm that is committed to helping our clients build wealth through quality investment opportunities in the real estate market. We do extensive research to find the best emerging market in specific states, build a team of professional brokers and lenders, and then find value-add properties. Our expertise is exclusively focused on investing in cash flowing properties nationwide. The properties are projected to generate both income and equity growth, ultimately experiencing significant capital gain when sold.

 

 

The country’s booming housing demand is impacting the single-family and multifamily markets and their investors like never before. In such a highly competitive environment, multifamily investors are turning to new markets, investment strategies, and financing solutions to meet return requirements. Geri Borger Urgo, head of production at NewPoint Real Estate Capital, shares her perspectives on how these forces are changing the way investors and lenders are conducting business.

 

MFE: We’ve seen the median price of an American home increase 20% in a year. Can you share your thoughts on what is driving this price appreciation?

 

Borger Urgo: There are several compounding factors at play here, the first of which centers on historically low interest rates. While we are actively seeing rates shift and trend upward, low rates in the historical sense have changed people’s perception of what is a reasonable price to pay for a home and armed homeowners with more buying power. Even though the average 30-year home mortgage recently surpassed 5%, remember that the high-6% to low-7% range was the norm. And anyone who purchased a home in the ’80s or ’90s would have dreamed about borrowing at today’s levels. So long as the median rate of outstanding home mortgages remains contextually low, the market will be able to support some appreciation.

The other major factor at play here is supply. There simply has not been enough housing built over the past decade— this is true across single-family homes and apartments. Part of this is due to the construction process being full of uncertainty. Recent supply chain issues, labor shortages, and material costs have compounded the issue and generally made everything more expensive.

 

MFE: Is it a coincidence that we’ve seen rents in major cities increase at a similar clip to home prices?

 

Borger Urgo: Many of the same factors are at play, though rent increases are also tied to some interesting demographic drivers. There has been a lot of renter turnover as of late. The National Multifamily Housing Council recently reported that 60% of renters moved in the past 18 months. Achievable rents have increased dramatically from 2020 when renters in certain markets were being offered concessions simply to renew leases. Today’s leasing activity is leading to significant increases in net effective rents. There is also a supply-demand imbalance.

Many millennials who would be exiting the rental market are having difficulty transitioning into homeownership due to costs—rising interest rates will only compound the issue. At the same time, the oldest members of Gen Z are turning 25, kicking off their careers and entering the rental market in a big way. Combine this with a general flight back to the urban core as offices reopen, and you see increased demand pressure hitting the market from all sides.

 

MFE: Austin, Texas; New York; and several markets in Arizona and Florida topped the list for areas with the greatest rent increases over the past year. What is driving the demand in these areas?

 

Borger Urgo: We’ve seen a lot of migration to tax-friendly states. That covers those markets in Texas, Florida, and, to an extent, Arizona. You’ve also got job growth. Tesla’s Giga Texas plant opened a few weeks ago in Austin and is expected to eventually employ up to 20,000 people. Arizona and Florida are also seeing outsized job growth. In New York, I think it is more of a stalled trajectory returning to regular growth, as the city was seen as the center of the pandemic for so long. Net effective rents dropped for a while because properties were trying to move past vacancies with heavy concessions. If you paced New York’s rent increases from 2019 to 2021, it would look less extreme.

 

MFE: You mentioned that affordability—be it in homeownership or a rental property—is largely a supply problem. How do we get more housing built?

Borger Urgo: Municipalities usually aim to solve for very low incomes—that is area median income at or below 50%. The Section 8 program already does that well. And you can make luxury development pencil out. But what about that middle-income family that is unable to purchase a $1 million starter home? Or the single mother who is struggling to balance rent and child care? Our teachers, nurses, and firefighters are not seeing income growth keep pace with increasing housing costs. What we really need to solve for is the missing middle. I’d love to find a way to provide more liquidity to the workforce construction market, and even see construction financing open up to the government-sponsored enterprises. Even then, with the supply chain issues and cost to build, you would still likely need some form of subsidies to make rents work at a level affordable to the American workforce. This is quickly becoming a major issue with inflation, and it is imperative that we prioritize finding a solution.

 

NewPoint’s Geri Borger Urgo weighs in on the impact of supply constraints and shifting demographic trends.

Brought to you by NewPoint Real Estate 

 

     The continuing surge of debt financing into the U.S. multifamily sector might not match the record totals seen in 2021, but the strongest apartment fundamentals in a generation mean that the lenders probably are not going to put on the brakes in 2022, experts tell Bisnow.

     Lenders may tinker at the edges of their underwriting standards as interest rates climb or the economy weakens, but the demand for multifamily products is too strong to pull back, even as talk of a valuation bubble circulates in the sector.

     "Lenders are coming off their best year in history, but still plan to do more business in 2022, and many have increased allocations," CBRE Senior Managing Director and Head of Multifamily Debt Production Kelli Carhart said, adding that there is plenty of debt capital available, but there are also plenty of opportunities, allowing lenders to be a bit more selective. “Multifamily lenders are in a strong position,” Carhart said, considering the tumult in the wider economy. "There’s also a lot of economic uncertainty, which means lenders can name their terms," she said. "Each lender seems to have their niche or bucket in which they want to lend. It may take more time to place a deal today, but [there] are still options." Some lenders have expanded their debt yield requirements, tapering lease trade out assumptions, or focusing on debt-service coverage ratios versus debt yield,” Carhart said. “Still, it’s important to remember that leverage levels are down significantly with the significant increase in the cost of debt capital — 60% LTV or less," she noted.

 

     In April, the Federal Reserve reported that banks did not change their underwriting standards during Q1 for most commercial real estate loan categories, except for those secured by multifamily assets, for which they eased standards as demand strengthened. Such easing included increasing the maximum loan size and lowering the spread on loan rates, increasing the maximum loan maturity and the length of interest-only payment periods, and lowering minimum debt service coverage ratios, reports the central bank, which surveys banks doing business in the U.S. every quarter about their CRE lending practices.

 

     Though mostly active in the affordable housing sector, the GSEs are also impacting the multifamily lending market by angling to be as competitive as possible, entertaining more aggressive income and expense underwriting in certain circumstances, Greystone Senior Vice President, Agency Production Vince Mejia said. "Examples include lowering debt-service coverage ratios and alternate exit loan analysis, all in an effort to increase proceeds and make agency financing more competitive," Mejia said. "Acquisition financing has been impacted with the rise in rates and low cap rates, driving loan proceeds down in the 55% to 65% LTV range." Altogether, Fannie Mae provided nearly $70B in financing to support the multifamily market in 2021, and funding of affordable multifamily rose more than 23% last year to the highest volume in the history of the GSE's 33-year-old Delegated Underwriting and Servicing program.

 

     As financial service companies are keener to lend on multifamily, developers and investors in the sector are keen to take them up on it. The volume of multifamily mortgage originations nearly doubled during the first quarter of this year compared to 2019, according to Mortgage Bankers Association data. In Q1 2019, MBA's origination volume index stood at 389, where 100 equals the average volume of the four quarters in 2001.  In Q1 2022, the index came in at 665. Though multifamily originations tend to follow a seasonal pattern — volume is typically lower in the first quarter of each year — the index in each quarter of 2021 outpaced the same quarter in 2019. “The continued growth in lending activity is the result of the ongoing strong demand for certain property types like industrial and multifamily. The rise in interest rates ought to take some wind out of the sails of borrowing in upcoming quarters, but strong market fundamentals, property values and investor interest should continue to support the market,” MBA Vice President of Commercial Real Estate Research Jamie Woodwell said in a statement. Woodwell also said, “As markets go, multifamily is about as hot as possible.”

 

     The median monthly asking rent in the U.S. increased 17% compared with a year ago to a record high of $1,940 in March, Redfin reports. Rents rose in parallel with median monthly residential mortgage payments, which were up 34% year-over-year. Last year and into this one, rents grew like Topsy, because of strong demand, but also because of the rising cost of buying a place to live. “The growth in mortgage payments has been driven by both climbing prices and climbing mortgage rates,” Redfin Chief Economist Daryl Fairweather said. “And those rising mortgage costs push more potential homebuyers into renting instead, which pushes up demand and prices for rentals. Mortgage rate increases are accelerating, which will cause both mortgage payments and rent to grow throughout 2022.” Moreover, the spikes in rent were not confined to traditionally expensive places, such as New York or San Francisco, but were spread nationwide. Of the top thirty metros surveyed by Yardi Matrix, apartment rent growth was up at least 8.8% over the last year in all but one. In May, the company reported that rent growth was positive in each of the top thirty metros over the last one-month, three-month and 12-month periods.

 

     Overall, the U.S. multifamily vacancy rate fell by twenty basis points during the first quarter of 2022 compared with the previous quarter, and 2.5 percentage points year-over-year to a record-low 2.3%, CBRE reports, data that encourages investment.

 

     Multifamily investment volume in Q1 2022 increased by 56% year-over-year to $63B — the strongest first quarter on record, CBRE reports.

 

     Developers are encouraged as well. New construction deliveries of 66,400 units in Q1 2022 brought the four-quarter total to 292,500 units, which is the highest number since 1987, according to CBRE. With more than 400,000 units currently under construction, 2022 deliveries are expected to eclipse 2021.

 

"The fundamentals in multifamily continue to be extremely strong," CBRE's Carhart said. "That's going to continue to position the sector to be a favored asset class within the lending community."

Confidence in the market for new multifamily housing weakened in the first quarter, according to the National Association of Home Builders’ (NAHB’s) Multifamily Market Survey. The Multifamily Production Index (MPI) decreased six points to 48 compared with the fourth quarter—dropping below the break-even mark of 50 for the first time in three quarters.

The MPI measures builder and developer sentiment about conditions in the apartment and condominium market on a scale of 0 to 100. According to the NAHB, the index and all its components are scaled so that a number below 50 indicates more respondents are reporting that conditions are getting worse rather than improving.

“The decline in the MPI indicates incipient caution on the part of multifamily developers,” said NAHB chief economist Robert Dietz. “This caution has not shown up yet in the multifamily starts rate, which remains quite strong, but the MPI typically leads changes in starts by one to three quarters.”

The MPI is a weighted average of three key multifamily market elements: construction of low-rent units—apartments that are supported by low-income housing tax credits or other government subsidized programs; market-rate rental units; and for-sale units. The component measuring low-rent units increased one point to 49, the component measuring market-rate units dropped 12 points to 49, and the component measuring for-sale units decreased nine points to 44.

The Multifamily Occupancy Index (MOI) inched down one point to 68—consistent with the recent occupancy rate highs. The MOI measures the multifamily industry’s perception of occupancies in existing apartments. It is a weighted average of current occupancy indexes for Class A, B, and C units and can vary from 0 to 100, with a break-even point at 50, where higher numbers indicate increased occupancy.

“Strong demand is still keeping multifamily developers fairly optimistic in many parts of the country, but high construction costs and their impact on affordability are making some developers increasingly cautious,” said Sean Kelly, NAHB Multifamily Council chairman and executive vice president of LNWA, based in in Wilmington, Delaware.

 

By Christine Serlin - Christine Serlin is an editor for Affordable Housing Finance, Multifamily Executive, and Builder. 

 

Is it lock-and-leave freedom?  Sense of community?  Fewer lifestyle complications?  Proximity to their favorite park or eatery?  Maybe it’s all the above for today’s renter by choice.

It’s estimated a third of today’s multifamily marketplace rents by choice, not circumstance. In other words: The group has money. Dollars enough to weigh various housing options, including home buying. Wealth creation through homeownership isn’t a major concern. They either have it or have other means to acquire it.

Renting by choice is a growing trend that forsakes the time-honored American rite of homeownership. It may be understandable. The shock of the Great Recession still haunts many. For Gen Xers and younger millennials, the pain of watching family, friends, and neighbors scrape by or surrender to an economic storm can leave an impression of “who wants that headache?”

Now, with home mortgage rates on the rise, some argue that concern is validated.

Older millennials and baby boomers are also well-represented in the rent-by-choice movement. Demographers will identify subcategories such as established married couples (or DINKs … dual income with no kids) under millennials. For baby boomers, it includes “lock and leave” downsizers that may be rich in equity but comparatively modest in cash. For them, renting unlocks that equity and helps supercharge their next chapter lifestyle.

How should multifamily professionals view renters by choice? What unique attributes do they offer beyond their pocketbook? A good person to ask is Kimberly Byrum, managing principal-multifamily for Zonda, a data-driven home building and multifamily advisor and Multifamily Executive’s parent company. Byrum recently shared her insights with MFE.

MFE: What is the underlying characteristic of a renter by choice?

Byrum: The fact they have the resources to buy a home but prefer not to. That’s in contrast to the renter by necessity, who must rent because there is no other financial alternative.

That may not mean they can buy a home in a place they want to. Just that they have the financial wherewithal to consider alternatives to leasing.

Maybe they owned a home once and don’t want the maintenance issues. Some want a high level of amenities and services for a single flat rate. That can describe affluent singles and couples over 35 years old. They’re the “laptops and lattes” segment with a higher income. Then there are the downsizers, folks 55 years old and up, that are ready to move on from homeownership responsibilities. Let the landlord take care of it.

MFE: Let’s talk about downsizers. What are their rental concerns? What are they looking for?

Byrum: For downsizers, the story is a bit different. Their interests aren’t strictly amenities, though that’s important, too. They’re often looking for a larger unit size, which could mean a 1200-square-foot two-bedroom unit. They’re looking for a little more storage and extra space for a visiting adult child or family. The couple may also own two cars, so there’s that.

MFE: And millennials?

Byrum: As a group, they don’t own as many cars. Storage isn’t so much an issue. An 800- to 900-square-foot single-bedroom apartment is a target for this income group. They’re more likely to stay close to entertainment and restaurants. With hybrid work schedules common, commutes are less of an issue.

MFE: How should a multifamily owner/operator think about rents if this group is less price sensitive?

Byrum: It’s balancing act between rent versus buying. This group is financially sophisticated and is going to do the math. If the equation tips too heavy to the buy side, it hurts rental prospects. You don’t want to be in a pricing situation where the numbers say you’re smarter to buy. I can say as mortgage rates rise, the rent versus buy calculation has now moved out by about a year, in favor of renting.

MFE: Any final thoughts?

Byrum: It’s hard to put any one segment in a box. I’ve never seen one building in any market that was just one demographic. In general, a renter by choice may be a little fussier and more selective upfront, but they tend to be longer leaseholders if the amenities and services are kept up.

ABOUT THE AUTHOR: Dennis Harrington is an award-winning freelance writer, specializing in information technology, commercial design, architecture, commercial and residential real estate

Job growth overcomes inflation concerns. Total employment increased by 390,000 personnel in May, consistent with April hiring, while the unemployment rate held at a historically low 3.6 percent for a third consecutive month. Continued job creation is an important baluster amid economic turbulence stemming from elevated inflation and rising interest rates. June will likely bring the year’s third-rate hike from the Federal Reserve, as well as marking the start of quantitative tightening. Higher interest rates are beginning to temper sales in the housing market, while price increases are weighing on consumer sentiment and personal savings. Retail spending has nevertheless continued to advance in real terms in recent months, bolstered by climbing wages, reflecting an overall positive economic trajectory.

 

Employment Chart Structural forces underscore space demand. Multiple factors continue to enhance the needs of renters and tenants for a range of commercial spaces. The ongoing housing shortage, underlined by millennial family formation, drives demand for rentals, while the aging of the baby boomer generation emphasizes the necessity for medical offices and seniors housing. The removal of most mask mandates and other health restrictions, particularly in the Northeast and along the West Coast, is supporting foot traffic at retailers, hotels and offices. Across most property types, construction is also falling short of demand, hindered by shortages of materials and labor, aiding vacancies and rents.

 

 

Investment plans become more dynamic amid tighter margins. Strong property fundamentals are continuing to draw investor interest, keeping cap rates at historically low levels across most property types. As such, higher interest rates are pinching yield spreads, emphasizing the importance of value creation on behalf of buyers. Some investors are focusing more on properties where rents can be frequently adjusted, as is the case with multifamily, self-storage and lodging. At the same time, retail and office spaces are poised for a potential absorption lift from tenants later in the year, which could present some upside opportunity for buyers.

 

Developing Trends

 

Core working ages participating at nearly pre-pandemic levels. The ongoing recovery in labor participation continues to be focused among the prime working age groups. The labor participation rate for those between the ages of 24 and 54 has closed in on the pre-pandemic high more rapidly than for the older cohorts. At 82.6 percent in May, the measure is only 40 basis points below the February 2020 rate. The shortfall for those over the age of 54 is more than three times as wide, with many individuals having retired early during the health crisis. Backfilling those workers with recent college graduates and young adults will take time, weighing on overall labor participation in the short term.

 

Wages advance at a tempering rate, aiding inflation outlook. Average hourly earnings continued to climb in May, up 5.2 percent year-over-year. The pace of wage increases is nevertheless decelerating, down from a yearly clip of 5.6 percent in March, lessening overall inflationary pressure. A slowdown in wage growth enhances the prospects that the trajectory of price increases will begin to decline.

 

2.4 Million Jobs Added Year-to-Date in 2022      822,000 Jobs Short of February 2020 Total

 

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Federal Reserve; RealPage, Inc

Zumper’s March report shows a median one-bedroom hit an all-time high of $1,400, or a 2.5 percent increase for the year.

Through the first three months of the year, 2022’s national rent growth is outpacing 2021’s rent growth, according to Zumper’s National Rent Report published last week: “That’s hard to believe given that 2021 may have experienced the sharpest rise in rent of any calendar year in our lifetimes,” Zumper reporter Jeff Andrews said in prepared remarks.

In Zumper’s March data, not only does the median one-bedroom nationally hit an all-time high at $1,400, but it represents a 2.5 percent increase for the year so far, ahead of the 1.9 percent growth at this time last year. “That rent growth in 2022 is outpacing 2021 is a sobering thought,” Andrews said.

But for context, the most rapid period of growth in 2021 came from May to October, when the median one-bed rent rose by “a shocking” 9.7 percent in just six months.

“It’s an extremely high bar for 2022 to keep pace with, even if the year has gotten off to a hotter start,” Andrews said. Still, it’s not inconceivable that rent growth in 2022 will be on par with 2021. Vacancy rates entering the year were at all-time lows and in a November survey conducted by Zumper, a staggering 81.6 percent of renters said they planned on moving in 2022.

That equation—enormous demand and very little supply—equals high rent growth. Add in the fact that the home valuations are projected to keep growing rapidly—and thus price out more renters who would otherwise buy—and it’s not hard to envision a scenario where 2022 ends up outpacing 2021.”

By Paul Bergeron Biggest US Markets Saw Commercial Prices Slip, CoStar Data Shows

U.S. apartment pricing declined in the first quarter as deal volume fell.
After soaring prices and record-high transaction totals in the fourth quarter, real estate investors cut back on spending in the first few months of this year. The shift hit apartments hardest, the only sector in which property values slipped, new CoStar data shows.

The CoStar Commercial Repeat Sale Indices, which monitor price differences in sales of the same property to spot trends, show that the volume of those transactions tumbled 44.8% in the first quarter to $43.8 billion after an extraordinary surge of activity in the fourth quarter totaling $97.7 billion.
Among all property transactions, prices fell most notably in investment-grade deals of larger dollar amounts in major markets, as tabulated in the value-weighted U.S. composite index.
“After the blockbuster record-setting quarter at the end of 2021, transaction volume was expected to pull back in the first quarter,” Christine Cooper, chief U.S. economist for CoStar Group and lead author of the repeat-sales data report, told CoStar News. “But the scale of the drop-off was unprecedented. This was the largest quarter-over-quarter fall in the history of the series aside from the second quarter of 2020 as the pandemic took hold.”

The value-weighted index that reflects activity in the biggest markets moved 1.3% lower to 294, off from its revised fourth-quarter value of 298. This compares to the quarterly gain of 5.4% in the fourth quarter. The index, though, was still up 16.5% over the 12 months ended in March.

Meanwhile, prices fell 0.5% for the more numerous but lower-priced property sales typical of second- and third-tier markets as measured in the equal-weighted U.S. composite index. This compared to its gain of 5.4% in the fourth quarter. The index is up 14.6% in the 12 months ended in March.

The drop occurred because of the historic run-up in fourth-quarter commercial property sales volume, Cooper added. “Some froth came off the market as pricing broadly cooled — and even dipped into negative territory in the multifamily sector, which had experienced the fastest price appreciation over the past decade,” Cooper said.

Pricing faltered in the multifamily index after 12 consecutive quarters of gains. Prices fell 1% in the first pullback since the fourth quarter of 2018. Investment capital continued to move down the risk spectrum as larger-dollar multifamily deals in prime markets experienced the highest level of eroding prices. The prime multifamily metropolitan index fell 2%, its second consecutive month of decline.

Strong fundamentals in the industrial sector have drawn investors to this property type during the pandemic but slowing price appreciation that began in the second half of 2021 continued into 2022. Industrial prices cooled for the third consecutive quarter, edging up just 0.3%. That is the slowest quarterly gain since the fourth quarter of 2017. The retail sector’s challenges weighed on price growth in the first quarter as the U.S. retail index also rose just 0.3%, slowing for the third consecutive quarter, while office price growth stalled, posting neither a gain nor a decline. The negative, minimal and stalled pricing movements have come as the country deals with increased inflation, according to Cooper.

“The Fed’s well-advertised intentions to raise interest rates sharply over coming months are likely giving investors at least temporary pause as financial conditions tighten and costs of capital move higher,” she said.

One sector that bucked the overall slowing price growth trends was hotel properties. The hospitality index was the top performer, registering a 10.5% increase in the first quarter. The increase is a sign of the sector recovering from the effects of the pandemic.

The latest indices are based on 1,940 sale pairs in March and data collected on more than 268,000 repeat sales since 1996.

For a complimentary evaluation of your apartment building, please call or e-mail us at 305 281 1179 or e-mail at [email protected] for your complimentary evaluation.

Sincerely,
Joe Biundini
License # SL 3474287 Leasing volumes robust.
After encountering a disproportionate number of hurdles in 2020 and early 2021, apartment demand has soared in the nation’s gateway metros. During recent months, New York, Los Angeles and Chicago challenged Sun Belt and Mountain/Desert hot spot metros like Dallas-Fort Worth, Houston and Phoenix for the country’s largest increases in occupied units.

Sizable job creation fuels renter demand.
Most gateway markets are now registering notable employment growth. Across the six major gateway metros, headcounts expanded by an average of 6.2 percent year-over-year in March, compared to 4.5 percent for the U.S. overall. Additions include a range of trades and service roles, as well as a mix of office-based jobs, work-from-home positions and hybrid employment situations. In turn, there is solid new household formation, particularly among young adults who have traditionally been attracted to gateway markets for their amenities and lifestyle characteristics. While some people who left these areas a year or two ago are returning, that is not the primary source of current apartment demand here. The locations that gained households moving from gateway metros in 2020 are not suffering resident loss, on net, at this point.

Rents rise above pre-pandemic levels. The annual growth pace for effective rents surged to 17.6 percent in Chicago during early 2022, moving past the hefty U.S. norm of 16.8 percent. Boston, Washington, D.C., Los Angeles and parts of the Bay Area posted year-over-year pricing increases in the 10 percent to 18 percent range, similar to the national average. Rent growth over the past year more than countered earlier cuts and pushed pricing to new highs in most gateway market locations. Rents as of the first quarter are 12 percent to 13 percent above early 2020 pre-pandemic prices in Los Angeles and Chicago. Overall increases in the range of roughly 5 percent to 8 percent registered in Boston and Washington, D.C., as well as in the gateway adjacent metros of Northern New Jersey and Oakland. A bump of just over 2 percent was seen in New York. In contrast, rents were still 2 percent under early 2020 prices in San Francisco, while San Jose’s average monthly rates trailed the past high by 3.9 percent.

Additional Trends

Room left for further substantial upward rent movement.
While improving rents in gateway metros is encouraging, these markets still lag most of the country in performance over the past two years. All six of the major metros in this category posted two-year rent increases below the 17.3 percent U.S. average, and fell well short of the pricing jumps of more than 30 percent recorded in several key Florida markets, as well as Phoenix, Las Vegas and Riverside-San Bernardino.

Momentum set to shift to gateway markets.
Looking ahead, gateway metros should maintain higher rent growth momentum relative to the country as a whole or today’s best performing metros. Monthly rates have yet to jump significantly in most gateway markets relative to what is occurring in some other locations where new residents are filing in more rapidly. Furthermore, none of the gateway metros have vacancy issues or outsized construction activity that could derail returning momentum for rent growth results.

* Preliminary 1Q 2022 numbers
Major gateway markets include Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; RealPage, Inc.
With the recent downturn in the Real Estate Market, many investors are faced with less money for due diligence on each property. There’s a lot more to Real Estate Investing than just putting money down on a deal and hoping it returns a profit. Many new investors think they can cut corners on due diligence in multifamily real estate investing. This can be a costly decision. Let us discuss how to conduct thorough research and perform a pro forma analysis on your future investments to make sure you are not missing out on hidden costs, future expenses, or details that could impact your bottom line.

What is Due Diligence?
Due diligence is a critical step in any investment process and multifamily real estate is no exception. Due diligence includes, but isn’t limited to: examining a variety of factors including, but not limited to historical crime data and nearby infrastructure, performing credit and background checks on individuals involved with the property, inspecting the property and its systems firsthand, obtaining copies of leases, permits, and licenses that have not yet expired

There are three major types of due diligence one needs to keep in mind

1. Financial Due Diligence
The purpose of performing due diligence on a potential multifamily property is to ensure that more value will be created than what was originally invested in the acquisition of the property. For an investor to develop an accurate picture of what type of tenant base will occupy a particular development, every single possible aspect relative to a specific property is investigated by professionals before they make any final decisions regarding whether or not they wish to proceed with the purchase. As part of the financial due diligence process, four major areas should be examined:
1. Assessment of past performance
2. Future forecasts
3. Off-balance sheet liabilities
4. Cash flow models

2. Physical Due Diligence
Multifamily real estate investors are always looking to acquire the best properties possible, and a huge part of that due diligence process is physical inspection. Physical Due Diligence is an inspection of the property and its systems by a licensed professional, usually an engineer or home inspector. They will look at all aspects of the property including Roofing and water damage, electrical, plumbing and much more. This is concerned with the physical features and structure of the building and its surroundings. Some of these reports include zoning compliance, appraisal, environmental investigation, and engineering reports. Hiring these third parties can be expensive so buyers usually hold off on these reports until after preliminary due diligence which can be dangerous in the long run

3. Legal Due Diligence
The most important part of legal due diligence is examining the existing title policy, which is supplied by the seller and title insurance company. By hiring an attorney, you can review the existing policy and order an update. Once your conditions are met, then the title company can issue the updated title policy. A lot of people try to jump through this process as attorneys can be very expensive and time-consuming

As a real estate investor, one must understand all your investment options. The goal of this write-up is to help you make better-educated decisions when investing in multifamily. Multifamily Real Estate Investing is a numbers game. If you play it right, it can be a source of passive income for decades to come. If you don’t play it right, you could lose it all in one fell swoop. Due diligence is one of the most important factors in any multifamily investment, whether you are after a single-family home or an entire apartment complex.

How many times has fear held us up? How many opportunities did we miss just because we were too afraid to try? It is time to overcome that and start living life.

 

     Everything you could possibly want out of life is on the other side of fear. I want to qualify that statement. We are not aware of what is going on in the world. There’s a lot going on. This is not to propagate ignorance. In the Middle East, there’s always going to be conflict. There’s been for a long time. There are things going on in government that are sad but that have been the case for a long time. We don’t have control over monetary policy, fiscal policy, COVID. We don’t have control over policy. We don’t have control over whether there’s quarantine or not.

     There are so many things that we think there’s a solution of control and influence and we get all worked up about it. People in general choose to focus on the things that they can’t control. The qualifier is everything that we could possibly want out of life is on the other side of the fear that we have control and influence over.

      In all aspects of life, there’s a gap between where we are now and where we want to be; a gap laced, typically with some degree of fear; Fear of failure, success, pain, of what others will think of you if you succeed, of what others will think of you if you fail and of what success or failure will mean to yourself image when you believe about yourself. The irony is that when we toe the line with this fear, there’s another fear that fills in the gap that takes its place. It’s a never-ending loop, an infinite loop. There are ways in which we can strategically push these thresholds. If we don’t, we are always going to come up against these thresholds because if you think about it, part of us tries to avoid fear and pain and rightfully so, at the same time, because life commands and demands growth. It will put things in our place over and over again, challenge, friction, pain, and problems so that we grow. Looking at what we can do to strategically position circumstances, experiences that will allow us to push those limits and thresholds, it could minimize or mitigate some of the challenges that often surprise us.

 

Life commands and demands growth.

 

    What are the lessons you can gain from this? First off, again, nature is commanding growth in your life, your relationships, your finances, professionally, every area of your life. Physically, nature is compelling you to grow. Most people push off those signs. They don’t listen. They think that there’s an easier way, a shortcut and ultimately, what happens is a stronger experience then another strong experience. They keep stacking up until there’s a massive failure in pain. That’s when we decide to say, “This is a lesson. I need to make some changes. This is what I need to do.”

     It helps you understand and share with and communicate with people at a deeper level. You either can gain perspective that you may not have had or their intention may be what you assumed and you know early on so you don’t have to prolong the inevitable, which will be even more painful if you continue to wait. When you feel something, see something that is irritating, that is frustrating, that borderline is like, “This is not right,” approach it head-on.  Share what you are feeling. Share what your perspective is. In most circumstances, you are not seeing things the same way as this other person.

     If the intention is what you assumed it was, then escalate and say, “This is what I’m going to do next because this is how I feel. I don’t want it to go on any longer.” It points to a very quick conclusion that if a person does not want to essentially align with whatever the perspective and situation is, then there is a clear exit and it happens quickly. It’s so simple, but it’s been incredible.

     A second lesson, which is strategically designing a threshold by breaking through thresholds, is you can strategically stretch yourself by pushing your own limits and learning to love challenges, friction, and conflict because you know that you can thrive because of being able to face it. Your psychological muscles continue to grow.

     Your income, your wealth, what you can manage, whether it’s people or money, is correlated with this ability to handle conflict, friction, and challenge. There are some invaluable lessons that you’ll receive in this. Self-respect and self-competence are scraping the surface. Plus, being able to strategically position yourself in these areas will also allows you to grow at a much quicker pace.

Patrick Donohoe highlights from The Wealth Standard podcast

 

     At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all of the due diligence done for you.  Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs.  We realize the world of real estate can be complex and intimidating.  Our proven processes and systems take away those barriers, so our investors become successful real estate investors.

     WIG is a privately-owned investment firm that’s committed to helping our clients build wealth through quality investment opportunities in the real estate market. We do extensive research to find the best emerging market in specific states, build a team of professional brokers and lenders, and then find value-add properties. Our expertise is exclusively focused on investing in cash flowing properties nationwide. The properties are projected to generate both income and equity growth, ultimately experiencing significant capital gain when sold.

The information presented is not legal or tax advice, is not to be acted on as such, the information may not be current and is subject to change without notice.

Your money’s value is decreasing.  With inflation rising 7% over the last year, the most severe rise since 1982, you might be thinking … “is my money safe in the bank?”. Experts agree… the answer is: NO. The truth of the matter is that if you’re not getting at least an 8% return on your money, you’re losing buying power. It’s a scary idea that prompts crafty investors to take steps to protect their assets in order to weather the storm. But where can they put their money and have a return, when inflation is at a 40-year high? It becomes a question of which assets are stable and reliable. There are certainly several investment options available. There’s commodities, stocks, IPOs, and other favorites among traditional investors. Cryptocurrencies like Bitcoin are the trendy new kid on the block. But these are all highly volatile investments.

     Volatility refers to having periods of unpredictable, sharp price movements. Proponents of cryptocurrencies and volatile assets will point to recent dramatic stock price increases as a sign of the investment’s power, but often ignore the dip that preceded it, or after.  What’s more, volatile assets are inherently more risky thanks to shifting attitudes and market prices. They are not a stable investment when it comes to consistent returns, which isn’t optimal during a time of inflation. Consistency and predictability are very important when building an insulated portfolio against inflationary periods.

     So now, we have to ask, what is a stable asset class that is predictable and able to grow over time, despite inflation levels?

 

     Commercial real estate is more stable than cryptocurrency, gold, and stock and more advantageous in the long haul. And, historically, commercial real estate has been the leading hedge against inflation.

     Here’s why. Because alternatives like gold or cryptocurrency don’t generate ANY cash flow for you.

But what’s even more important to understand is CRE’s potential for long-term value creation.

You see, with commercial real estate, you not only have an investment that keeps up with inflation, but through value-add initiatives, you can actually dramatically increase the equity in a property. Here is an example of how this works: Property A currently has 100 units that rent for $1,100 each. All operating costs aside, this property is generating $110,000 a month from rents collected.

Now we will add value to the property by adding new flooring and appliances to those units, as well as a new tennis court for the community to enjoy.

When reassessed, the market value of those units rises to approximately $1,300 each. The property is now generating $130,000 per month from rents collected. That is an additional $20,000 per month or $240,000 over the course of a year. This was also completely passive, investors didn’t need to facilitate or pay-out-of pocket for any of the value-add efforts. And of course, this was all during an inflationary period. From day one, there was steady cash flow.

      An asset's market value is driven by its risk/return profile. Accordingly, value-add investors attempt to achieve capital value appreciation through income maximization or risk reduction. 

     Let’s back-track though. What about the stability factor for commercial real estate specifically?

Well, we can’t really predict what will occur with cryptocurrency in the coming years. However, daily-use, necessity-based commercial real estate is a totally different matter.  These are far more predictable given core factors like population, location, and the simple fact that people need to live whether there’s inflation or not.

     I’m sure you can picture a community-centric multi-family apartment complex. You might have one in your own community, where major grocery stores, shared with restaurants, clothing stores, and other daily-use tenants. If you think about it… these are the hearts of the community.

So what if you could own that multi-family complex? Is that not an asset that will continue to be valuable and impact the area far into the future?

     But here’s the best part: you don’t have to go it alone. You don’t need to hunt for deals yourself and then take on the role of building manager to ensure your investment is managed well.

 

     Ready to combat inflation?  At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all of the due diligence done for you.  Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs.  We realize the world of real estate can be complex and intimidating.  Our proven processes and systems take away those barriers, so our investors become successful real estate investors.

We do extensive research to find the best emerging market in specific states, build a team of professional brokers and lenders, and then find value-add properties. Our expertise is exclusively focused on investing in cash flowing properties nationwide. The properties are projected to generate both income and equity growth, ultimately experiencing significant capital gain when sold.

Orlando and Las Vegas claim the top spots in Marcus & Millichap’s 2022 US Multifamily Index by ranking at the top nationwide in job creation and household formation, which in turn are fostering outsized jumps in effective rent. 

     High rates of rent growth, bolstered by robust in-migration, distinguish many of the top-performing metros in the Index, including Phoenix (#5), Salt Lake City (#6) and Austin (#7). Many coastal residents are moving to these metros for lower-cost living arrangements. 

     Besides that, Florida dominates the top 10 for similar demographic reasons. Individuals, predominantly from the Northeast and Midwest, are relocating to the warmer climates of Fort Lauderdale (#3), West Palm Beach (#4) and Tampa (#8). 

     Rapid hiring in Miami (#10) is also driving renter demand in the market, while strong pre-pandemic property performance and a relatively quick economic recovery placed Atlanta in the ninth slot. 

 

Population Booming in DFW, NC Markets

 

     Other metros favored with hearty population expansions, including Dallas-Fort Worth (#12), Charlotte (#13) and Raleigh (#15), sit slightly lower due to large construction pipelines that add short-term vacancy pressure.

     Larger markets have more ground to make up, falling lower on the Index. The Bay Area metros of San Francisco (#25) and San Jose (#26) lie in the middle of the Index as the region continues to recover from the pandemic despite growing staff counts. 

     Employers in tech-centric Seattle-Tacoma (#22) are also hiring, although a heavy development pipeline adds near-term pressure. 

 

Lack of Building Hampers LA, Indy, KC

 

     Conversely, minimal building activity is benefiting Los Angeles (#23), where vacancy is also tight. Less new supply also aids renter demand in Indianapolis (#24), while Kansas City (#28) is distinguished among Midwest metros for its high rent growth. 

     Uncertainty regarding the degree and speed to which companies and public agencies return staff to offices plays a prominent role in the positioning of Washington, D.C. (#33) and New York (#34) in the bottom half of the Index. 

     As with the higher-ranked markets, demographics heavily factor into which metros fall into the lower bound of the Index. The populations of Chicago (#37) and Cleveland (#41) are expected to mildly contract this year, while slow household and job creation places Pittsburgh at No. 46.

Like many companies, third-party diligence companies are feeling the strain of supply chain disruption.

    

     It seems that no industry is exempt from the supply chain issues that are plaguing the economy. These challenges are affecting third party companies that provide due diligence support and documentation to buyers during a transaction, essentially elongating the process. As a result, sellers are now requesting shorter due diligence periods as one of the most popular concessions.

     “In this COVID-19 environment with supply chain delays and worker shortages across all sectors, third-party real estate diligence vendors—like title companies, surveyors, environmental engineers and appraisers—are feeling the strain like other industries,” T. Gaillard Uhlhorn, a member at Bass, Berry & Sims PLC, tells GlobeSt.com. “As a result, it is taking purchasers longer to get their standard diligence reports for review from their providers.”

     These documents include title commitments, surveys, property condition reports, Phase I environmental site assessments, appraisals and so on, according to Uhlhorn. With limited access to these documents, sellers are responding by pushing for expedited closings. “This trend is making the push for shorter diligence period and closing periods even more stressful on potential purchasers,” says Uhlhorn. “This is an interesting trend we are witnessing in many markets.”

     Buyers eager to win deals have offered nonrefundable offers to beat out competition, but on the seller side, seller-requested concessions are becoming common. Shortened due diligence periods are among the most popular, but Uhlhorn notes that there are others. “In addition to “nonrefundable” deposits, sellers can demand other concessions from potential purchasers like increased earnest money deposits, shorter diligence periods, shorter closing periods, fewer seller representations and warranties, lower caps on liability for breaches of representations and warranties, or fewer conditions to close,” he says. “In a hot apartment market, a purchaser will need to stretch to make returns pencil out and to ensure that its offer is the best to win the deal.”

     Whether a seller requests an expedited due diligence period or not, buyers will still need to work efficiently to execute with supply chain-related challenges. Some experts recommend coordinating and consolidating site visits as one solution. When possible, schedule to have the whole due diligence and lender team walk the property and units at the same time. This will help to limit intrusions for the residents and sellers and provide safety and peace of mind.

Economy exceeds expectations in fourth quarter. Annualized gross domestic product jumped 6.9 percent in the final period of last year, largely on the back of an increase in inventories. Personal expenditures contributed nearly 2.3 percent to last quarter’s gain, primarily due to holiday spending that was spread throughout the period. Much of the positive momentum could carry into 2022. While the influence of stimulus on capital markets is fading, the ongoing labor shortage is applying upward pressure to wages, supporting greater consumer spending. Ultimately, growth prospects could hinge on the Federal Reserve’s response to ongoing economic headwinds, most notably high inflation.

 

Commercial real estate well positioned. Uncertainty surrounds the ability of the Fed to both maintain maximum employment and rein in price increases. If the central bank overcorrects, it would temper or even suspend growth; commercial real estate, however, is in a strong position to weather these headwinds. Fundamentals in nearly all commercial sectors, including industrial and multifamily, have recovered from the effects of the pandemic. Retail, which was projected to be one of the hardest hit sectors, will see vacancy come to within 10 basis points of the pre-health crisis rate this year.
 
Challenges Still Ahead

Headwinds mounting for growth this year. Several factors will have a ripple effect on the economy in 2022, testing the Fed’s ability to maintain price stability and GDP growth. Inflation, which is at a 40-year high, is a prominent concern, and will require the Federal Open Market Committee to be more aggressive with rate hikes. Potentially, three to five rate increases are expected this year, depending on the magnitude of the increases. Elevated borrowing costs could affect investors’ yield requirements on properties. This is particularly true for properties leased to high credit tenants for an extended period without inflation-backed lease escalations included.
 
 Employment situation challenged. Approximately four million jobs have not been recouped since the recession, despite the fact the unemployment rate is under 4 percent. The overall workforce has declined significantly as baby boomers have retired and some households have taken on added family care responsibilities or transitioned to one income. Less severe health threats, paired with strong wage increases, should prompt more people to fill some of the 11 million positions available across the country.

 Sources: Marcus & Millichap Research Services; Bureau of Economic Analysis; Bureau of Labor Statistics; STR, Inc. U.S. Census Bureau

If you have a property you’re looking to sell, should you sell it? Or should you do a 1031 exchange?

A 1031 exchange is a tax exempt exchange where you can roll into the capital gains property and defer the capital gains tax. The capital gains tax is the levy on the profit from an investment that is incurred when the investment is sold.

 

How does a 1031 exchange really work?

 

A 1031 in the tax code allows you to take the capital gains from a property you sell and invest that money into a new property of “like-kind” (A like-kind exchange is a tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset. The term like-kind property refers to two real estate assets of a similar nature regardless of grade or quality that can be exchanged without incurring any tax liability. The Internal Revenue Code (IRC) defines a like-kind property as any held for investment, trade, or business purposes under Section 1031, making them a 1031 exchange. This means both properties involved in the exchange must be for business or investment purposes. Personal residences, therefore, do not qualify as like-kind properties).

 Qualified third party groups hold the funds. They will hold them for you for a period of time until you can identify a new property and prepare to close on a new one.

 

In general, when it comes to deferring capital gains; (Tax-deferred status refers to investment earnings—such as interest, dividends, or capital gains—that accumulate tax-free until the investor takes constructive receipt of the profits), that’s the reason people do 1031 exchanges.

 

Let’s say you have a rental property you bought for $500,000. It’s worth $1 million right now.

You got $500,000 in gains. You’ve got all this money and would love to sell it. But if you did, you would have to pay all the taxes on it. A 1031 exchange allows you to take that money and defer it to a larger deal.  You’ll have up to 45 days to identify a property. You can identify up to three new properties and then you’ll have six months to close. These timelines can be very tight and if you don’t make them, the money goes to capital gain and you have to pay the taxes. You’ll need a plan of attack and be able to get it done if that’s your goal.

 

What if I Sell the Property?

 

What happens if you sell this property? What if you don’t want to bother with a 1031 exchange? You can totally do that! There’s nothing wrong with that:

Pretend you have a $2 million multifamily apartment. You have $1 million in gains. There are long term gains; (the gain may be short-term - one year or less or long-term - more than one year and must be claimed on income taxes). When you sell that property, you get taxed. For your state and your federal taxes, let’s say your rate is 25%. That means you will have net $750,000 on that $1 million and you’ll pay $250,000 in taxes,

That’s a lot of money! If you had the option to defer those taxes, I think it’s really important; it makes so much more sense to do a 1031 exchange into the next property. There are, however, some considerations to be made. If you can’t find another property, you might have some trouble with this option. Especially in this market where things are so competitive! Another consideration is maybe you have to sell right now. Maybe your partners or family members don’t want to be involved in the next deal. If there’s enough equity in the deal, you could potentially 1031 part of it or cash people out.

One approach is to try the 1031. Get it set up, pay the fee, do it. Then you look around and see what you can find. If you’re having trouble finding a replacement property, this is something you can look at.

 

 Other 1031 Considerations

 

What are some other considerations when it comes to a 1031 exchange? First, when you are going into the next property, there is a challenge that might come up. The person who’s selling a property will know you are at a 1031 exchange and you’re on a tight timeline.

Why is that important? It gives you a pretty significant disadvantage; They know if the deal doesn’t close you’ll be penalized because this is one of the properties you’ve identified, they can come back and say they won’t work with you, they want you to pay additional charges,

They won’t have any concessions with the house or the property. People can really take advantage, they know that you have to close this sooner or else you’ll have a bigger tax bill.

There is another way to do it!

You can identify the new property first before you sell the current property.

What does that actually look like? You have the new property and get it under contract. Then you’ll say you have some extensions built in. Then you’ll say you’re going to make additional money guaranteed or that you will make it non-refundable after a certain period of time (maybe another 30 days). The person you’re buying from knows the property will close. They’re not concerned. This tactic allows you to identify the new property first and then you can list and sell it. You’re going in at this already agreed upon price. It’s challenging, but it is a safer way to do a 1031.

 

There other considerations such as an “Investment Sales Trust” too lengthy to discuss here. 

 

The issue really is timing. You can use a 1031 and then try to figure out where you’ll put it. You can use a 1031 and then try to figure out where you’ll put it.

In general, when it comes to 1030, try to defer, defer, defer. If you can just continue to defer taxes, it’s going be much better than every time you sell a property.

 

Disclaimer: Wealthley Investment Group is not a tax or financial advisor. This is for educational purposes only. We are not giving specific advice on what you can do. 

 

CBRE is forecasting a record 2022 for investment in commercial real estate due to the added momentum in the economic and real estate recoveries, fiscal stimulus projects, and a rebound of big cities and downtowns—as long as the pandemic is held at bay.

  According to CBRE, it is anticipating a 4.6% gain in U.S. gross domestic product in 2022 as businesses and real estate hit their full stride in the recovery from the pandemic and related restrictions. Investment volumes are expected to increase 5% to 10% as low interest rates and the return of international travel create more demand.

  “Our outlook for U.S. commercial real estate next year is positive due to a number of tailwinds overriding deterrents such as inflation,” said Richard Barkham, CBRE’s global chief economist and head of Americas Research. “COVID-19 flare-ups still pose a risk, but governments and health authorities appear to have made progress in containment and treatment. We see this rising tide further buoying the capital markets, multifamily, and the industrial and logistics sector, and aiding the burgeoning recoveries of the retail and office sectors.”

  CBRE’s 2022 U.S. Real Estate Outlook is forecasting a record-breaking year for multifamily, citing solid fundamentals, heightened investor interest, ample liquidity, and a growing range of debt products.

Overall occupancy and net effective rents are expected to be above pre-pandemic levels by the end of 2021. Even though there are some challenges facing the market, that overall health is expected to continue in the new year.

  “The growing economy is boosting household formation, which had been artificially suppressed by the pandemic. New households are catalyzing demand for rentals, which is expected to match pace of new deliveries in 2022. We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year,” according to the outlook.

CBRE also predicts construction to remain elevated in the near term, with completions this year reaching a new high and another 300,000-plus units delivered in 2022. Providing context, CBRE added that deliveries have averaged 206,000 units annually since 2010.

  However, despite the strong demand for multifamily, CBRE said the volume of new Class A product coming online will limit the performance of those higher-quality communities. While Class A rents were most negatively affected during the COVID-19 crisis, there remains more room to recover. CBRE projects 8% growth in urban effective rents in the year ahead but a moderation to 3% in 2023.

  Other key findings for multifamily from the CBRE 2022 U.S. Real Estate Outlook include:

Urban properties are filling back up, with occupancy rates nearing the pre-pandemic levels, as the nation sees fewer restrictions on urban amenities, higher vaccination rates, and more workers returning to offices. As of the third quarter of 2021, urban vacancy rates averaged 5%, 70 basis points higher than the pre-pandemic level. They are expected to fall to 4% by the end of 2022; investment volume for multifamily is expected to reach nearly $213 billion, a record, in 2021, which is above 2019’s $193 billion. CBRE is forecasting at least a 10% increase to $234 billion in 2022. Trends on the investment front include the acceptance of strong non-coastal markets and the growing interest in favoring ESG-compliant assets, especially from European investors; and the level of liquidity from the 2022 increased caps on multifamily purchase volumes for Fannie Mae and Freddie—$78 billion for each government-sponsored enterprise—should facilitate strong value growth, according to CBRE. It also expects foreign capital to return as well as liquid multifamily debt capital markets, including traditional lending sources and alternative lenders such as debt funds and mortgage REITs, to further stabilize and perhaps even compress cap rates even as interest rates increase.

  The CBRE outlook also highlighted trends to watch for 2022, including the growing single-family rental market and the return to the office.

  The attraction of single-family rentals is expected to increase for both investors and renters as more millennials reach the child-rearing life stages. This will push urban operators to focus more on Gen Z renters to fill the resulting vacancies.

  CBRE also anticipates that rising office occupancy will provide a boost for urban multifamily demand, projecting that office workers will spend an average 3.4 days a week in the office, down from the average 4.4 day per week average in 2018. Living near the office may longer be as important for renters, but it will still be a key consideration.

Inflation appears to be providing another tailwind for investors looking to increase allocations to commercial real estate. But is the promise of commercial real estate as an inflation hedge all it’s cracked up to be?

  According to Bureau of Labor Statistics estimates, the consumer price index rose 5.4 percent in September, the fifth straight month in which the inflation rate was five percent or greater. Views remain mixed on whether higher inflation could be transitory—caused by a combination of reopening economy and a choked supply chain—or whether more long-term inflationary pressures are at play.

   “I think it is transitory, but inflation could be stickier than people think and continue into 2022,” says Richard Barkham, PhD, global chief economist, head of global research and head of Americas Research at CBRE. Barkham expects inflation to drop back once some of the supply side issues contributing to price increases improve as more people return to the workforce.

  One of the common selling points for commercial real estate investment is that the asset class provides a good hedge against inflation because it generates cash flow. Owners also have the ability to raise rents along with rising inflation—in fact some leases have automatic CPI adjustments built in. Higher revenues also correlate to higher property values. However, experts caution that the concept of commercial real estate as an inflation hedge in investment portfolios is sometimes misunderstood, and certain properties are better positioned to in environments with rising prices than others.

   “Commercial real estate doesn’t give you instantaneous protection against all unexpected blips in inflation,” says Barkham. “However, if you look at a longer period of five, seven or 10 years, generally speaking, the values of real estate will go up with inflation.” “Real estate does keep pace with rising inflation reasonably well with higher prices that flow through to rents, although that is not true of all sectors”, Barkham adds.

  Industry research supports the argument that real estate assets provide protection against inflation. According to Nareit, dividend increases for REITs have outpaced inflation as measured by the Consumer Price Index in all but two of the last 20 years. In 2002, dividend growth failed to edge out inflation by just half a percentage point. The only other time in recent history dividend growth fell below inflation was just after the financial crisis in 2009. Over the 20-year period, average annual growth for dividends per share were 9.6 percent (or 8.9 percent compounded) compared to 2.1 percent (2.2 percent compounded) for consumer prices.

 

Comparing private CRE vs. public REITs

  Berkadia recently introduced a new white paper that assesses inflation and risk in real estate. In particular, the research compared performance of private commercial real estate, equity REITs and the stock market. One of the key findings of the research for the post-Great Financial Crisis (GFC) period studied is that higher inflation tends to help private commercial real estate returns, while hurting REIT and stock returns. In addition, when comparing individual property types, privately held apartments and industrial delivered the strongest risk-adjusted performance.

  The Berkadia research introduces the inflation ß (beta) concept that takes into account the sensitivity of returns to changes in the inflation rate. The inflation ß quantifies the implied marginal rise or decline in excess returns given a rise in the inflation rate. For example, an asset with inflation ß of 2 implies that for a 1 percent rise in inflation, excess returns will rise by 2 percent. Essentially, as measured by inflation ß, some property types have a more favorable (or unfavorable) inflation sensitivity than others.

  The Berkadia research found a post-GFC inflation ß for private commercial real estate that was 1.20, whereas equity stocks had an inflation ß of -2.49 and equity REITs had an inflation ß of -5.27. In simple terms, rising inflation tends to imply rising returns for private commercial real estate, notes Noah Stone, an economic analyst at Berkadia. One of the suspected reasons for that outperformance is the difference in liquidity. The illiquidity of privately held real estate is likely to protect values more during times of inflation.

  The Berkadia research also showed that apartments have the strongest risk-adjusted performance during both times of moderate (2-5 percent) and high inflation (5+ percent), whereas industrial has the strongest risk-adjusted performance during time of low inflation (0-2 percent). “In our view, there is no one property type that is a loser. All of them are winners when you look at risk-adjusted returns, but definitely apartments and industrial outperformed on a risk-adjusted basis,” says Stone.

  It is important to note a number of variables that can impact an owner’s ability to capture inflation increases, such as supply and demand and the lease structure. “In terms of the apartments, the short-term leases are more flexible and allow for quick and rapid responses that allow landlords to capture rent increases when faced with exogenous factors like inflation,” says Dori Nolan, senior vice president, National Client Services at Berkadia.

  Some owners will structure leases with periodic rent increases, or even link rent increases to increases in the CPI. Industrial will provide very good short-term and long-term inflation hedging, particularly as demand is so strong right now. In the past, retail has been quite good at delivering short-term inflation protection, because retailers are usually quick to incorporate price changes into their business models. “I don’t know that retail would be able to do that now, because physical retail has been highly impeded by internet retail,” says Barkham. “Office will offer some longer term inflation hedging protection, but in the short term the sector has been weakened by demand factors”, Barkham adds.

  Another factor to consider is that property types are impacted differently by inflationary pressures on the operating expense side. Although shopping centers and office buildings can pass expenses through to tenants as common area maintenance costs, owners will bear some of the cost on assets that are not fully occupied. In addition, those property types that also have operating businesses, such as seniors housing and hospitality, are more directly impacted by rising costs. Labor costs in particular have been a bigger concern for operators of hotels and assisted living/memory care facilities.

 

Inflation influences CRE strategies

  Cadre is one investment management firm that is factoring inflation into decisions on portfolio construction. “From a blanket perspective, we’re in the camp that there is inflation that is here to stay, at least in the immediate and short-term of the next 12 to 24 months,” says Dan Rosenbloom, managing director and head of investments at Cadre, a tech-centric real estate investment management company. Cade also believes that there will be a run-up in asset values with some properties that will be better positioned to capture it.

  Multifamily is one asset type that Cadre is leaning into more so than others. “When we’re buying multifamily, we have to look at the basis and the cost per unit. During an inflationary time, like we’re seeing now, costs will go up. So, your basis looks more compelling related to what replacement cost would be,” says Rosenbloom. Additionally, Rosenbloom says,”The question is if inflation starts to happen, can investors actually capture that income? “This is where market selection and asset selection become really important. You need someone who understands not only the macro, but the micro markets that you are investing in.”

  For example, Cadre recently purchased an apartment property in the Southwest where rents in that particular submarket are being marked up by about 20 percent for leases that are rolling. “What we are seeing in that market is that wages are going up or people that are coming in have jobs where they can afford those increases,” Rosenbloom says.

  “Investors also need to watch out for medium-term hiccups in the economy due to inflation”, cautions Barkham. “If the Fed thinks inflation is transitory, it won’t be very aggressive in trying to control it. However, if the Fed thinks inflation is going to be something more than transitory, then there could be a sharp rise in interest rates, which will be quite damaging to real estate in the short term. These are all factors playing out that impact scenarios for short-term inflation protection”, says Rosenbloom.

 

With the arrival of a New Year, come New Year’s resolutions. Many people use the time of the New Year to set goals for themselves that they aim to achieve throughout the course of the next 12 months.

Towards the end of last year, many people expressed hope and also apprehension about what all 2022 will hold. In some regards, this is understandable, especially in light of how 2020 and 2021 turned out.

 

The past couple of years have taken some people’s lives and twisted them into something unrecognizable. Therefore, individuals with this story are largely hoping that 2022 will be a time when they can recover and bounce back.

 

According to Fox Business, one major goal for most Americans is to improve their financial situations over the course of this year.

 

The Leading New Year’s Resolution for 2022

 

A poll by Slickdeals shows more than three-quarters of American citizens want to make decisions that are better for their finances. When assessing the events over the past two years, the reality that 76% of Americans aim to better their finances shouldn’t come as a shock. During 2020, countless people lost their businesses and their jobs. Then, in 2021, inflation and medical mandates hit, both of which had negative impacts on the economy. With inflation soaring through the roofs, people’s money has stopped going as far as it used to. Meanwhile, medical mandates propelled folks out of the workforce, crippling situations for business owners and communities across the country at large. Additional findings from Slickdeals even reveal most Americans with the goal of improving their finances worry that inflation is going to be a real problem. These worries are valid, also.

Last year, economists warned that inflation wouldn’t be going away this year. As a matter of fact, the rising prices of various goods across the nation are forecasted to last for a very good part of this year, if not into 2023.

 

Will Americans Succeed?

Time will tell whether or not Americans are able to meet their goals of bettering their finances in 2022.

However, if inflation gets worse, more financial challenges will await the people of this country. At this time, five in ten Americans want to free themselves of debt. Meanwhile, 44% of people in the country are interested in using coupons and savings apps. Slickdeals later noted that 47% of people are interested in freeing themselves from bills they don’t need; finally, another 41% are looking forward to getting longer lines of credit and/or credit cards.

Do you have financial goals for the New Year? Do you want to improve your finances in 2022? Will you succeed? 

At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all of the due diligence done for you.  Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs.  We realize the world of real estate can be complex and intimidating.  Our proven processes and systems take away those barriers, so our investors become successful real estate investors.

WIG is a privately-owned investment firm that’s committed to helping our clients build wealth through quality investment opportunities in the real estate market. We do extensive research to find the best emerging market in specific states, build a team of professional brokers and lenders, and then find value-add properties. Our expertise is exclusively focused on investing in cash flowing properties nationwide. The properties are projected to generate both income and equity growth, ultimately experiencing significant capital gain when sold.

U.S. median apartment rents have spiked by 17.8% since the beginning of 2021, according to the most recent Apartment List National Rent Report, though the increase has been slowing in recent months

U.S. median apartment rents have spiked by 17.8% since the beginning of 2021, according to the most recent Apartment List National Rent Report, though the increase has been slowing in recent months.Even at a slower rate of growth, however, rents are still gaining ground more than usual for this time of the year. Month-over-month in November, the national increase was 0.1%, coming at a time of year when median rents typically drop.The 11-month 17.8% rise vastly outstripped rental increases in recent years. Rent growth during the same periods in the years from 2017 to 2019 averaged 2.6%, Apartment List reports.

   Even at a slower rate of growth, however, rents are still gaining ground more than usual for this time of the year. Month-over-month in November, the national increase was 0.1%, coming at a time of year when median rents typically drop.

   During November, more than half of the largest U.S. apartment markets (53 out of 100) saw a drop in median rents. Among the markets in which rents have started their winter slowdown, many are coastal markets that experienced steep rent drops in 2020, only to see fast rebounds in 2021. 

   San Francisco experienced a 2.7% drop in rents in November alone, its second monthly drop in a row, and rents fell by more than 1% in San Jose and Oakland, California. Rents also dropped in such markets as Minneapolis, Boston and Seattle. In Seattle, a 2.1% drop in November brought that market's rent to slightly below its pre-pandemic median rate.

   Rent growth in six of the 10 markets with the largest rent hikes since March 2020 also experienced a drop in November, Apartment List reported. Only one of those 10 markets, North Las Vegas, saw an increase of more than 1% for the month, and that market has seen pandemic-era rents grow more than any of the other 100 largest U.S. apartment markets, up 38% since March 2020.

   The 10 markets with the steepest rent increases in that time have all seen rents climb by 34% or more. Nine of them are within just three metro areas: Las Vegas, Phoenix and Tampa, Florida.

Occupancy has been a strong driver of apartment rent increases this year. In a separate report, RealPage found that apartment occupancy nationwide is now 97.5%, which is 250 basis points higher than the long-term average over the last three decades.

As we move into the closing weeks of the year, I want to share three commercial real estate predictions every investor should consider for 2022. There are, of course, a lot of variables in play going into the New Year, most notably, the risks posed by COVID variants. But assuming we don’t have a major severe deadly vaccine resistant version of hit us, the trends I’m about to share should come true.  

My first prediction is that we will see increasing momentum in the recovery of the urban core. This will not be a bounce back, but more of a slow march toward recovery. It will also look different in each city.  Local city policy, like mask mandates, vaccine mandates, rules on public gatherings, etc, will have a big influence on this. So, cities like New York and San Francisco will likely recover more slowly than cities with less stringent codes. The broader urban recovery will be strongly influenced by a movement back toward working in the office. Now I know a lot of people are saying that working from the office is an outdated concept, but I see two powerful sources pushing toward a return to the office.

 First, companies have been seeing a slow degradation of productivity, corporate culture, collaboration and staff development. Second, more and more workers are indicating that they want to go back to the office, at least part time. A lot of employees miss being together and getting together with their piers missing out on training, collaboration, engagement and career tack development. Ultimately, this will be an important driver returning to the office. Younger employees, especially, are beginning to push for a return to the office. As a result, we should see a slow but steady strengthening of urban housing, downtown amenities and services and office space demands.

My second prediction is that housing shortage will be persistent. The housing shortfall will continue to put upward pressure on single family home prices, keep apartment vacancy rates low and push rents upward. Again, there will be a lot of variance by market.  Vacation destinations like Las Vegas and Orlando that were severely impacted by COVID will generate outside momentum. And migration trends will favor secondary and tertiary cities, particularly in the southern portion of the country. Although housing construction w will accelerate in 2022, it will likely still fall short of overall demand, and rising construction to focus development on upper price tier housing units. Much of this construction will be concentrated in suburban areas, boosting suburban retail centers and suburban office space demand. I want to add that traditional workforce housing won’t see a substantive inventory increase, keeping class B and C apartments particularly tight.

My final prediction will be influenced by the other two that I already shared. Returning to the office will place additional pressure on the already tight labor market, creating more wage pressure across a broader swath of employment sectors. At the same time, housing shortages will drive up home prices and rents. Together with other factors like the continued supply chain challenges, shortages of r.aw materials like lumber and steel, and of manufacturing inputs like computer chips, these drivers will continue to elevate inflation.   This is placing additional pressure on the Federal Reserve and as they have announced, they will be accelerating the taper of quantitative easing and we should expect at least three interest rate hikes in 2022. Although many believe that rising interest rates align with upward rising cap rates, the consensus I among the real estate analysts I talked to is that strong market liquidity cap rates will keep down. That means the yield spread between the cost of capital and commercial tight estate returns will likely tighten.

These three predictions should they come to pass will make an interesting climate in 2022. But remember, real investors need to play the “long game” and keep their eyes on the horizon.

John Chang – Senior Vice President, Director Research Services

Marcus & Millicap

Year over year, loan originations for commercial and multifamily have seen a 119% increase.

 

   Commercial and multifamily borrowing saw a 119% increase in the third quarter compared with a year ago and a quarter-over-quarter increase of 19%, according to the Mortgage Bankers Association (MBA).

For multifamily properties specifically, the MBA’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations found that they experienced a 105% increase in lending volumes year over year in the third quarter. In addition, multifamily properties had a 31% increase quarter over quarter.

   “Overall commercial real estate borrowing and lending are running at high levels, but there continues to be an important differentiation by property type,” said Jamie Woodwell, MBA’s vice president of commercial real estate research. “Borrowing hit an all-time quarterly high during the third quarter, driven by strong or improving market fundamentals, higher property values, low interest rates, and solid mortgage performance. Borrowing and lending backed by industrial and multifamily properties are each running at a record annual pace.”

   According to the MBA, all property types showed a year-over-year increase in the third quarter, including an 866% increase in the dollar volume of loans for hotel properties, a 317% increase for retail, a 156% increase for industrial, a 102% increase for office, and a 45% increase for health care loan originations. While year-to-date office and retail lending are each up significantly from 2020, Woodwell added that both remain below 2019 levels.

   On a quarterly basis, third quarter originations increased 62% for retail compared with the second quarter, 60% for hotel, and 9% for office. Industrial properties were essentially unchanged, and health care property originations fell 52%.

   “Among capital sources, nearly every major group—including commercial mortgage-backed securities (CMBS), banks, life companies, and investor-driven lenders—is lending well above 2020 levels, with life companies and investor-driven lenders also exceeding their 2019 year-to-date volumes,” said Woodwell.         “The one exception is the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, whose conservator limited their loan purchase volumes this year.”

   The dollar volume of loans originated for investor-driven lenders, including REITs, specialty finance, credit companies, and others, increased by 319% year over year. In addition, commercial bank portfolio loans saw a year-over-year boost of 232%, life insurance company loans saw a 175% increase, CMBS loans increased 125%, and GSE origination loans were up 15%.

   Quarter over quarter, the dollar volume of loans in the third quarter for the GSEs increased 79%, with originations for commercial bank portfolios increasing 51% and life insurance companies increasing 3%. CMBS loans saw a 5% decline, and loans for investor-driven lenders decreased 6%.

The 10% rise in national asking rents in August is highest on record, helped by more young workers returning to cities

 

   Despite a yearlong national eviction ban and continuing pandemic, it has rarely been a better time to be a big apartment-building landlord.

   National asking rents rose 10.3% in August, measured on an annual basis, according to Real Page, a rental-management software company, which analyzed more than 13 million professionally managed apartments. That marked the first double-digit increase in the more than 20 years this data has been collected, and in several hot cities the rent increases were much greater than the national figure.

   “The rent growth that we’re seeing in places like Phoenix and Las Vegas and Tampa, it’s obviously unprecedented,” said Jay Parsons, deputy chief economist for Real Page. August rents rose more than 20% year over year in each of these cities. Monthly rents were up more than 20% in smaller markets like Boise, Idaho, and Naples, Fla., too.

Fast-rising rents reflect several factors, analysts say. Younger adults who lived with family last year are now renting their own apartments, in many cases as they prepare to head back to the office. Middle-income workers who have been priced out of the scorching housing market have little choice but to pay higher rents. Limited growth in new apartment supply, meanwhile, can’t keep up with demand.

   Apartment occupancy rates, a key metric for helping landlords determine how much they can increase rent, hit a record high of 97.1% in August. Household incomes for new renters at professionally managed properties also reached a new high of more than $70,000 a year, according to Real Page. An end to the federal eviction ban last month is likely to further strengthen landlords’ hands.

   Multifamily-property values have increased 13% since before the pandemic, according to real-estate securities advisory Green Street. More money is being invested now in apartment buildings than in any other type of commercial real estate, according to data company Real Capital Analytics.

   Few analysts predicted this scenario 18 months ago. When Covid-19 hit, the U.S. unemployment rate rose to nearly 15%. Surveys showed an increasing number of renters falling behind on their payments, and federal and local eviction bans often meant these tenants couldn’t be replaced. Uncertainty about rent collections sent chills through the debt markets, raising concerns about a liquidity crunch in multifamily real estate.

Now, most segments of the multifamily market look strong. Even as more renters migrate back to cities, suburban markets continue to sizzle as record-high home-sale prices keep more people in rental housing. Others are relocating and working from home.

   “Multifamily is able to capitalize on both of those trends,” said Karlin Conklin, principal of Investors Management Group, which has buildings in the suburban areas of cities like Raleigh, N.C., and San Antonio.

   Multifamily-property values have increased 13% since before the pandemic, according to real-estate securities advisory Green Street.

   The rent increases mean that tenants who enjoyed big discounts last year are in for a rude awakening. In Nashville, Tenn., 27-year-old business analyst Zachary Wendland rented a one-bedroom apartment in a luxury rental high-rise for $1,420 a month in October. In June, the building was sold to Camden Property Trust, a publicly traded landlord, in one of the priciest-ever multifamily sales in the city.

   Mr. Wendland wasn’t given the option to renew his lease with the new owner, but a similar unit in the building is now on the market for $2,199. “I couldn’t imagine a year ago paying $2,000 to live here,” he said. Now, he is apartment hunting again.

   At the Nashville building, only six out of 430 units are available to rent, said Ric Campo, chief executive of the building’s new owner, Camden Property Trust. The mounting demand from high-paid professionals and transplants means rent increases between leases are getting bigger. “It’s not just Nashville. It’s pretty much every market,” Mr. Campo said.

   Some individual investors have felt excluded from the rent rally. These landlords own about 41% of all rental properties nationwide, including the majority of single-family rentals, according to U.S. Census Bureau surveys. Unemployment for lower-income workers caused many renters to miss payments, and eviction bans usually meant landlords had limited recourse. These building owners don’t have the scale to absorb unpaid-rent problems as easily as a corporate owner with thousands of apartment units.

   A recent survey of about 1,000 small rental owners from the National Rental Home Council, a landlord trade group for single-family rental-home owners, found that one-third had sold or planned to sell a rental home because of the effects of the eviction moratorium on their business, with most selling to owner-occupiers.

   Still, if unpaid rent is pushing more rental-home landlords to exit the business, it couldn’t come at a better time. National home-sale prices are up 18% over the past year.

Mortgage lending to multifamily owners has returned to pre-pandemic levels. Many landlords have tapped ultralow interest rates to refinance their mortgages, increasing their cash on hand and lowering their mortgage payments, said Jamie Woodwell, vice president of research and economics at Mortgage Bankers Association, a real-estate-lending industry group. Much of the pandemic lending was driven by the government-backed mortgage programs, he said. But other lenders have since ramped up their multifamily business.

   “You don’t have a single private source of capital that isn’t interested in lending on multifamily,” said Willy Walker, chairman and chief executive of commercial real-estate firm Walker & Dunlop Inc.

   Where landlords have problems with their loans, the federal government has stepped in to help. The Department of Housing and Urban Development, and the government-backed mortgage giants Fannie Mae and Freddie Mac, crafted forbearance programs for covered building owners who saw drops in their rent collections. The Federal Reserve Bank also stepped in to purchase more than $10.5 billion in multifamily mortgage-backed securities since last spring, which helped encourage more lending.

  The $46 billion in emergency rental assistance provided by Congress—and in most cases paid directly to landlords—is also slowly starting to help more building owners with unpaid rent. “That assistance has been extraordinary,” said Ms. Conklin. Her company has earned back 25% of its unpaid rent and expects more in the coming months, she said.

   For most real-estate companies, going under because of unpaid rent is “unlikely,” Mr. Walker said. “There are not many operators who have such a high level of nonpayment that it is going to cause them to default on their loan,” he said.

Yardi Matrix: Average U.S. asking rent reaches high of $1,572 in October. 

The average U.S. asking rent increased by $23 in October to a record high of $1,572. According to Yardi Matrix’s Multifamily National Report. In addition, asking rents were up 13.7% year over year.

This continued growth has been driven by an ongoing surge in demand that started in the spring, according to the report. The average occupancy rate of stabilized properties also has reached a record 96.1% in September, a 1.4% year-over-year increase.

“Since March, the average U.S. asking rent has increased by $179, or roughly the amount of increase over the previous five years combined,” stated the report. “The question now is how long before the market begins to decelerate to some semblance of normal growth. If typical seasonal patterns hold, growth will soon recede.”

https://www.yardimatrix.com

Yardi Matrix said historically rent increases tend to flatten between September and March, with analysts expecting growth starting to slow as short-term factors like the impact of stimulus funds and pent-up consumer demand are met.

In almost a quarter of Yardi Matrix’s top 30 markets, rents were up 20% or more year over year, with Phoenix topping the list at 26.3%. Tampa, Florida, and Las Vegas also experienced strong rent growth at 25.8% and 23%, respectively. In 23 of the top 30 markets, rents were up by at least 10% year over year. Minneapolis at 4.8% was the only metro with asking rents up less than 5%. According to Yardi Matrix, even metros that typically see slower growth have experienced gains, including Baltimore, 13%; Philadelphia, 10.7%; and Indianapolis, 10.4%.

This rent growth isn’t contained to the nation’s largest markets. In the 20 metros outside the top 30, 14 saw double-digit year-over-year rent growth, with the Southwest Florida Coast leading the way at 29.1%, followed by Jacksonville, Florida, at 21.7%, and Tucson at 20.1%.

Asking rents nationally rose 1.5% in October, a 50-basis point acceleration from the previous month. Month over month, rents in high-end Lifestyle units increased 1.6% in October while Renter-by-Necessity units rose by 1.2%.

The Sun Belt continues to see strong month-over-month growth, with rents rising by 2% or more in eight metros—Phoenix and Orlando, Florida, at 2.5%; Miami, California’s Orange County, and Las Vegas at 2.4%; Tampa, Florida, at 2.3%; Atlanta at 2.1%; and Charlotte, North Carolina, at 2%.

No metros registered negative growth overall month over month in October. Gateway metros also saw solid rent increases, including New York at 1.6%, Los Angeles at 1.4%, Boston at 1.3%, and Washington, D.C., at 1.1%.

Single-family rents also continue to rise, up 14.7% year over year nationally. According to Yardi Matrix, demand is strong in the fast-growing regions in Florida and the Southwest that are benefiting from in-migration trends.

Growth is strong across the board, but some metros are seeing rent increases topping 40%, such as Miami at 41.9% and Tampa at 41%. Phoenix follows at 24.8%. The occupancy rate was up 0.8% year over year through September but is inconsistent on the metro level. Texas metros led the nation in occupancy growth, with Houston at 9.1%, San Antonio at 7%, and Austin at 3.3%, while nine metros saw flat or negative occupancy growth, according to Yardi Matrix.

Demand for apartments across the U.S. has never been higher, and the supply side is failing to keep up despite its best efforts.

Absorption of multifamily units jumped by more than 255,000 in the third quarter according to data from property management and analytics platform. That represents the largest figure for a single quarter in records that reach back to the early 1990s and comes just as the annual demand volume of over 597,000 is miles past what has previously been recorded, more than 200,000 above its most recent peak in Q3 of 2018.

The demand volume curve has gone nearly vertical in the first three quarters of this year, reflecting an unleashed market that was all but frozen for most of 2020. A dip in rent prices, a little more money in the bank and a job market more favorable to applicants for the first time in a generation all combined to form an unprecedented rush — one that might have peaked in the third quarter, RealPage reports.

Average rents have recovered from their pandemic nadirs in every major market of the U.S. except the San Francisco Bay Area, and in most markets have far surpassed pre-pandemic levels. The New York metropolitan area led all U.S. markets in net absorption in Q3, overtaking the Dallas-Fort Worth metro that had held the top spot for multiple quarters.

A significant portion of the jobs added so far this year have been in well-paying sectors, corresponding to Class-A apartments having the strongest Q3 among multifamily classes, RealPage reports. Near-term job growth going forward is expected to be among lower-wage jobs, which have less correlation with apartment demand.

Multifamily developers have been working hard to respond to the current trends, with new construction permits totaling over 57,000 units issued across the U.S. in August, according to U.S. Census Bureau data reported by CoStar. That represents the hottest month for new permits since June of 2015.

That a month with historic levels of construction permits represents less than a tenth of Q3's estimated demand reflects a shortage of housing in the U.S. that is worsening at an accelerating pace. Compounding the supply shortfall is that the supply chain for materials, fixtures and appliances remains rife with delays and shortages, while labor also remains short of demand. Even a record number of office-to-multifamily conversions has not closed the gap.

Such a discrepancy between supply and demand is unambiguously good news for one group: investors. The average price of multifamily assets has grown faster than the red-hot industrial sector in the past couple of quarters. This acceleration, coming at a moment with rare levels of liquidity, has seen large investors opting to acquire whole companies rather than rolling up individual assets.

Major rent increases are the latest talk in the real estate world.  If you’re a landlord, this is great news to you, and if you’re a tenant, you are feeling a bit panicked. If you’re a homeowner, you are probably just feeling relief that you have a fixed mortgage. People act like this is such a surprise, but I saw this coming. It happened in 2008 as well when many people were losing their homes and moving into apartments. Increased demand increased the rents. Yet this time, it is different. We had a lot of government intervention in this downturn and, so far, very little home loss. Yet, here we still have it, rents skyrocketing. Places like Phoenix are doubling in rent. The question is why and I am going to explain below and also, if you’re a tenant, what you can do about it. 

 

1. In 2020, Rents were declining or staying the same

Typically rents grow year over year. With the eviction moratorium in place and many people moving around the country, rents overall went down in a lot of areas in 2020. Fast forward to 2021; landlords want to get that missed rent growth back, so they are raising their rents. 

 

2. Housing Prices are increasing at a Record Pace

You cannot have people paying astronomically more for homes, and it does not affect rental rates. For example, if someone buys a condo for 300k, they are going to need to rent it for more than if they bought it for 200k. Rent incomes are based on home costs. If a home is worth more, the mortgage, property taxes, and insurance is all more expensive, so you will always see that reflected in the rents. 

 

3. There is more Demand for Rentals and a Limited Supply 

With home prices being so high, many people are selling their homes or unable to buy a home and therefore renting. This increases the demand for rentals. As with anything, if you have increased demand and a limited supply, prices will go up.

Also, there is a supply issue. With building costs increasing, there is not very much new construction. Most of the construction you are seeing was started before the pandemic and is just being completed, but very little new construction is being conducted. That will affect supply in the next year or two. 

 

4. Air BNB

A lot of landlords didn’t want to deal with the eviction moratorium and decided to use their rental as an Airbnb. This is especially popular in tourist states like California, Florida, Arizona, and Nevada. The Airbnb market has cut the supply of normal rental housing, limiting the supply and raising rents. 

 

As a Tenant, What You Can Do….

 

1.Ask Your Landlord if They’ll do a Longer Lease

If your landlord will do it, locking your rent in now is a good idea. As rents increase over the next few years, locking in your rent for a longer term than a year can really help you out. 

2. Downsize

If you’re in a two-bedroom, then find a one-bedroom that is more affordable or even a studio if that is what you can afford. You never want to stretch yourself too thin with rent vs. income. 

3. Get Creative

 Find creative ways to get more income. Maybe you get a roommate or rent your spare room on Airbnb. I even know someone who rents their car out on an app. You may just need to think of creative ways to passively make money. 

4. Look for Mom and Pop Landlords 

If you want to find a deal on rent, typically, you want to find mom-and-pop landlords. This is because small landlords don’t want vacancies, so they tend to keep their rents a bit lower than market rent and are more likely to do a multi-year lease. These smaller landlords tend to advertise on Zillow, Craigslist, and Facebook Marketplace.

The GSE has teamed with Esusu to report on-time rent payments.

 

Freddie Mac is helping renters build credit with a new initiative that encourages multifamily operators to report on-time rental payments to the three major credit reporting bureaus. According to the government-sponsored enterprise (GSE), less than 10% of renters see their on-time rental payment history reflected in their credit scores, which can hinder access to credit and competitive rates for a range of financial products.

Freddie Mac has partnered with Esusu, a leading financial technology platform, to deliver on-time rental payment data from property management software platforms to the credit bureaus. The initiative also will automatically unenroll renters when they miss a payment so not to harm the credit scores of those who struggle financially.

“Rent payments are often the single-largest monthly line item in a family’s budget, but paying your rent on time does not show up in a credit report like a mortgage payment,” said Freddie Mac CEO Michael DeVito. “That puts the 44 million households who rent at a significant disadvantage when they seek financing for a home, a car, or even an education. While there remains more to do, this is a meaningful step in addressing this age-old problem.”

The GSE will provide closing cost credits on multifamily loans for owners who agree to report on-time rental payments through Esusu’s platform. It also has negotiated discounted fees for the services. The platform manages the end-to-end process of reporting payments to the three major credit bureaus and ensures compliance with industry standards. According to Freddie Mac, this eliminates the administrative and compliance burden for owners, which has been a big hurdle for reporting rental data. Esusu also reports up to 24 months of past on-time payments, providing an immediate positive impact. In addition, the platform builds credit score awareness and helps renters verify their rental history.

“At present, the most common way for rents to be reported to the credit bureaus is when there is a missed payment that has gone to a collections agency,” said Alexis Sofyanos, senior director of equity in multifamily housing at Freddie Mac. “Freddie Mac wants to flip that script, so that renters who pay their rent on time and in full each month get credit for doing so, while also putting in safeguards for the most vulnerable.”

Founded in 2018, Esusu reaches over 2 million rental units across the nation.

“Working with Freddie Mac allows us to address credit invisibility, which is an essential first step toward addressing renter financial stability,” said Samir Goel and Abbey Wemimo, Esusu’s co-founders. “Where you come from, the color of your skin, and your financial identity should never determine where you end up in life. Today, there are over 45 million adults in America with no credit score, the vast majority of whom are immigrants, minorities, and low- to moderate-income households. The benefit of the Esusu platform is that everyone wins. It’s a win for renters, property owners, and society at large.”

Yardi Matrix: Average U.S. asking rent reaches high of $1,572 in October. 

The average U.S. asking rent increased by $23 in October to a record high of $1,572. According to Yardi Matrix’s Multifamily National Report. In addition, asking rents were up 13.7% year over year.

This continued growth has been driven by an ongoing surge in demand that started in the spring, according to the report. The average occupancy rate of stabilized properties also has reached a record 96.1% in September, a 1.4% year-over-year increase.

“Since March, the average U.S. asking rent has increased by $179, or roughly the amount of increase over the previous five years combined,” stated the report. “The question now is how long before the market begins to decelerate to some semblance of normal growth. If typical seasonal patterns hold, growth will soon recede.”

https://www.yardimatrix.com

Yardi Matrix said historically rent increases tend to flatten between September and March, with analysts expecting growth starting to slow as short-term factors like the impact of stimulus funds and pent-up consumer demand are met.

In almost a quarter of Yardi Matrix’s top 30 markets, rents were up 20% or more year over year, with Phoenix topping the list at 26.3%. Tampa, Florida, and Las Vegas also experienced strong rent growth at 25.8% and 23%, respectively. In 23 of the top 30 markets, rents were up by at least 10% year over year. Minneapolis at 4.8% was the only metro with asking rents up less than 5%. According to Yardi Matrix, even metros that typically see slower growth have experienced gains, including Baltimore, 13%; Philadelphia, 10.7%; and Indianapolis, 10.4%.

This rent growth isn’t contained to the nation’s largest markets. In the 20 metros outside the top 30, 14 saw double-digit year-over-year rent growth, with the Southwest Florida Coast leading the way at 29.1%, followed by Jacksonville, Florida, at 21.7%, and Tucson at 20.1%.

Asking rents nationally rose 1.5% in October, a 50-basis point acceleration from the previous month. Month over month, rents in high-end Lifestyle units increased 1.6% in October while Renter-by-Necessity units rose by 1.2%.

The Sun Belt continues to see strong month-over-month growth, with rents rising by 2% or more in eight metros—Phoenix and Orlando, Florida, at 2.5%; Miami, California’s Orange County, and Las Vegas at 2.4%; Tampa, Florida, at 2.3%; Atlanta at 2.1%; and Charlotte, North Carolina, at 2%.

No metros registered negative growth overall month over month in October. Gateway metros also saw solid rent increases, including New York at 1.6%, Los Angeles at 1.4%, Boston at 1.3%, and Washington, D.C., at 1.1%.

Single-family rents also continue to rise, up 14.7% year over year nationally. According to Yardi Matrix, demand is strong in the fast-growing regions in Florida and the Southwest that are benefiting from in-migration trends.

Growth is strong across the board, but some metros are seeing rent increases topping 40%, such as Miami at 41.9% and Tampa at 41%. Phoenix follows at 24.8%. The occupancy rate was up 0.8% year over year through September but is inconsistent on the metro level. Texas metros led the nation in occupancy growth, with Houston at 9.1%, San Antonio at 7%, and Austin at 3.3%, while nine metros saw flat or negative occupancy growth, according to Yardi Matrix.

Major rent increases are the latest talk in the real estate world.  If you’re a landlord, this is great news to you, and if you’re a tenant, you are feeling a bit panicked. If you’re a homeowner, you are probably just feeling relief that you have a fixed mortgage. People act like this is such a surprise, but I saw this coming. It happened in 2008 as well when many people were losing their homes and moving into apartments. Increased demand increased the rents. Yet this time, it is different. We had a lot of government intervention in this downturn and, so far, very little home loss. Yet, here we still have it, rents skyrocketing. Places like Phoenix are doubling in rent. The question is why and I am going to explain below and also, if you’re a tenant, what you can do about it. 

 

1. In 2020, Rents were declining or staying the same

Typically rents grow year over year. With the eviction moratorium in place and many people moving around the country, rents overall went down in a lot of areas in 2020. Fast forward to 2021; landlords want to get that missed rent growth back, so they are raising their rents. 

 

2. Housing Prices are increasing at a Record Pace

You cannot have people paying astronomically more for homes, and it does not affect rental rates. For example, if someone buys a condo for 300k, they are going to need to rent it for more than if they bought it for 200k. Rent incomes are based on home costs. If a home is worth more, the mortgage, property taxes, and insurance is all more expensive, so you will always see that reflected in the rents. 

 

3. There is more Demand for Rentals and a Limited Supply 

With home prices being so high, many people are selling their homes or unable to buy a home and therefore renting. This increases the demand for rentals. As with anything, if you have increased demand and a limited supply, prices will go up.

Also, there is a supply issue. With building costs increasing, there is not very much new construction. Most of the construction you are seeing was started before the pandemic and is just being completed, but very little new construction is being conducted. That will affect supply in the next year or two. 

 

4. Air BNB

A lot of landlords didn’t want to deal with the eviction moratorium and decided to use their rental as an Airbnb. This is especially popular in tourist states like California, Florida, Arizona, and Nevada. The Airbnb market has cut the supply of normal rental housing, limiting the supply and raising rents. 

 

As a Tenant, What You Can Do….

 

1.Ask Your Landlord if They’ll do a Longer Lease

If your landlord will do it, locking your rent in now is a good idea. As rents increase over the next few years, locking in your rent for a longer term than a year can really help you out. 

2. Downsize

If you’re in a two-bedroom, then find a one-bedroom that is more affordable or even a studio if that is what you can afford. You never want to stretch yourself too thin with rent vs. income. 

3. Get Creative

 Find creative ways to get more income. Maybe you get a roommate or rent your spare room on Airbnb. I even know someone who rents their car out on an app. You may just need to think of creative ways to passively make money. 

4. Look for Mom and Pop Landlords 

If you want to find a deal on rent, typically, you want to find mom-and-pop landlords. This is because small landlords don’t want vacancies, so they tend to keep their rents a bit lower than market rent and are more likely to do a multi-year lease. These smaller landlords tend to advertise on Zillow, Craigslist, and Facebook Marketplace.

Demand for apartments across the U.S. has never been higher, and the supply side is failing to keep up despite its best efforts.

Absorption of multifamily units jumped by more than 255,000 in the third quarter according to data from property management and analytics platform. That represents the largest figure for a single quarter in records that reach back to the early 1990s and comes just as the annual demand volume of over 597,000 is miles past what has previously been recorded, more than 200,000 above its most recent peak in Q3 of 2018.

The demand volume curve has gone nearly vertical in the first three quarters of this year, reflecting an unleashed market that was all but frozen for most of 2020. A dip in rent prices, a little more money in the bank and a job market more favorable to applicants for the first time in a generation all combined to form an unprecedented rush — one that might have peaked in the third quarter, RealPage reports.

Average rents have recovered from their pandemic nadirs in every major market of the U.S. except the San Francisco Bay Area, and in most markets have far surpassed pre-pandemic levels. The New York metropolitan area led all U.S. markets in net absorption in Q3, overtaking the Dallas-Fort Worth metro that had held the top spot for multiple quarters.

A significant portion of the jobs added so far this year have been in well-paying sectors, corresponding to Class-A apartments having the strongest Q3 among multifamily classes, RealPage reports. Near-term job growth going forward is expected to be among lower-wage jobs, which have less correlation with apartment demand.

Multifamily developers have been working hard to respond to the current trends, with new construction permits totaling over 57,000 units issued across the U.S. in August, according to U.S. Census Bureau data reported by CoStar. That represents the hottest month for new permits since June of 2015.

That a month with historic levels of construction permits represents less than a tenth of Q3's estimated demand reflects a shortage of housing in the U.S. that is worsening at an accelerating pace. Compounding the supply shortfall is that the supply chain for materials, fixtures and appliances remains rife with delays and shortages, while labor also remains short of demand. Even a record number of office-to-multifamily conversions has not closed the gap.

Such a discrepancy between supply and demand is unambiguously good news for one group: investors. The average price of multifamily assets has grown faster than the red-hot industrial sector in the past couple of quarters. This acceleration, coming at a moment with rare levels of liquidity, has seen large investors opting to acquire whole companies rather than rolling up individual assets. 

     These questions pop up frequently on the internet and social media, but who exactly is asking these questions besides economists and news outlets? Some groups would understandably be concerned about a real estate crash. House flippers would be one of them. A real estate crash would put a crimp on short-term profits. Real estate developers, real estate agents, and brokers would be other groups who would be concerned about the bubble bursting. Potential retirees banking on the equity in their homes for retirement would also have cause for concern.  

     First of all, I don’t think we’re in a housing bubble. A correction of demand typically causes bubbles, but there’s no reason to believe demand for housing will wane anytime soon. The last real estate bubble was a fluke caused by subprime mortgage-fueled demand and prices. We are not in the same environment. Banks have cleaned up their act, and prices reflect real and not artificial demand.  
  Regardless of whether we’re in a bubble environment, there’s a segment of investors unconcerned about a real estate crash, and that segment is the long-term investors. Long-term investors are unconcerned about short-term corrections because, in the right asset classes like affordable housing and mobile home parks (MHPs), where demand far outstrips supply, a market correction will only increase demand as people downsize. Additionally, long-term investors know that even if there is a short-term dip in the value of their assets, prices will eventually bounce back. There may be a short-term dip in the value of a long-term investment in the worst-case scenario, but in some cases, a shift in home prices doesn’t necessarily carry over into other real estate sectors. Because of their long-term investment window and the reliable cash flow from their assets, long-term investors can afford to hold onto their properties for as long as they need for the market to rebound.  The Great Recession of 2008 and the recent pandemic-induced recession are prime examples. While many commercial sectors saw declines along with declines in single-family, MHPs thrived - unaffected by the wider market vulnerabilities.   It’s well-established that certain sectors of CRE are more correlated to the broader economy than others. Retail and office are among the most highly correlated where lagging retail sales drag down demand for retail and office space. On the other end of the spectrum are segments that thrive in a downturn as households downsize. Affordable multifamily and MHPs are the two segments that come to mind - unaffected by economic downturns or drops in home prices.
 An impending housing bubble - whether real or not - doesn’t scare away sophisticated investors with long-term investment windows. History has proven that market corrections are typically short-term. Regardless, some real estate sectors are unfazed by broader market downturns, real estate bubbles, or even inflation. Consistent demand ensures reliable cash flow insulated from downturns, which correlates with rising prices because people will always need affordable housing.
 
 Will real estate crash?  Does it matter? Not if you're investing in the right assets.

       Andrew Lanoie, Co-Founder - Four Peaks Capital Partners, LLC

Eviction bans are appealing in concept. It makes sense: Evictions are bad, so let’s stop it from happening. But reality is more complicated—and the collateral damage includes the very same people who policymakers are sincerely trying to protect.

In the darkest moments of COVID-19 last year, policymakers from city halls to the White House rushed to introduce unprecedented eviction moratoriums. Those bans were ostensibly about limiting spread of the virus, but quickly broadened to a cause centered on preventing displacement based on the flawed theory that all evictions were tied to low-income renters unable to pay rent. The federal moratorium would be extended multiple times before finally expiring Aug. 1, only to get extended again one day later under strong political pressure.

Curiously, though, there’s been scant effort to study the full impact of blanket eviction bans and no material attempt to more narrowly define these programs to reduce unintended consequences. In other words, 16 months after COVID-19 first hit, policymakers have yet to advance from “chainsaw to scalpel”—still using the same blunt-force instrument without any real focus on those most in need—and relying exclusively on a problematic dataset that appears to overstate the number of renters at risk.

Most media accounts on the consequences of evictions focus only on the negative financial impact to landlords. That is indeed material, particularly for family-run small businesses dependent on rent checks to pay the bills. But here are four ways eviction bans are backfiring on renters, as well:

 

1. One Bad Actor Hurts the Rest

Thankfully, the vast majority of America’s renters are not only paying the rent, but they’re good neighbors, too. In the lyrics of The Osmond’s, “One bad apple don’t spoil the whole bunch.” Renters are often very incorrectly stereotyped, and we see those ugly stereotypes pop up at city halls all over the country when new apartment developments are proposed.

One bad apple does not spoil the bunch, but they do impact the bunch. While the latest federal moratorium does not specifically protect “bad apples,” some local and state programs have offered blanket eviction bans that leave property managers very little recourse to handle residents who harass fellow renters or damage property. There’s no solution to deal with renters repeatedly hosting loud parties or allowing an unleashed dog to roam around the property—even if the lease prohibits them.

There’s a misconception that evictions are only about removing nonpaying residents, but that’s inaccurate. Legitimate evictions occur for many more reasons intended to protect fellow renters at the same community. For example, low-income renters with nowhere else to go have no choice but to put up with a neighbor who harasses them or damages shared amenities. That creates unsafe living conditions, which landlords can’t address without evictions.

 

2. Higher-Income Nonpayers Block Others from Safe Housing

Apartment occupancy nationally hit an all-time record high of 96.9% in July. It’s even tighter in the most affordable, market-rate Class C sector at 97.5%. That means it’s harder than ever to find safe, affordable places to live—particularly for renters with low- to mid-level incomes—while demand has never been higher.

Here’s the problem: When vacancies are so limited, every unit matters. Eviction bans are shielding a small number of higher-income renters who could pay rent, but choose not to. Landlords all have horror stories. One told the story of a renter who hadn’t paid rent for months and had ignored communications asking if assistance was needed. Then the renter showed up in the leasing office to pick up a big-screen TV they had ordered. The community manager asked about rent, and the renter responded: “Oh, we don’t have to pay rent.”

Thankfully, these horror stories aren’t representative of the vast majority of renters—who continue to pay rent. And nearly every rental property owner will tell you they are more than willing to assist renters who genuinely need help and have offered up numerous programs to do so.

The latest federal eviction ban specifically applies to individuals with incomes under $99,000 (or joint filers under $198,000), but renters typically are “self-certifying” their income. Renter fraud was a big challenge long before COVID-19, and the new rules make it easy for a small share of bad actors to create problems. Additionally, some cities and states with even broader eviction moratoriums are unintentionally shielding wealthier renters who can afford the rent but aren’t paying it, which only exacerbates the housing supply crisis and blocks out families needing safe, affordable places to live.

 

3. Eviction Bans are Reducing the Speed of Renter Aid

Congress approved the Emergency Rental Assistance program last December, and the fund soon had nearly $47 billion to help renters pay the rent. But more than six months later, only $3 billion had been distributed to renters. Federal policymakers blamed cities and states who they say haven’t moved quickly enough to distribute funds. Why is that? Why are they so slow—particularly in the most challenged markets like New York and California?

Doug Bibby, the president of the National Multifamily Housing Council, made a keen observation: Policymakers “fail to acknowledge the role of continued eviction moratoriums in undermining the distribution of these assistance funds.”

In other words, what urgency is there to get and distribute funds if eviction bans just get extended again and again as they have? When the moratoriums finally expire—as we just witnessed on Aug. 1—it creates a manufactured panic as if no one knew the expiration date was real.

As a contrast, consider the Payroll Protection Program approved earlier in 2020. It wasn’t perfect, but it was fast in getting money to businesses struggling to pay employees. Without the promise of a secondary safety net behind those federal funds, the money moved very fast. In rentals, the never-ending eviction moratorium is the secondary safety net that state and local policymakers abused—taking months to create often onerous restrictions and slow-moving processes—instead of simply focusing on distributing aid quickly. Additionally, unlike PPP, rental assistance flowed through hundreds of highly divergent city and state programs, creating confusion among both renters and landlords.

In our estimation, $47 billion is likely too much and too late. But if rental assistance programs are still way behind, policymakers have no concrete way of measuring how much need there is for the 97% of unspent funds.

 

4. Eviction Bans Could Increase the Cost of Housing

There’s a false narrative that the federal Emergency Rental Assistance program will make landlords whole. That isn’t accurate because the program generally reimburses landlords only for lower-income renters, while inexplicably requiring landlords to foot the bill for higher earners. Furthermore, many renters behind on rent end up moving out without applying for assistance—making it highly unlikely landlords ever recoup those funds.

All these costs can only be absorbed for so long until landlords are forced to raise rents more for paying renters, that’s a lose-lose for both property managers and renters.

Secondarily, there’s a longer-term supply and demand question that could drive up rents. In simple terms, rents are tied to supply and demand. Rents increase as a function of more demand than supply. In the short term, eviction moratoriums remove supply that would otherwise be available. That’s a relatively small factor nationally given that more than 95% of apartment renters are paying rent. But those challenges could get even worse in cities adopting longer-term bans, which would likely discourage additional new development and further limit supply.

In that way, eviction bans are another form of rent control—another well-intended policy idea that proved more harmful than hurtful. It’s no coincidence that cities with rent controls are also the most expensive places to rent, and that’s a big reason why voters in California—one of the most progressive in the country—twice voted down referendums for statewide rent controls. Similar education is needed on the eviction moratorium topic.

 

The Solution

One of the least understood facts of today’s evictions narrative is this: The overwhelming majority of renter distress in 2021 is structural, pre-dating COVID-19. This is not a new issue. It took a pandemic for way too many policymakers to see the five-alarm fire that has been blazing for decades.

The root problem is a severe shortage of designated affordable housing supply. Harvard’s Joint Center for Housing Studies estimates we need more than 8 million additional affordable units just to meet current demand. Having been blind to this shortage previously, the same policymakers who long failed to fund affordable housing are now asking housing providers to foot the bill for their mistake.

Eviction bans are a Band-Aid that hide—but don’t treat—this underlying wound. The Biden administration has proposed funding to build or maintain 2 million units of affordable housing. That’s a big start. Any sincere effort to help vulnerable renters must start here.

It’s summer and the sun is shining on the multifamily market! As the U.S. continues on its path to recovery, we have been monitoring everything from rebounding geographies to the stateof different sectors within the multifamily space. In this issue, we:

• Analyze the state of the economy and how the multifamily space is influenced
• Cover the state of multifamily policy with Doug Bibby, the President of the National Multifamily Housing Council (NMHC)
• Discuss the current state of the small balance lending sector
• Chat with Alison Williams, Walker & Dunlop’s Chief Production Officer overseeing small balance financing
• Provide a market spotlight on New York City and the greater Tri-State area
• Introduce CREUnited, an alliance of industry heavyweights dedicated to increasing minority involvement in CRE

Click here for the report

Growth remains steady. In the second quarter, the economy expanded 6.5 percent on an annualized basis. Gains would have been larger but supply-chain challenges and a labor shortage hamstrung improvement. Those issues should be transitory, however, as amplified federal unemployment benefits sunset in September. In May, 9.2 million jobs were available nationwide, the highest level on record. Additionally, the national eviction moratorium may expire soon, which could encourage more workers to reenter the workforce. Supply-chain difficulties should also abate as the world’s economy gains footing in the coming months. Most of the improvements were in personal expenditures as Americans spent stimulus funds across a wider range of spending alternatives.

 

Retail and hospitality are real estate’s biggest beneficiaries. As the economy expands and residents take advantage of more options, retailers and tourist destinations are hosting more visitors. Since February of 2020, core retail sales have soared 16.8 percent, and additional gains are anticipated in the second half of this year. Although some retail space is expected to be vacated in the coming months, most firms that have weathered the downturn thus far are anticipated to prosper. Hotels are beginning to recover as well with travelers taking advantage of the summer travel season. In June of this year, occupancy jumped to 66.1 percent, up from the recessionary low of just 24.5 percent during April of last year. Additional gains are anticipated through the summer and the fall should bring more business travelers, who make up an sizable share of the industry.

 

Consumer spending drives GDP. Personal consumption grew at an annualized rate of 11.8 percent of GDP last quarter. Services, which had been challenged during the recession, continue to bounce back due to reopening. In the second quarter, services expanded by 12 percent, the largest increase since the first quarter of last year. The largest detractor from GDP was fixed residential development, which declined 9.8 percent last quarter. As inventory issues abate in the coming months through the reopening of global trade, economic growth could accelerate.

 

Headwinds Short-Term Concern

 

Rising COVID-19 cases cloud future. The much more transmissible Delta variant of the novel coronavirus is giving policy- makers pause and could result in future restrictions that temper the economic recovery. The CDC issued new guidance on indoor masking, though the number of states willing to adopt the restrictions is unclear. California, for instance, only urges but does not mandate indoor masking. Deaths due to COVID-19 in the U.S. are approximately half the level they were when the CDC dropped mask recommendations, so vaccines appear to have diminished the correlation between cases and mortality. As a result, most states are likely to be hesitant when considering strict restrictions.

Government spending could amplify GDP. A $1.2 trillion bipartisan bill that will fund infrastructure projects over the next several years could support the publicly financed portion of the economy. In the second quarter, federal spending decreased 5 percent as stimulus capital dissipated, though some of the earlier funds were funneled to local and state governments, which contributed 0.8 percent to economic gains in the spring period.

6.5%	16.8%
Annualized 2Q Increase in GDP	Annualized Growth in Core Retail Sales From February 2020

 *Through2Q
 Sources: Marcus & Millichap Research Services; Bureau of Economic Analysis
 National Bureau of Economic Research; Smith Travel Research; U.S. Census Bureau

What does it mean for an investment to be tax-efficient? It means the degree to which the investment maximizes returns while minimizing taxes. When assessing an investment's tax efficiency, the two most important factors to consider are tax rate and timing. On the tax efficiency scale, the ideal investment is taxed at the lowest rates with a significant portion of the tax liability deferred - all while providing a high return.  
     Tax savings are an important factor in building wealth, but they shouldn't be the focus. The focus should be on after-tax return on investment. It doesn't matter if your investment is taxed at lower rates if your investment doesn't make any money.

 

See example below:
DEBT INVESTMENT
Assumptions -

Term:  2 Years

Interest Rate:  6%

Tax Rate:  37% (Highest Individual Rate)

After-Tax Annual Return:  3.78%

EQUITY INVESTMENT  
Assumptions -

Holding Period:  2 Years

Total Appreciation:  7%

Average Annual Appreciation:  3.5%

Tax Rate:  20% (Long-Term Capital Gains Rate)

After-Tax Annual Return:  2.8%

     In this example, although the equity investment is taxed at the lower long-term capital gains rate, the debt investment is a better alternative because the after-tax return is higher than that of the equity investment. The point is, when determining the tax efficiency of an investment, don't forget about maximizing returns.  
     In terms of tax efficiency, there's no better investment than passive commercial real estate investments (CRE) because not only do CRE investments offer the potential for above-market returns, but they also offer a variety of tax benefits that allow you to keep more of what you make in the short-term as well as long-term.
 
The tax benefits of passive CRE investments can be broken down into three main categories:
 1. Lower Rates.

2. Tax Deductions and Exemptions.

3. Tax Deferral and Elimination.

Lower Rates.

     Passive CRE investments are typically organized as partnerships - limited partnerships and limited liability companies being the most common types. The advantage of partnerships is that distributions incidental to ownership of a partnership interest are treated as capital gains, and distributions made after a minimum one-year holding period are treated as long-term capital gains and taxed at a maximum rate of 20%.  

     Suppose you invest in CRE by contributing capital to a private equity investment or private fund in exchange for a partnership interest. In that case, if you hold that interest for at least a year, all distributions after that will be taxed at the long-term capital gains rate vs. the ordinary rate. If you're in the highest individual tax bracket, you're paying 20% vs. 37%, the highest individual marginal tax rate.
 
Deductions and Exemptions
 
Deductions
     Like individuals who can deduct a variety of items from their gross income like mortgage interest, tuition, and home office expenses, partnerships that own CRE can deduct significant expenses that are then passed through to the individual investors at the partner level.   
 
Some of the most common real estate-related deductions include:
1. Depreciation (Accelerated).

2. Mortgage Interest.

3. Property Tax.

4. Operating Expenses.

5. Repairs.

Exemptions
      An additional tax benefit for private fund investors is the exemption from paying FICA payroll taxes (Social Security & Medicare) on their partnership income. That's an additional savings of 7.65% per year.  
 
Tax Deferral and Elimination
 
Deferral
  Without getting into too much detail, passive real estate offers several opportunities for deferring gains into future years through structures such as 1031 exchanges and investments in Qualified Opportunity Funds in Opportunity Zones.
      Tax deferral can also be achieved in the form of tax-deferred appreciation, where the growth of an investment is tax-deferred until the partnership interest is sold, transferred, or otherwise liquidated or the underlying asset is sold or otherwise disposed of.  
 
Elimination
      What's better than paying lower taxes? Not paying any taxes. The single biggest opportunity for eliminating taxes can be found through the leverage of retirement accounts.  
 Take, for instance, Self-Directed IRAs (SDIRAs). Because SDIRAs allow for investments in alternative assets such as passive CRE, they offer investors the opportunity to take advantage of additional tax benefits.
Consider the benefits of investing with a Self-Directed Roth IRA. With a Self-Directed Roth IRA, if you are under 50, you can contribute up to $6,000 per year into an IRA and an additional $1,000 if you are 50 or older. Because you contribute to a Self-Directed Roth IRA with post-tax dollars, your investments will grow tax-free.
 
 Now let's revisit our example above, but let's throw in a passive CRE investment...
 
DEBT INVESTMENT
 Assumptions –

Term:  2 Years

Interest Rate:  6%

Tax Rate:  37% + 7.65% (Highest Individual Rate + FICA)

After Tax Annual Return:  3.32%

EQUITY INVESTMENT
Assumptions -

Holding Period:  2 Years

Total Appreciation:  7%

Average Annual Appreciation:  3.5%

Tax Rate:  20% (Long-Term Capital Gains Rate)

After-Tax Average Annual Return:  2.8%

PASSIVE CRE INVESTMENT
Assumptions -

Holding Period:  2 Years

Annual Cash Flow:  5%

Total Appreciation:  10%

Average Annual Appreciation:  5%

Tax Rate: 20% (Long-Term Capital Gains Rate)

After-Tax Average Annual Return: 8%

      The return on this passive CRE investment example is an oversimplification because it doesn't consider the time value of money from the tax deferral of the appreciation, and it doesn't calculate the effective tax rate from factoring in factoring deductions. Still, it should illustrate the tax efficiency of these types of investments.  
 
      It's easy to see why passive CRE investments generate high after-tax returns.
 
Not only do passive CRE investments generate above-market returns, but the significant tax benefits afforded allow you to keep more of what you make, making passive CRE investments one of the most tax-efficient investments around.

 

Andrew Lanoie - Co-Founder
 Four Peaks Capital Partners LLC

All information contained herein is for informational purposes only and should not be construed as a securities offering of any kind. Prior to making any decision to contribute capital, all investors must review and execute all private offering documents, including the project prospectus and the Private Placement Memorandum. Access to information about our investments is limited to investors who qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, and Rule 501 of Regulation D promulgated there from

Before you start investing passively in a multifamily property, you need to know the different steps, the process it goes through. 

 

The first thing that you should understand is that we have someone called an operator or a syndicator. This is typically a team of people who go out and find properties. Operators are people who identify the property, look closely at the property, renovate certain things and add value to it. Now these operators typically work in certain regions.  They work with different classes and different property sizes and this is what makes them unique. You don’t want operators who are working with everything, everywhere because then they are not specialized in their fields/property types. Let’s say you want to invest in brand new construction, then you should really look for an operator that focuses in that special area. You also need to make sure your goals align with the strategy of the operator you are partnering with. If you are interested in brand new construction, you need to find an operator who has the same focus as yours. Conversely, if you’re focused more on distressed real estate, doing full renovations and adding value, you want to find an operator who is aligned with that strategy.

Once you have the right operator, the deal hunt starts. The operators have to be really on top of their game in order to get a property under contract. Since they are working in a local market, they tend to have strong relationships with the real estate brokers. These brokers can provide them with opportunities to get the best properties on the market. Once they find the right property, they have to quickly and accurately determine if the deal is worth pursuing. This requires necessary due diligence. Operators will look at the property one last time, update their assumptions and adjust their business plans accordingly. If everything goes well, they will get the deal under contract.

After the deal is under contract and the operators are sure that it’s a solid investment, they will now present the investment property to the potential investors. This is typically done through a webinar or some sort of deal package saying, Hey, we’ve got this deal! We want to present it to you.  These investors can either be individuals who are willing to invest $50,000 or $100,000 or they can be individuals or large groups/organizations with hundreds of thousands (or millions) to invest.

The fourth step in the process is where investors get to make a decision.  The investors will make a choice, say, hey, do I want to invest in this deal? Or do I not? Do I like the operator? Do I like the deal? Does the business plan make sense?

For investors: Go above and beyond in your research. Ask as many questions as you want from the operator, list your concerns and review all the data and information out there in as much detail as possible. 

5.          Deal Closes

Now if you are satisfied with your research and are ready to invest in a deal like this, the next step is to fill out a short form telling us: “Hey, I’m interested in investing in this property.” This short form is called a “soft commit”. After that we will send you some paperwork to sign. You will then wire the funds to us and enter into a multifamily syndication deal. Also, the deal is not official until you fulfill all the requirements of ‘closing the deal”.  To help you understand, this whole closing process is very similar to that of a single family home transaction. For example, when you buy a house, there is a specific day when you actually close the deal on the house. You bring in certain documents, wire the funds and make sure all the requirements of a ‘closing’ are met accordingly. Same happens when you close an investment deal with us.

The next step in a value-add multifamily real estate syndication is the part where the value is actually added. Often the business plans call for increasing rents by, let’s say $100 or $200. To do this, the operators will increase the rental value of the property by spending $10,000 or $15,000 per unit in renovations and then raise rents for these nicer units. These renovations may sound time consuming but they end up increasing the property value significantly. Simply put, it is the ultimate strategy to add value to any type of multifamily syndication. Based on the property and the business plan, renovations can include interior (such as updating appliances, high-speed internet), exterior and/or common area renovations, such as improving curb appeals, updating light fixtures, adding a clubhouse and more.

Once the planned renovations complete, these value-add multifamily properties start to generate a nice passive income for the investors. Please note that you won’t be getting income from day one because it takes time let’s say 90 days or 180 days depending on the renovation to finish and see cash flow increase for the property. After the multifamily apartments are updated, investors start to earn passive income through rents collected from the units in that updated property. So there are two ways you get paid through doing a multifamily deal. The first is called cash on cash. And that’s what I mentioned above i.e. the value add method.  So let’s say a deal calls for 8% cash on cash. That means on average, if somebody invested $100,000, we would expect around $8,000 per year to be paid through the life of the deal.

The other way you get paid through investing in multifamily syndication is by getting a lump sum when the property is sold.  The IRR or the average rate of return in this case is the cash on cash plus any backend appreciation when the property is sold. 

Total return on deal = Cash on cash + Property Value Appreciation

These are typically double digit returns depending on the type of deal.

The final step in a value-add multifamily real estate syndication is selling the asset. Most of our deals are usually 3 to 7 year long depending on the investment timeline and the deal’s performance. But in the end, rather than holding the property forever, we prefer selling it. The investor’s capital is returned so that it can be invested into another project. So there you have it. These are the important steps of a multifamily syndication deal. As a passive investor, you don’t have to worry about doing a single thing in any of these steps. However it is important for you to understand how the investment process works and what to expect from a value-add multifamily syndication.

 

At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all of the due diligence done for you.  Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs.  We realize the world of real estate can be complex and intimidating.  Our proven processes and systems take away those barriers, so our investors become successful real estate investors.

     The multifamily market experienced considerable strength in the second quarter, with anticipation of continued demand in the third quarter, according to CBRE Research’s latest U.S. Multifamily Figures report.

     The industry saw a net absorption of 179,400 units, the highest second quarter total in over 15 years, “reflecting pronounced cyclical market expansion and recovery,” stated CBRE Research. The first half of the year net absorption totaled 197,300 units, which is nearly five times higher than the first half of 2020 and 4.5% above the pre-COVID first half of 2019.

CBRE Research attributed the rise in demand to job growth, improving consumer confidence, rising home prices, and the easing of COVID-19 restrictions.

Construction levels also remained high in the second quarter, with 65,600 units added. The year-to-date total comes in at 117,900 units, with the first half of the year’s net absorption outpacing the new supply. For 2021, according to CBRE Research, annual completions are expected to hit over 300,000 units for a new cyclical peak.

     Construction starts and permit activity are also up year over year. Through May, starts totaled 218,800 units, 19.4% higher than the same period last year and 48.2% higher than in 2019. Permit activity in the first half totaled 247,800 units, 22.3% higher than the same period in 2020 and 14.5% from the first half of 2019.

With 771,600 units under construction in May, deliveries are expected to remain high into 2023, stated CBRE Research.

     Demand also is outpacing supply in most major markets. Over the past year, the major Florida metro areas—Miami and South Florida, Tampa, Orlando, and Jacksonville—added 34,200 units with net absorption at 50,500 units. Houston, Dallas/Fort Worth, Austin, and San Antonio delivered 51,400 units with net absorption at 60,400 units.

Six of the 24 leading markets for new supply—Austin; Charlotte, North Carolina; Fort Worth; Jacksonville; Nashville, Tennessee; and Orlando—had a completion-to-inventory ratio of more than 3.5%, which is a potential red flag for overbuilding. However, CBRE Research said high levels of demand are being maintained, justifying this robust development activity.

Falling to its lowest level in two years, the overall vacancy rate dropped to 4% in the second quarter, down 70 basis points quarter over quarter and 60 basis points year over year. Fourteen markets also saw vacancy rates under 3%, including California’s Inland Empire at 1.6% and Ventura at 1.7%; Providence, Rhode Island, at 1.8%; and Norfolk, Virginia, at 2%.

Multifamily investment volume also saw a boost in the second quarter, increasing 34% quarter over quarter to $52.7 billion. Except for fourth quarter volume, which is traditionally the highest level of the year, 2021’s second quarter volume was the highest quarterly level in at least 15 years, said CBRE Research. The multifamily sector accounted for 36.6% of total commercial real estate volume in the first half of the year, followed by industrial at 20.6% and office at 18.9%.

     Leading all metros for multifamily investment in the first half was Dallas/Fort Worth, with $7.7 billion in total sales—8.4% of the U.S. total. Atlanta and Phoenix followed with $6 billion and $5.7 billion, respectively, in investment volume for the first half.

 

Rents have risen 8% since the start of the year, and the average rent rose by $26 in July to $1,510.

Multifamily asking rents rose by 8.3% year over year in July, breaking records again for rent growth in this month’s Matrix Multifamily National Report. Rents have risen by 8% since the start of the year, and the average rent rose by $26 in July to $1,510.

     This meteoric rent spike speaks to a growing demand for multifamily across the country, as supported by the performance of many publicly traded REITs. According to Yardi, REITs concentrated in the Sun Belt are showing even higher gains. Of the 140 metros covered by Yardi Matrix, 129 showed positive YOY rent growth.

     Out of the top 30 markets, 13 experienced double-digit asking rent growth YOY. Phoenix led the way at 18.9%, followed by Tampa, Florida, at 16.4% and Las Vegas at 16.1%. Only three markets experienced negative growth YOY—San Francisco at -0.5%, San Jose, California, at -0.7%, and New York at -0.8%. However, with these markets on their way to recovery, Yardi anticipates positive rent growth as soon as next month.

     Rents rose by 1.8% on a month-to-month basis from June to July, and 26 out of the top 30 metros experienced rent growth of 1% or higher month to month; San Jose led the list at 3.6%—the strongest month for the city since the start of the COVID-19 pandemic—followed by Raleigh, North Carolina, at 3.5% and Boston at 3.2%.

     Gateway market performance is much stronger in the short term than the long term. Month to month, rents rose 3% in New York and 1.8% in San Francisco. If recent trends continue, Yardi anticipates that rents in both markets could return to 2019 levels this year.

     Occupancy rose to 95.3% in June, up 0.6% from one year ago. (Occupancy data is current to the previous month.) The National Multifamily Housing Council’s Rent Payment Tracker has shown consistent collections throughout the pandemic, with 95.6% of multifamily households making a full or partial rent payment in June.

     Single-family rents rose 12.8% on a year-over-year basis in July, while occupancy rose 1.2% over the same period. All of the top 30 metros experienced positive rent growth, and 19 out of 30 saw growth in the double digits.

     Tampa led the way with 31.7% YOY rent growth, followed by Miami at 26.3% and Phoenix at 24.2%. Twenty-six out of the top 30 metros saw occupancy gains, led by Indianapolis at over 6%.

The median rent in the 50 largest metros nationwide increased 2.7% year over year, the largest growth since the beginning of the COVID-19 outbreak, according to a new report from realtor.com®. The nation’s largest tech hubs are seeing some of the biggest rebounds in rental prices as more technology firms announce return-to-the-office plans.

The U.S. median rent in April averaged $1,483, the fastest growth since March 2020. Prior to the pandemic, rents were growing 3.2% annually.

Rents for two-bedroom units are seeing the most growth, now surpassing pre-COVID-19 growth rates—up 5.2% annually, realtor.com® notes.

Rents in the largest tech hubs saw prices fall the most in 2020 due to the growth of remote work. Rents in tech hubs are still down 5.4% from a year ago but that marks an improvement from a 6.6% decline in February, realtor.com® notes.

“In tech centers, rent declines are getting smaller, signaling they are on the path to turnaround,” says Danielle Hale, realtor.com®’s chief economist. “If the trend continues, renters could expect to be paying pre-pandemic rates by as early as this fall.”

The median rent in the nation’s largest tech hubs was $2,086 in April, up 1.1% from March. Still, rents continue to be lower in the largest tech centers like San Jose, Calif. (-12.5%); San Francisco (-10.9%); and Seattle (-7.35). But the declines are lessening, researchers note. On the other hand, Denver and Austin, Texas, are leading the rental market recovery among tech hubs. The median rent in Denver is up 2.2% and is up 1.7% in Austin annually.

“Overall, the U.S. rental market is beginning to return to pre-pandemic levels,” says Hale. “With the largest growth occurring outside of major cities, renters are encountering different scenarios depending on the market in which they are searching and size of the unit they are looking for.”

     The freefall is over, but it might take a few years for urban apartments to fully return to their pre-pandemic form. As many Americans fled cities during the pandemic and generated a glut of empty apartments, landlords in Manhattan and other urban metros slashed rents and offered draw-dropping concessions, including covering moving costs, free internet, months of free rent and other sweeteners.

     Now, with millions of vaccine shots going out daily and the promise of a post pandemic future drawing closer, things are beginning to change. As more lockdown measures are eased, prospective urban residents are being lured back by city life and lower rents. For example, in Manhattan in January the number of new deals jumped 94 percent year-over-year to 5,459. It was the largest one-year jump since  April 2011, reported appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

     Given the brightening prospects, the question for the sector is how long it might take for rents in top markets to completely bounce back. And while most observers are optimistic, the timeline will be years rather than months.

     "If full recovery is defined as getting both occupancy and rents back to the levels that were seen in early 2020, it takes another two to three years... even in our best-case scenario," says Greg Willett, chief economist for RealPage, Inc., based in Richardson, Texas.

 

Downtowns already on the mend—with a long way to go

 

     Many of these downtown apartments are already doing much better than just a few months ago. Rents are once again rising in San Francisco, for example. On the other hand, rents in Manhattan are still at their lowest level in a decade. In fact, the Wall Street Journal reported that some landlords have removed vacant inventory from the market in an attempt to help decrease supply and stabilize rents.

    Amid all of this, economists are looking forward to a strong economic recovery in summer 2021—and that will include downtowns in gateway cities.

    "The prospects look good for some real growth to begin to emerge later this year, once most people have received COVID vaccinations," says Willett. "Office workers are returning to their desks, and lifestyles begin to show some resemblance to what was seen pre-pandemic."

     In the urban core of gateway cities like New York City, 92.5 percent of the apartments were occupied as of March, according to RealPage. That's down from 95.9 percent before the pandemic in Manhattan plus the urban core neighborhoods of San Francisco, Los Angeles, Seattle, Chicago, Boston and Washington, D.C. While progress will occur over the next year or so, RealPage forecasts say that occupancy rates in these places won’t make it back to roughly 96 percent until the middle of 2023.

   "The amount of ground to make up is enormous," says Andrew Rybczynski, managing consultant for CoStar, working in the firm's Boston offices. "San Francisco will almost certainly be one of the last downtowns to recover." Other downtowns that suffered big losses, like Seattle, New York, and Washington and are currently not experiencing outperformance in rent growth will probably face longer recoveries as well.

    "These neighborhoods will in many ways look and feel like their former selves well before pricing gets all the way back to its prior peak," says Willett. "That period when households may perceive that they’re getting a bargain is what will make recovery possible."

     In less expensive cities, like Dallas, apartments downtown will take less time to fill up.  Rents have risen over 2 percent in March since the start of 2021, and were down just 1 percent compared to the year before. This rent growth is significantly faster than at the same time two years ago, before the pandemic. "It seems likely that downtown Dallas will surpass pre-pandemic peaks before the summer," says Rybczynski.

     High-rise towers cut their rents most deeply during the pandemic—by 9.3 percent, according to projections across the U.S. by Marcus & Millichap for the first quarter 2021 compared to the year before. That compared to a 4.2 percent rent cut for mid-rise apartments and a 2.1 percent increase for low-rise apartments.

     Some high-rise apartments downtown emptied out as renters found new homes in less expensive cities and suburbs. Many apartments downtown also lost residents because of competition from other, new high-rise towers—and more new apartments are still opening, often still offering months of free rent to attract residents.

    "Leasing activity is up sharply in gateway metro urban cores, but lots of that activity still stems from existing renters playing musical chairs," says Willett. "They’re moving from one apartment to another, taking advantage of the opportunity to upgrade their housing choices or to save money on rent."

    Effective rents for new leases downtowns in these gateway cities are down by an average of about 15 percent compared to early 2020, according to RealPage. In expensive locations like these, that typically works out to drop in monthly rent of about $450 a month. A most of this drop comes in the form of rent concessions. Nearly half (43 percent) of the apartments available for rent offered some form of rent giveaway in early 2021, according to RealPage. The typical discount is around 10 percent, or a little more than five weeks of free rent, but it’s not unusual to see discounts equaling two months or more of free rent.

     "Step one in getting back on track will simply be to burn off the drastic rent concessions seen in the market," says Willett.

Suburbs are still a bargain compared to downtown

     Less expensive areas like suburbs suffered far fewer losses in pandemic than these expensive downtowns. The percentage of occupied apartments in suburban areas was several percentage points higher than in downtowns in early 2021, according to economists.

     But even with rents falling in downtown areas, it is still much more expensive to live downtown than in the suburbs. "Anywhere between 35 percent and 50 percent premiums to live downtown is not unusual, though Boston comes in at an over 80% premium," says Rybczynski. "The spread has shrunk in most places, but the difference is still enormous."

Gateway cities offer amenities

     Long after the pandemic is over, downtown areas will offer experiences and amenities than renters can't get anywhere else. "Experiential retail is much denser in downtowns and cities than the suburbs," says Rybczynski. "Theater districts usually don’t pop up in suburban towns."

    That's especially true in most expensive cities, which draw visitors—and renters—from around the world. "There is no substitute for Broadway or Michigan Avenue or Powell Street," says John Sebree, senior vice president and national director of the Multi Housing Division at Marcus & Millichap, working in the firm's Chicago offices.

    These amenities will continue to attract renters. "Our demand forecasts still call for stronger [overall] demand in downtowns than suburbs, but we expect the spread to narrow between demand in cities and suburbs," says Rybczynski.

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Some markets have fully recovered from pandemic dips and will see rent gains north of 5.0 percent by the end of the year. Apartment rents are rising quickly in many cities and towns across the U.S.—faster than most economists were anticipating. “Pricing in most spots—really all but the gateway metros—is at all-time highs,” says Greg Willett, chief economist for RealPage, headquartered in Richardson, Texas. “Apartment rents by and large are moving up substantially, more than many expected coming into 2021.”

The rents offered for new leases reached a new high in April 2021, averaging $1,430 a month across the U.S., according to Yardi Matrix. That’s up 2.0 percent from the $1,401 offered in April 2020, when the U.S. economy was largely shut down to slow the spread of the coronavirus. It’s also higher than the peak of $1,405 reached in March 2020, just before the pandemic began. Average apartment rents offered for new leases sagged to a low of $1,398 in May 2020—a discount of just a few dollars.

With some notable exceptions, the rents property managers offer for new leases (not including concessions) ultimately didn’t drop much even early in the pandemic. Property managers are generally slow to cut their offered rents, especially when they are facing a challenge they hope is just a temporary setback.

By October 2020, average offered rents had regained the few dollars per month they lost in the first months of the pandemic, matching their old peak and continuing to rise through the winter, even as the number of COVID-19 cases diagnosed rose again over the holidays.

Rents are also growing more quickly as the U.S. economy continues to recover. The increase in April was the largest bump in rents since the start of the pandemic.

In more than a third (19 out of 50) of the largest metropolitan areas in the U.S., Average rents were 5 percent higher in April 2021 than they had been 12 months earlier according to RealPage. The most improved markets include several growing cities in the Southwest. “There are double-digit annual price increases in Riverside/San Bernardino, Phoenix, Sacramento and Las Vegas.”

 

Overbuilt, urban markets are slower to recover

In a few places, desperate property managers offered months of free rent to potential renters. These concessions were largely concentrated in the central business districts of the largest, most overbuilt, “gateway” cities like New York and San Francisco. Effective rents, which include the value of landlord concessions, dropped as much as 10 percent or even 20 percent in these places during the pandemic compared to the year before, and are now gradually recovering, though they still have a long way to go before rents are back to pre-pandemic levels, according to Jeffrey Adler, vice president for Yardi Matrix, working in the firm's Englewood, Colo., offices.

As more people are vaccinated against COVID-19 and more workers are likely to return to offices, at least part of the time, these downtowns are likely to strengthen. “There’s the possibility that urban core rent growth could begin to catch up to the much stronger pace of expansion that now registers in the suburbs,” says Willett.

Class-A properties recover more quickly

Luxury apartment properties also suffered more in pandemic than other kinds of apartments. The average rents offered at class-A properties were already dropping even before the first coronavirus inflection was diagnosed and new apartment properties opened faster than property managers could rent them.

Offering rents for class-A apartments averaged $2,024 a month in April 2021, according to Yardi, that is still lower than $2,055 the year before. But it’s much better than $1,995 just a few months ago in January 2021.

“The biggest surprise in the rent performance stats so far this year is how much pricing has improved in the class-A, luxury stock that took such a big hit during 2020.”

Occupancy is still relatively weak for these luxury apartments—and new luxury properties are still opening and offering deep concessions. However, “leasing momentum has returned to a level that’s strong enough to allow owners and operators to get more aggressive on pricing during prime leasing season”

The multifamily sector, which has been known to outperform other major commercial real estate sectors, is on track to continue this positive trajectory. A notable increase in the sector’s cumulative return premium since the financial crisis of 2007-2008, coupled with younger generations renting longer, as well as the number of downsizing empty nesters increasing, are just a few of the factors leading us toward what Dr. Peter Linneman has called “the golden age of multifamily investing.”

At Capital Square, the majority of our investment portfolio is multifamily assets. As chief strategy and investment officer of the company, I play an integral role in sourcing well-located, Class A and B apartment communities located primarily in the Southeast to provide compelling opportunities for our individual investors. We strongly believe that the multifamily asset class has, and will continue to, weather any industry storms due to a number of factors.

No Room: The Supply And Demand Of Multifamily Housing

Demand for apartments has continuously outpaced supply. According to the National Multifamily Housing Council (NMHC), America needs 4.6 million more apartments by 2030. This high demand is largely due to the ideas around homeownership shifting as Baby Boomers and Millennials — two of the largest generations in recent history — alter how our country lives. Millennials are delaying purchasing a home due to lifestyle choices and student debt, while the number of Boomers with empty nests seeking to downsize is increasing.

The National Multihousing Council projects that the U.S. needs to build 328,000 new apartment units annually through 2030 to meet demand — but that mark has only been hit three times since 1989. Between 2011 and 2017, only 243,000 new units were completed yearly, leaving an average annual shortfall of 29.8%. This, combined with the fact that almost 50% of apartments in the United States were built before 1980, creates exceptional demand for quality multifamily products. 

Revolutionizing Main Street: How Shopping Hubs Are Changing

 

Compelling Fundamentals: In addition to the apartment shortage, there are several other reasons that multifamily can be a potentially lucrative asset class for the right investor:

 

• One of the largest asset classes: Housing accounts for approximately 33% of consumer spending.

• Rent growth potential: Regular rent increases and value-add opportunities, like interior renovations, offer predictable growth potential.

• Strong demand for quality apartments: Nearly half of all U.S. apartments were built before 1980, further adding to the demand for more modern multifamily units.

• Potential hedge against inflation: During the inflationary crisis of the 70s, the median rental rate increased by a yearly average of 8.5%, well above inflation. Today, with modern technology, pricing tools and the relative short lease terms (compared to office, industrial or retail), multifamily assets can be an even greater hedge against inflation.

• Favorable government financing: With inexpensive capital and favorable financing widely available, multifamily has a competitive advantage versus other investments.

• Low vacancy: Even in a pandemic, people still need a place to live. In the third quarter of 2020, the U.S. multifamily vacancy rate was 6.4%, the lowest point since 1985.

 

Additionally, multifamily has the advantage of the liquidity of its renter base. Office buildings typically only house a few tenants, while an industrial building may be rented by only one company. If that company goes out of business, this could be a big problem for the building’s owner.

A multifamily building, however, can still be a potentially strong investment, even if net operating income (NOI) falls. Assuming a 2.5% growth rate over the next eight years, a property’s NOI could fall by 10% this year and 8% in 2022, but a multifamily investor could still witness a 9.5% internal rate of return, according to Dr. Linneman’s calculations.

Built On A Stable Foundation

In today’s modern era of commercial real estate investing, multifamily has generally outperformed the other major commercial real estate sectors (office, hotel, industrial, retail) with its stable foundation as an essential asset, the increase in rental demand from younger generations and Baby Boomers and the lack of quality multifamily units.

Regardless of the state of the economy, people will always need a place to live. With much of the country in flux as it continues to recover from the unprecedented events of Covid-19, this new golden age of multifamily investing could be right for those individuals with a certain amount of risk tolerance and a long enough hold horizon.

In the investing sector, there are  three different groups of investors with different motives. Everyone has an agenda - some are more reckless than others.  

Group #1 are the thrill-seekers. To them, investing is a game, and that game is to outdo someone or something else. Some have a goal to beat the S&P 500. Others want to outsmart Wall Street by beating others to the punch.

It's a timing game for them - picking up stocks before they rise and dumping them before they slide - profiting from anticipation. Group #1 and the market timers are about gambling and speculating. That's no long-term strategy to build on

In Group #2, investing is an extension of high school. They want to hang out with the cool kids. They're the first ones to jump on the latest trends and styles. They'll try anything. They just want to fit in. To put another way, they don't want to be left out and will do whatever the crowd is doing not to be left out of the conversation - no matter the outcome. More often than not, just like in high school, going with the crowd often ends in disaster because the crowd doesn't invest based on logic; they invest based purely on emotions. In high school, going with the crowd often means doing things you wouldn't typically do on your own.  Neither is going with the herd. Going with the herd has historically resulted in disaster, so that strategy is no good.   

In the first two groups, investors invest based on emotions - whether that's doing what thrills them by trying to outsmart the markets or chasing the next big thing like the cool kids are.

 

Then there's Group #3. This group doesn't have an agenda. They want to take emotion out of their investment decisions, so they play it safe or leave the decisions to financial advisors. In high school, these kids mostly stayed out of trouble. They went to school, got good grades, and probably had after-school jobs because it was safe, and it's what their parents' parents did. This group may end up making good incomes and salaries, but they don't do anything out of the norm. They just want to make it to retirement safely.  Investing is a means to an end goal, that goal was NOT just to safely reach retirement or even that common lofty dream that others have of one day traveling.  
Group #3 is this group of  highly-compensated friends who are married to their jobs and could never seem to get time off to do the things they wanted to do. They didn't have the time to put thought into investing, so they left it to financial advisors - most of whom couldn't even beat the S&P 500 - or they stuffed their money in 401(k)s. The lives of these groups, despite all their education, high incomes, and big houses, they lacked the one thing that  trumped everything else.

Andrew Lanoie - Forbes Councils Member

FREEDOM

They are missing the freedom to do what they wanted and how, when, and were on their terms and not on the terms of the corporations, hospitals, or law firms they worked for:  
At Wealthley Investment Group we are highly experienced real estate investors that can educate you on the entire process and make sure you are acquiring high quality assets with all of the due diligence done for you.  Our goals are to make real estate investing easy for the average investor through our various investment programs that can be tailored to your needs.  We realize the world of real estate can be complex and intimidating.  Our proven processes and systems take away those barriers, so our investors become successful real estate investors. Wealthley  is a privately-owned investment firm that’s committed to helping our clients build wealth through quality investment opportunities in the real estate market. We do extensive research to find the best emerging market in specific states, build a team of professional brokers and lenders, and then find value-add properties. Our expertise is exclusively focused on investing in cash flowing properties nationwide. The properties are projected to generate both income and equity growth, ultimately experiencing significant capital gain when sold.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

The public perception is that as the economy and the housing market go, so does the rest of the real estate market. With anxiety over a potential housing crash, what would be the possible effect on your portfolio? For insight, let's look back to the last housing crash that sparked the global financial crisis.

Let's start with the causes of the housing crash of 2007. Experts agree that there was not just one factor that contributed to the housing bubble. The crash resulted from a combination of factors like the gathering forces of a hurricane that fed off each other until they could no longer be contained.

It all started with investor demand for a new kind of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Before 2006, most MBSs and CDOs were related to refinances. This new breed of MBSs was created to expand the mortgage lending box, which eventually pumped $3 trillion more into the mortgage pool for droves of new lenders with relaxed lending standards offering so-called non-traditional NINJA (no income, no job, no assets) mortgages.

These asset-backed securities, which were packaged by banks, were sold to the investing public as fixed-income securities, which appealed to investors because, at the time, they offered higher interest rates than treasuries and carried strong risk ratings from rating agencies. 

Fueled by the demand for asset-backed securities, lenders were motivated to originate more and more mortgages leading many to relax their borrowing criteria, giving rise to subprime loans. Fueled by greed, nobody stopped questioning the wisdom of offering loans at high interest rates to borrowers with poor credit.   

Subprime loans opened up home-buying to a larger pool of candidates, fueling rabid residential housing demand and driving up prices. Hoping to profit from the real estate boom, investors of all types — individuals, institutional, private equity, syndication — jumped into the fray. 

Then, in 2007, the rug got pulled out from under the whole housing house of cards as borrowers started to default on their subprime mortgages, destroying the asset-backed securities secured by these mortgages and everything in their orbit, setting off the global financial crisis. Lenders, borrowers, buyers of the asset-backed securities, investment banks, real estate investors, financial institutions and credit rating agencies were the first groups to get hit. Still, the devastation soon spread worldwide, plunging the worldwide economy into the Great Recession. 

In the aftermath of the housing bust, the financial institutions that survived tightened the flow of credit to businesses and consumers, making borrowing more complex and the path to recovery even more daunting.

As history has demonstrated, the residential housing market is closely tied with the broader economy. If one goes, so does the other. But what about the commercial real estate (CRE) market?

With the benefit of hindsight, how did the Great Recession affect the CRE? Probably not how you would expect. Although specific segments such as office and retail took hits due to their close correlation to the broader markets, not all CRE segments or geographic markets were equally impacted. What we can learn from the aftermath of the Great Recession is that the real estate market is diverse and that what happens in the housing market doesn't necessarily translate to commercial calls. With multiple asset classes and segments across numerous locales — urban, suburban and rural — a downturn in the economy doesn't affect all classes equally.  

While retail and office are more closely correlated to the broader economy, there are asset segments that thrive during a recession, as the Great Recession proved. As people lost their homes, many downsized to multifamily properties in the affordable segment that has seen continually increasing demand and restricted supply since the recession. Self-storage also thrived as a natural consequence of downsizing.  

Rewind to the start of Covid-19 induced downturn, and the CRE class demonstrated that not all locations and segments are impacted equally. While many commercial sectors saw increased vacancies and decreased revenues, a couple of industrial and mobile home parks saw reduced vacancies and increased rents. 

Even as not all CRE segments are impacted equally in a downturn, the same is accurate about geographic locations. In 2020, locations with less restrictive lockdown measures fared better than others. This demonstrated that CRE markets could vary substantially across cities, regions, metros, etc. Locales that do not rely on a single industry tend to fare better than markets that do, as the Great Recession demonstrated.  

Not all investors saw their portfolios devastated by the Great Recession. What can passive investors learn from those who thrived? How were they able to buck the trend? 

The lesson we can learn from successful investors who survived the Great Recession is that diversification is critical. Putting all your proverbial eggs in one asset and the geographic basket is a recipe for disaster. Diversification across various geographic locations, investment strategies (value-add, opportunistic, etc.), and segments — particularly those that are recession-resistant like affordable housing, mobile homes and self-storage — will not only give you the best chances for surviving but also potentially thriving during a recession.  

Besides diversification, another critical factor in surviving a recession is investing with the right sponsors. The right assets in the right locations managed by the right people can make the difference between your portfolio being wiped out and thriving during a downturn. 

Nobody knows when the next housing crash will occur. Wall Street wants to sell you on volatility because the public markets are marked with volatility, but as we learned from the Great Recession, investing in commercial real estate the right way can shield your portfolio from the next downturn.

Andrew Lanoie is a Best Selling Author, Investor and Podcaster at The Impatient Investor, as well as Co-Founder of Four Peaks Partners.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

During elevated uncertainty, private investors continued forward. Private investors have been a driving force behind commercial property sales since the onset of the health crisis. Large institutional investors took a step back in 2020 as the health crisis clouded the near-term outlook and created barriers to completing sales, including travel. During the early stages of the pandemic, some private buyers took advantage of the limited institutional competition to acquire assets with favorable pricing, but as the market has moved back to normal, private investors have frequently pushed pricing aggressively. Overall, 55 percent of the dollars invested during the 12-month period ended in March of this year came from private buyers. That ratio is 300 basis points above where it was in 2019 before the health crisis. That behavior is represented across property types, including industrial and multifamily assets. The ratio of private investment into industrial assets roughly doubled between the first quarter of this year and the same period in 2020. For apartment buildings, the share of private investor capital has been slightly higher, representing 66 percent of 2020 dollar volume. The measure rose as high as 76 percent during the second quarter of 2020 when uncertainty was at its peak, and while trailing down in recent months, it remains above the historical average.

 Health crisis underscores private investment demand for retail and office assets. The uptick in private investor sales activity is apparent for retail and office properties. Approximately 67 percent of 2020 retail sales volume was from private buyers, led by an active third quarter where private capital represented roughly four out of every five investment dollars. During the first quarter of 2021, private buyers were most involved in acquisitions of retail properties with grocery tenants. Private investors generally make up a smaller pool of sales dollars in office properties, but their share of activity has been increasing in recent years nonetheless. During the second and third quarters of 2020, private investment represented over 40 percent of total dollar volume for office transactions. Moving into 2021, private buyers have been especially active with medical office properties, comprising 55 percent of investment dollars. Institutional grade investors, meanwhile, represented a preponderance of the transaction volume for offices in central business districts in the opening period of this year.

Multiyear trend fosters more diverse capital investment pool. Moving forward, engagement among larger investor organizations may slightly temper private buyer dollar volume compared with pandemic-period peaks. Private capital often captures a larger share of the market during periods of upheaval, such as last decade’s financial crisis or the current pandemic. The long-term trend, however continues to illustrate greater private investor engagement across all major property types. This includes assets in the typical private buyer price range of $1 million to $10 million, but also in transactions priced above that threshold. This dynamic benefits the larger investment landscape by fostering an overall more diverse buyer pool.

Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Federal Reserve; MNet; NICMap; Office of Financial Research; Real Capital Analytics; RealPage, Inc.

Cap rates compress as investors become Increasingly active, performance durability and post-COVID recovery prospects favored health and economic outlooks improving.

Multiple factors point to an economy that is firmly in recovery as vaccinations continue. A number of stimulus checks and new support programs such as federal unemployment insurance have helped to lessen the financial burdens of those most impaired by the health crisis. For those who were able to keep working, stimulus measures and fewer consumption options have bolstered personal savings. The total value in savings deposits and money market funds has increased an estimated $4.3 trillion since February 2020. These pent-up savings are giving way to heightened retail spending as more venues reopen. Core retail sales have grown 13 percent from the February 2020 pre-pandemic benchmark. Reviving air travel suggests that both business and leisure travelers are also back on the move.

Varying performance restrains overall marketable inventory. Strengthening economic tailwinds should boost commercial real estate fundamentals this year, inciting recovery speculation among investors and spurring buyer activity. At the same time, the recovery has thus far been uneven, with some cities, states and property types jumping ahead of others, generating a broad range of valuation variance. Many owners remain in a holding pattern, awaiting additional clarity before they sell, which is restraining the flow of marketable inventory. This demand-supply unbalance has exacerbated the expectation gap between buyers and sellers in many markets, slowing deal flow for underperforming assets.

Competitive bidding spurs cap rate compression. Buyers have most aggressively focused on assets that weathered the pandemic best, including many industrial, multifamily and self-storage properties. Investors have also targeted property types expected to make a quick post-crisis recovery, such as hotels as well as certain types of retail and seniors housing. While some discounting has occurred in unique situations, valuations of most asset types have largely held steady or surpassed pre-health crisis levels as strong buyer interest has aligned with limited for-sale inventory. This dynamic has also led to cap rate compression among sought after assets.

Commercial property yields offer compelling margins. A limited number of marketed assets is supporting price appreciation and cap rate compression in regions with a positive growth outlook. Despite these contracting yields, the margin remains wide relative to alternative low risk investment vehicles. Interest rates are still historically low, with the 10-year Treasury rate trailing the average commercial property cap rate by over 400 basis points. As the economy reopens, investment demand profiles are strengthening, and that anticipated momentum will carry over into markets and property types that have faced more recent hurdles.

Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Federal Reserve; MNet; NICMap; Office of Financial Research; Real Capital Analytics; RealPage, Inc.

Multifamily performance varies based on market. Apartments in large primary metros have been more impaired by the health crisis than properties in smaller cities. Vacancy across all primary markets increased 80 basis points over the past four quarters, while the average effective rent declined 3.4 percent. Secondary and tertiary markets have fared better, with a 10-basis-point vacancy decline and rent growth of 2.2 percent over the same span. Migration trends driven both by the pandemic as well as the aging of the millennial generation are affecting performance. More than half of millennials are 30 years of age or older, common family formation years, spurring demand for larger, more affordable living spaces outside the urban core.

Apartment pricing surpasses pre-pandemic levels. In numerous markets, well-performing properties have achieved pricing above early 2020 levels. Though some submarkets in some metros continue to contend with weakened fundamentals that are suppressing values, optimistic investors in many cases are underwriting a strong recovery in 2021. Non-premier housing will likely enjoy the most robust renter demand, but Class A properties will also see a leasing recovery as workplaces reopen. Lifted investor optimism is spurring acquisition demand, but current trends have also persuaded some prospective sellers to hold onto assets longer. Strong buyer interest has aligned with hesitant seller activity to bolster price appreciation and apply downward pressure to cap rates, with a current national average in the low-5 percent range.

Private Buyers Emerge as Driving Force of Investment Sales During Peak Periods of Pandemic-Related Uncertainty

During elevated uncertainty, private investors continued forward. Private investors have been a driving force behind commercial property sales since the onset of the health crisis. Large institutional investors took a step back in 2020 as the health crisis clouded the near-term outlook and created barriers to completing sales, including travel. During the early stages of the pandemic, some private buyers took advantage of the limited institutional competition to acquire assets with favorable pricing, but as the market has moved back to normal, private investors have frequently pushed pricing aggressively. Overall, 55 percent of the dollars invested during the 12-month period ended in March of this year came from private buyers. That ratio is 300 basis points above where it was in 2019 before the health crisis. That behavior is represented across property types, including industrial and multifamily assets. The ratio of private investment into industrial assets roughly doubled between the first quarter of this year and the same period in 2020. For apartment buildings, the share of private investor capital has been slightly higher, representing 66 percent of 2020 dollar volume. The measure rose as high as 76 percent during the second quarter of 2020 when uncertainty was at its peak, and while trailing down in recent months, it remains above the historical average.

 Health crisis underscores private investment demand for retail and office assets. The uptick in private investor sales activity is apparent for retail and office properties. Approximately 67 percent of 2020 retail sales volume was from private buyers, led by an active third quarter where private capital represented roughly four out of every five investment dollars. During the first quarter of 2021, private buyers were most involved in acquisitions of retail properties with grocery tenants. Private investors generally make up a smaller pool of sales dollars in office properties, but their share of activity has been increasing in recent years nonetheless. During the second and third quarters of 2020, private investment represented over 40 percent of total dollar volume for office transactions. Moving into 2021, private buyers have been especially active with medical office properties, comprising 55 percent of investment dollars. Institutional grade investors, meanwhile, represented a preponderance of the transaction volume for offices in central business districts in the opening period of this year.

 Multiyear trend fosters more diverse capital investment pool. Moving forward, engagement among larger investor organizations may slightly temper private buyer dollar volume compared with pandemic-period peaks. Private capital often captures a larger share of the market during periods of upheaval, such as last decade’s financial crisis or the current pandemic. The long-term trend, however continues to illustrate greater private investor engagement across all major property types. This includes assets in the typical private buyer price range of $1 million to $10 million, but also in transactions priced above that threshold. This dynamic benefits the larger investment landscape by fostering an overall more diverse buyer pool.

Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Federal Reserve; MNet; NICMap; Office of Financial Research; Real Capital Analytics; RealPage, Inc.

Real Estate investing can be generally be broken down into FIVE categories. But what are these categories and what do they mean?

CORE: Core assets are generally the A quality asset in the A market. These are viewed as the lowest risk because of their age condition and market dynamics. Because of the low risk, they often also generate the lowest returns.  The returns from these assets are typically from cash flow and long term, market driven appreciation. The buyers of these assets tend to be institutional and carry low leverage with the intent of holding 10+ years.

 

CORE PLUS: Compared to CORE, these assets are older and/or in a less desirable market, although still in strong markets and sub-markets with strong population growth, low crime and good schools. Simply stated, these assets will be fully renovated assets with little or no deferred maintenance. When talking about multi-family, the units will be recently renovated and achieving full market rents. In reference to market risk, these assets will typically fall into Class A or B *sub-markets, within major and secondary **MSAs.   The returns on these assets are, like CORE, derived primarily from cash flow with long-term, market-driven appreciation. Leverage is still fairly low, but slightly higher than CORE.

 

VALUE-ADD: VALUE-ADD assets are existing cash-flow assets that have the opportunity to increase in value. The business plan can vary but will always boil down to the increasing income of the asset. Most common in multi-family, the income increases are created through unit renovations, improving or adding common areas (BBQ areas, dog parks, etc.) These assets usually fall into the B and C range and can be found in A, B and C markets.

 

These assets will quite often have some deferred maintenance that needs to be addressed and often outdated aesthetically or operationally. These assets will often require a capital investment to be brought up to market standards.  In regards to the large amount of work and capital infusion, the returns in this class are Raised significantly from CORE PLUS. The returns often come from cash flow and forced appreciation but rely more heavily in appreciation.

 

OPPORTUNISTIC: Opportunistic assets are the riskiest of the existing asset classes. These assets often have severe deferred maintenance, high vacancy and very little, if any, existing cash flow. Significant construction is performed to bring the property up to market standards. Many times, the property is repurposed within its existing structure; for example, converting a vacant warehouse store into self-storage or apartments.

 

Relative to the purchase price, leverage is often high for these types of assets. The returns are generated through appreciation.

 

DEVELOPMENT: Development is the riskiest of ALL asset classes. Typically, developers buy vacant land, but may also buy existing buildings with the intent to demolish the existing and build something new.  

Returns for developments are created through forced appreciation.

 

SOURCE: Best Ever Report #38 – Ashcroft Capital

 

* In the commercial real estate context, a market is typically a city or an MSA and a submarket is a smaller defined area within the market such as a neighborhood or suburb. The term describes a defined area that is geographically contiguous and does not overlap with other submarkets.  

 

**an MSA is an area having at least one urbanized area of 50,000 or more in population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. 

American Rescue Plan Act signed into law. The latest round of stimulus, at $1.9 trillion, is the second largest package ever passed by Congress. The spending bill contains relief for individuals, states, and schools, as well as new financial resources for vaccine distribution. Additional funding is allocated to restaurants, which could support struggling establishments after a winter spike in cases forced many such businesses to shutter or sharply curtail occupancy. Passed along party lines, the bill may represent the last round of stimulus to combat the economic damage caused by the global health crisis. The Biden administration has signaled a welcoming stance to further spending, though a rapidly fall- ing case count could end the need. Inflation concerns may also prompt greater pushback from budget hawks.

Extended unemployment insurance benefits apartment owners. The previous stimulus passed in December as part of an omnibus bill had pushed federally sponsored unemployment benefits out to March, supporting apartment rent collections. The percentage of apartment owners collecting rent had slowly declined, falling to a cyclical low in January at 93.2 percent. That figure ticked up in February as unemployment payments that expired at the end of last year were reinitiated. The latest stimulus extends federally funded unemployment insurance to September of this year at $300 per week. A combination of rising retail openings and federal unemployment assistance should help return rent collections to pre-recession levels.

Individual checks to boost retail sales. An infusion of $600 checks to Americans in January helped push retail sales up 5.3 percent. The latest round of stimulus includes $1,400 for individuals, though the qualification stipulations are narrower. Nonetheless, the influx of cash pushed into the economy at a time when more establishments are permitted to operate should bode well for retail real estate. Furthermore, the recipients are more likely to spend the stimulus checks rather than save them due to a reduction in income caused by the pandemic.

Monetary Headwinds Forming

Concerns about inflation elevate. Federal Open Market Committee Chairman Jerome Powell recently commented that reopening could lead to an increase in prices, though he believes it will be temporary. Other experts are not as confident in the temporary nature of inflation. The money supply has increased nearly 26 percent over the past 12 months, putting pressure on prices. The Fed has announced that it will let inflation run “hot” prior to raising rates, but balancing inflation and economic growth may be challenging in a post-pandemic environment.

Fed to keep rates low amid high unemployment. In an effort to keep markets calm, the Fed has committed to holding interest rates low for an extended period. The central bank’s dual mandate is heavily tipped in favor of full employment over inflationary pressure. Assets that tend to perform as a hedge against inflation, including commercial real estate, could attract a significant share of the capital that has been pushed into the markets.

$1.9T	93.5%
American Rescue Plan Act Total Stimulus	Rent Collections in February 2021

Sources: Marcus & Millichap Research Services; National Multi-Housing Council; U.S. Census Bureau

Some politicians love to jump on the TAX THE RICH bandwagon to fight income inequality. They want to redistribute the wealth, but beware! It's your wealth they want to redistribute.

We all know politicians are a bunch of hypocrites. They spout about climate change at conferences they took private jets to attend. They talk about income inequality, but none of them live it in their personal lives. Take the 2020 presidential candidates, for example. Nearly all were millionaires, with two even being billionaires. Yet, not one of them gave away more than 5% of their income to charity - often lagging average Americans in the same tax brackets.

There are two ways to address income inequality: 1) either bring those at the top down to the level of those at the bottom, or 2) lift the ones at the bottom to the level of those at the top.
 
 Politicians are all about the first approach. Instead of viewing taxes as revenue necessary to fund government functions such as self-defense and infrastructure, taxes are considered a tool to redistribute wealth. I'm not sure that's what our founding fathers intended. The problem with politicians is that many of them never started or owned a business. Many were academics, lawyers, and for some, politics is all they've ever known. People who have never owned a business don't understand the sacrifices and struggles to be successful business owners. That's why it's easy to paint business owners as exploiters of the poor - getting rich at the expense of those less fortunate. It's easy for politicians to tell business owners that "they didn't build that" - meaning their own businesses. They want to take credit for what you built, and they want to accuse you of stepping on the poor on the way to the top.

What politicians don't get is that it's the business owners who create the jobs for the poor. They don't get that if you punish the rich, it's the poor who will pay the price. What happened when Seattle imposed a $15 minimum wage on businesses downtown? Low-margin businesses like restaurants moved out. Who paid the price? Workers who lost their jobs.

Punishing the rich will not make the poor better off. It will only confine them to the status quo. That's because the rich will always be wealthy. They will always find a way to make money no matter how much you tax them. They'll reallocate their capital to more efficient uses.
 
 There are habits ingrained in the rich that set them apart from the poor, and contrary to popular political belief; it's not because they exploited the poor.  

Redistributing wealth to the poor will not lift the poor because it doesn't change their habits. The poor are poor because of habits, and no amount of redistribution will change those habits. Education, opening up opportunities, on the other hand, will go a lot further in teaching the poor the proper habits to become rich than simply handing them money.

A 2016 article in theguardian.com profiled one Nobel Laureate in Economics who would agree that punishing the rich is not the way to lifting the poor. The report profiles Christopher Pissarides, professor of economics at the London School of Economics, who told the World Economic Forum annual meeting in 2015 in Davos, Switzerland, that citizens worldwide suffer extreme inequality, but punishing people on high incomes is not the answer. "I don't think taxing high incomes and simply taking the money and passing it on as transfers to lower incomes can work in today's open globalized world," Pissarides, who won the Nobel prize for economics in 2010, said in a briefing on income inequality.

According to Pissarides, governments should combat inequality by using their tax revenues to create jobs rather than redistribute money from the rich to the poor. Redistribution takes away the incentive for lower-skilled people to acquire skills and go into the labor market; he argued and created disincentives for higher earners to stay in the country, work hard and look for new ventures to make money.

Pissarides was entirely on point. You punish the rich; they'll go somewhere else to get rich while taking jobs away from the poor. The poor aren't better off. On the other hand, if you educate the poor and give them jobs and opportunities to lift themselves up, that seems like the only practical way to address income inequality.

Here are the differences in habits between the rich and the poor and why helping the poor adapt the rich habits will go a lot further in advancing their stations in life than just giving them handouts.  

• The rich save—the poor spend.
• The rich never spend more than they make. The poor spend more than they make by acquiring debt.
• The rich trade money for time by seeking out passive income opportunities that make them money while they sleep. The poor will always trade time for money if they don't find alternative passive income sources.
• The rich think long-term - saving and planning for their financial futures. The poor think short-term - many never planning beyond the next paycheck.
• The rich make investment decisions based on data, projections, and economic fundamentals. The poor speculate - treating the stock market like a casino.  
• The rich don't follow the crowds. They don't let emotions and what's hip or trending on social media influence their investment decisions. The poor are easily swayed and follow the crowds - often driven by FOMO (the fear of missing out).

Wouldn't it be more effective to lift the poor up by educating them on how they can be rich instead of continually bombarding them to message that being rich is bad? Why would they ever want to be rich? There's no incentive too. That's why punishing the rich will only take away from the poor, who will pay the price when the rich take their jobs elsewhere.
 
Habits are why the rich always get richer, and the poor always get the status quo.

From Andrew Lanoie -4 Peaks Capital
 March 17, 2021

Managers and owners share some of the ways they have adapted over the past year.

By Stephen Ursery is a content manager for LinnellTaylor Marketing, a Denver-based public relations agency.

Taken as a whole, the multifamily industry isn't exactly known for moving with lightning-fast speed to implement new technology and processes. But in 2020, operators across the country had to do just that.

With on-site leasing severely curtailed and social distancing protocols in place because of the pandemic, apartment managers had to turn on a dime and find new ways to serve prospects and residents. Self-guided and video tours are some of the more high-profile and well-known adaptations, but they are far from the only examples of multifamily innovation and ingenuity the industry saw this past year.

Creative operators engaged artificial intelligence (AI) leasing agents, cutting-edge resident referral platforms, and more intensive lead management, to name just a few of the innovations. They also emphasized thorough and frequent communication to associates and residents.

"The industry was challenged in so many ways in 2020," says Wendy Simpson, vice president of marketing for Edgewood and Vantage Management. "It was no doubt a difficult year for all of the obvious reasons, but it was refreshing to see operators find new ways to provide the right experiences for prospective renters and residents."

A Range of Responses

When the pandemic struck, Edgewood Management and Vantage Management, like operators across the country, moved quickly to adapt. Among the first changes the sister companies made was to increase their use of the Microsoft Teams platform for project management and communication between associates. "One of the initial challenges we had to overcome was maintaining effective and timely communication because we were no longer in the office or in the field side by side, at least not as much as we were used to," Simpson says. "This made the ease of communication even more critical than ever."

The companies also implemented resident portals, which were already in place at a portion of their communities, across their entire portfolios to make sure residents could easily pay rent and make service requests online. The portals also provide an efficient way for community managers to connect with residents. They ramped up their use of live and prerecorded video tours and made sure community websites had clear, visible language directing prospects to a self-scheduling tour solution.

One of the most impactful changes Edgewood and Vantage made, according to Simpson, was to install Rentgrata across a portion their portfolio. The messaging platform appears as a website widget and allows prospects to contact current residents directly to ask questions about the lifestyle at a community.

A pilot project conducted early in the pandemic showed that the platform resulted in more than $528,000 in leases that might not have been secured otherwise.

"In any circumstance, we feel it's incredibly beneficial for a prospect to get genuine feedback from a current resident. These conversations really help a prospective renter make a quicker and more informed leasing decision," Simpson says. "And over the past year, it's been a particularly important resource for prospects who haven’t been able to physically tour our properties because of the pandemic."

In the case of the lease up of Abrams Hall Senior Apartments in Washington, D.C., the Edgewood team responded to the pandemic by going "old school." Because the property's prospective renters often were not fluent in technology, Edgewood associates often drove applications to the homes of prospective renters and, if necessary, would discuss the application with the prospect over the phone. Associates would arrange to come back and pick up the application at a later time. The property would sometimes overnight the paperwork to prospects and provide a prepaid envelope for them to return the application. "It was back to basics with a high-touch approach of customer service, and that was really the best way we could have successfully accomplished that lease-up," Simpson says.

Pegasus Swings into Action

Before the pandemic struck, Pegasus Residential already had implemented self-guided tours across a portion of its portfolio. The company had been impressed by the results and was planning on expanding their use when COVID arrived. "The pandemic hit, and we're like, 'OK, we have to shut down our offices, and this is the perfect opportunity for us to mass roll out this product,'" says Yakov Belousov, executive director of operations for Pegasus.

The company also expanded its use of video tours and began using an AI platform from Different to serve as a leasing agent. When needed, the platform can communicate with prospects over the phone and by text, chat, and email.  "If someone was chatting with this AI, they would have a hard time recognizing that they're talking to an AI program," Belousov says. "If they want to talk to a human being, all they have to say is, 'Hey, I want to talk with someone that's on-site.' Then it will automatically connect them with our folks. That has helped us tremendously."

Pegasus also innovated by unveiling a mobile app that provides its owner-clients with around-the-clock access to real-time information about their communities and allows the clients to communicate quickly and easily with the company. It felt the app was an ideal way to make sure owners felt in the know during the ups and downs of the pandemic.

Pegasus also quickly realized the importance of helping its residents feel connected, Belousov adds.

"Some of our residents don't have a lot of social connections, so they rely on their interactions with our teams and with their neighbors," he says. "Since we haven't been able to have a lot of face-to-face interactions, we have online events where we eat meals together and play games together. We have tried to connect in the only way that we can, which is in the digital universe. It's been a lot of fun. "In the multifamily industry, we wear many different hats. Sometimes we're moms. Sometimes we're dads. Sometimes we're psychologists, psychiatrists. Sometimes we just listen to our residents. We have to be there in many different ways, and we've been reminded of that during the pandemic."

Major-League Lead Management

When Mill Creek Residential couldn’t offer in-person tours because of the pandemic, the apartment company saw the number of leads who initially reached out online or by phone jump dramatically—by up to 50%, says Stephen Prochnow, senior vice president of property management for Mill Creek. As a result, the company intensified its emphasis on "providing prompt and thoughtful responses to customers," Prochnow says.

To ensure those responses take place, Mill Creek created a robust database using a variety of sources to track the response time to each lead. The database also tracked which kinds of tours a prospective resident took (the company expanded its use of in-person, self-guided, and live video tours).

"We expanded our lead reporting to track which of those tour types were most effective and led to closing," Prochnow says. "It was a focus on analytics and KPIs around the lead management and reporting process."

Mill Creek also offered different programs to help residents who are having difficulty paying their rent. "It was really important to us to engage directly with our renters and to try and keep them in their homes if at all possible," Prochnow says. "So, we gave our residents options. One option was a rent deferral option, and another allowed them to extend their lease for no increase and defer some element of rent in the process. "And then, if they had some change in their situation that was impacting their ability to continue to rent with us, we did allow them to break their lease if we weren't able to find a rent deferral option that worked for them." In addition to these various adjustments, Mill Creek focused on frequent and clear communication with associates and overall associate well-being.

"2020 resulted in being one of our lowest associate turnover years we've had as a department, which is great, considering all the challenges that the on-site teams faced," Prochnow says. "We really focused on transparency and frequent communication. We tried to put in place policies and practices that put associate safety first. I think our associates have been very resilient and flexible throughout the year."

Looking into 2021

Morgan Porter, director of digital marketing for Birchstone Residential, recognizes the significant lessons learned throughout 2020 and believes the most important one is balancing technology and people. “The ability for our industry to so quickly adjust to the ever-changing impact of the pandemic on our operations is nothing short of phenomenal,” Porter says. “We should be proud of our teams and celebrate their successes to overcome and thrive in such a tumultuous time. However, even though technology has grown in importance in our industry, we must remain steadfast in our commitment to our people.”

Birchstone closely evaluated each technology within its stack to ensure the solution would complement its culture and team member-centric philosophy.

Moving into 2021, Porter and the Birchstone team anticipate that convenience-based technologies like self-guided tours, AI technologies, and solutions that enhance communication between residents and communities will continue to evolve, further bringing the face-to-face customer service the multifamily industry is known for back to the forefront. "The challenges of the pandemic have made it clear that you have to support your associates," Porter says. "Technology is a great catalyst to do so, but it is also imperative to recognize that technology should help not hinder the ability to provide great customer service.”

Despite uncertainty and obstacles, the industry continues to weather the COVID-19 pandemic.

By Donna Kimura – Affordable Housing Finance

Considering the unprecedented challenges faced in 2020, the affordable housing industry managed to do pretty well. Projects still got built, capital continued to be available for new deals, and, perhaps, new light was even shined on the importance of a place to call home. Having weathered economic downturns and market turmoil before, the industry once again found its footing after the initial gut punch of the COVID-19 pandemic and the subsequent shelter-in-place orders that began almost a year ago.

Developers will have to continue to overcome the immense obstacles brought on by the global pandemic in the coming months. Even as vaccines are being distributed nationwide, COVID’s presence still casts a long shadow. “Is there any doubt that the COVID-19 won’t continue to be the biggest issue in 2021?” says Richard Gerwitz, co-head of Citi Community Capital. “The impact on tenants and landlords, the continuing local budget crises, the increased need for shelters and supportive housing. As eviction moratoriums end, and the infection rate has increased, the beginning of the year in particular may be the most challenging time for us as yet.”

In spite of all the issues the industry is confronting, the number of projects seeking low-income housing tax credit (LIHTC) or private-activity bond allocation has continued to rise, according to Gerwitz. “The availability of 9% LIHTC allocation has almost always been a challenge, but now private-activity bond allocation availability is also being fully utilized in an increasing number of states,” he says. “With an emphasis on building new units, allocation plans and decisions are concentrating on new construction, making it more difficult to finance the preservation of at-risk units.”

Lenders are also being more cautious, particularly in terms of underwriting commercial income, either by requiring a master lease, discounting rents significantly, or not considering such income at all. Mixed-income has been a trend, and lenders are being similarly cautious about how market-rate unit rents, or the rents for units with limits above tax credit unit rents, are underwritten, he says.

A Resilient Asset Class

Despite the vast challenges that remain, affordable housing finance leaders have a positive outlook for the financial markets in 2021. The Federal Reserve has made assurances that it won’t raise interest rates in the near term. A new stimulus bill was approved at the end of 2020. And, vaccines offer hope of stopping the spread of COVID-19.

“The need for affordable housing continues to grow. In addition, the asset class is strong,” says Maria Barry, national executive, community development banking, at Bank of America. “That’s helpful heading into the new year. We’ve seen affordable housing do well in previous downturns, but 2020 was unique. The fact that we’ve seen the continued strength of the portfolio demonstrates the strength of the asset class.” In 2019, Bank of America’s community development banking team provided $4.88 billion in debt and equity and was on pace to surpass that for a record year in 2020. The bank started the year with a strong pipeline and continued to work closely with clients to ensure they were able to address COVID-related risks to get to closing, according to Barry. To mitigate risks, Barry and her team looked at several areas. For example, if construction was delayed or halted, they examined if a project had enough reserves to carry the financing. “We also looked at take-outs to ensure there was enough cushion so if there was a delay, the take-out wouldn’t be jeopardized,” Barry says. “We also asked about how changes or delays would be reflected in project contracts. We also asked for additional assurance for the subsidies and when they were going to be coming into a project. Ongoing dialogue was critical to make sure that the developer would be successful if something happened during COVID.”   “Until COVID is behind us, we’ll continue to ask the same questions and possibly additional questions depending on what we see happening in the market and in the deals in our pipeline,” she says.

KeyBank was also on track to have a record year in 2020, according to Rob Likes, national manager of the bank’s Community Development Lending and Investment platform. Like many other financial providers, KeyBank stepped up its underwriting and due diligence to understand the fluid nature of the market as well how clients were addressing COVID-related risks.  “We took a close look at the impacts clients were seeing to their portfolios and the steps they were taking to address any challenges,” he says. “For example, with every client we kept in constant contact about whether they were seeing construction delays, how lease-ups were going, rental collections, and the COVID protocols they were following to maintain the health and safety of tenants and employees.”  As long as COVID is still around, those measures will continue to be in place, he says.

At the same time, the debt market should remain strong, according to Likes. “The agencies have increased the allocations for affordable housing, so we’ll continue to see a strong focus on the sector with plenty of available capital,” he says. 

Similar to the market crash of 2007 and 2008, the government-sponsored enterprises (Fannie Mae, Freddie Mac, and the Federal Housing Administration/Department of Housing and Urban Development) played a key role in providing financing and filling a void created when private lenders hit the pause button or tightened their credit box, adds Jim Gillespie, executive vice president at Bellwether Enterprise Real Estate Capital.  “I expect the agencies to remain competitive into 2021-2022 and continue to develop more creative debt solutions for affordable and workforce housing,” he says.

Paul Weissman, senior managing director and head of affordable housing production at Lument, agrees. “Even with the new caps, we expect Fannie and Freddie to continue to be aggressive in what I would call the true or ‘capital A’ affordable housing space,” he says. “They will look to expand business across tax credit transactions and increase Section 8 volume. I’m fairly optimistic that there’s likely not much change that’s going to happen there.”  One key change last year was the agencies all implemented some form of debt-service reserve requirements to reduce risk.  “Those requirements were generally waived for Section 8 and tax credit transactions involving new credits, but for the most part, debt-service reserves are now required on a lot of the refinancing of affordable and conventional communities,” Weissman says. “If residents aren’t able to pay rent for some period of time, those reserves will help carry properties through a rough patch.”  Section 8 and new LIHTC deals were generally not required to have debt-service reserves because the investors who were putting significant capital into those assets were taking into consideration potential softness for some period of time and because LIHTC properties typically have operating reserve requirements and operating deficit guarantees from developers, he says.

This year, developers may see an easing of the debt-service reserve requirements. “If the agencies were requiring a six- or nine-month debt-service reserve, that may start to go away as concerns surrounding the pandemic recede and jobs start to come back at a higher velocity within hospitality and other sectors,” Weissman says.

Lument’s affordable division was up close to 25% in loan volume compared with the prior year as of early December. This was in part due to a number of refinancing’s of existing transaction to take advantage of lower interest rates, according to Weissman.

In addition to navigating a tumultuous market, the firm had a busy year combining Hunt Real Estate Capital, Lancaster Pollard, and Red Capital Group to create Lument.

The Good (and the Bad) News

Heading into the new year, the Federal Reserve has said it expects to keep interest rates low until the economy continues to improve. That’s good news.  The affordable housing industry also scored a major victory at the end of 2020 when Congress approved a 4% fixed LIHTC rate, which will help more deals pencil out.

On the other side, the challenges that developers faced before the pandemic remain, and the health crisis continues to be volatile.  The pandemic could put a strain on the availability of funds at local and state levels due to the drop in tax revenues, which will put a strain on their ability to provide critical subordinate financing on affordable housing projects, says Gillespie.  “Tax credit pricing could fluctuate or decrease if investors’ (corporations’) earnings drop, and the need for credits is lessened, another uncertainty,” he says. “Thankfully, our industry is filled with very smart and creative individuals who are committed to finding capital solutions to build or preserve affordable housing.”

Others share similar concerns. “There’s potential that some state and local budgets could be affected due to the need to redirect funds toward COVID,” Barry says. “That could have an impact on housing subsidies.”  Looking at changes that developers may see in deal terms; she says they may need to build in a little more room into their projected schedules. “A lot of it is related to time, giving a little more time, a little more cushion, to work through any unforeseen delays and ensure other deadlines like placed in service are met,” Barry says. “Some of this we started to see pre-COVID with construction delays. When you add COVID into it, everyone needs to make sure they have enough time.”

Developers may also be asked to put more in the interest reserve, ensuring they have a cushion for bumps in the road.

“I have concerns about the expiration of support, especially before people begin to feel safe again,” adds Weissman. “People who work in restaurants and the hospitality industry represent a large swath of renters across the country. I’m concerned that stimulus protections may end too early, and I’m concerned that interest rates will start to go up. I’m also concerned about stagnation in rent growth. If we start to see rents stagnate or decline and interest rates increase at the same time, that could have a meaningful impact on valuation. I think that’s more pronounced at the higher end of the spectrum than the lower end because there’s just not much housing available at the lower end.”

On the positive side, affordable housing has performed well at a time when the hotel, office, and retail sectors have become struggled. This resiliency as well as an emphasis on social-impact investing is expected to keep capital in the market.

Gillespie also anticipates new opportunities in workforce housing through the continued expansion of debt products designed specifically to finance the product. “This, combined with plentiful private capital targeting this product type and the fewer regulations relative to the LIHTC, should result in an increased focus and expansion of the workforce housing market,” he says.

Will the Biden economy make, break, or transform you? I’m going to talk about the potential impact of a new presidential administration, how they are planning to influence the economy, and how that might impact you. We’ve had a lot of volatility, a lot of swinging when it comes to the markets, the economy over the last couple of months. January, the short squeeze on GameStop, the potential short squeeze that was initiated on silver.  

You have an almost $2 trillion stimulus package. You have Elon Musk investing $1.5 billion into Bitcoin. I can keep going. There’s a lot of volatility. News information spreads quickly. Unless it’s controlled, it’s a very volatile, emotional rollercoaster, anywhere from wanting to get in, the fear of missing out, also some fear, anxiety, and worry about taxes and change. I’m here to tell you that there is an aggressive agenda that is hopefully evident to you. This isn’t new. I’m going to talk about some of the details but the actual agenda, the purpose, the reasons, the results that this administration wants have been clear for a while.  

Here are some of the bullet points. Raising a minimum wage to $15 an hour, forgiving student loan debt, making college free for people making up to $125,000 per year, increasing top marginal tax’s brackets to 40%, capital gains tax for high-income earners, at the actual ordinary income tax rates. Corporate taxes going up for real estate investors. I know many of you, I am myself, this has a huge impact but removing the step-up in basis for real estate gains as a potential, as that passes along to the next generation. Biden‘s administration also wants to spend $1.3 trillion on infrastructure, $2 trillion on clean energy. The list goes on.  

I think the word free is interesting because it’s one of the first things you learn in economics. There’s no such thing as free. Money may not be coming out of the pocket of the person that’s going to college but it’s coming out of somebody else’s pocket. That brings me to something very simple that illustrates how the administration is going to pay for this and the potential impact it’s going to have. We have a $28 trillion deficit, which means there’s debt and there’s interest on debt of $28 trillion, which is a lot of money. I don’t need to go into that. There are only two ways to pay for these initiatives. The initiatives it’s to save the middle class. It’s to continue some of the aid and support for those negatively impacted by COVID. There are only two ways to pay for it, taxes and deficit spending.  

Taxes, we are currently spending double what we collect. I’m speaking as a country. We are spending double what we collect in taxes. Raising taxes by double, I would say, is stifling, most likely negatively disruptive to the economy. The easy way to do it, which has been used for quite some time, several decades, is deficit spending, which basically means that the government issues new debt, essentially IOUs, and the central bank gives them money created out of thin air in exchange for that debt. That’s where we’re at. I’m not going to stop there. I can keep going through other bullet points of some of the agenda items. A fascinating read, it’s short, but if you are interested in all that detail, go to TaxFoundation.org. They did a whole analysis of how this is going to impact things. There are some variables in there that could potentially change. It doesn’t mean that all of these things are going to get passed and included in some of the tax changes. We don’t know. This is proposed but TaxFoundation.org is always on top of it.  

Their initial analysis is interesting, where we lose about 500,000 jobs because of it. We also have a decline in GDP and GNP, Gross National Product. Everything is going down. If you look at the distribution of wealth and income in the United States, everyone essentially loses because of this agenda. There’s essentially the population that is making $125,000 and below that benefits but the benefit is slight. It’s not that much at all. It’s interesting where you’re able to look at, “What is the impact that this is going to have?” From a narrative standpoint, it’s easy to say, “We want to save the middle class. We want to create jobs. We want to bring jobs back domestically. We wanted X, Y, Z as end results and motivation to do certain things.” When you get into the numbers, it’s interesting where you have a much more objective point of view.  

Take that for what it’s worth but here is what I’m going to say. This is deviating, hopefully not reigning too much on your sentiments. The idea here was to paint a picture that the volatility of life is here to stay. I believe it’s always been here. It always will be here. I think my initial reaction to this is whether it’s my kids having to pay taxes and pay back debt or my grandkids, that narrative is used oftentimes by conservatives. I get emotionally stirred up because I know the data behind it. This isn’t going to make much of a difference. It’s going to dig our hole even deeper.

Opportunities Everywhere

I’m focusing on it because my reaction was short-lived. The punchline of it all is that there is opportunity everywhere. It’s always been there. As much as we want life to be programmed, robotic, predictable, and easy, it’s not how it works. There’s never been a perfect presidential administration, a perfect tax code, a perfect economy, a perfect profession, a perfect spouse, perfect kids, perfect neighbors, perfect colleagues, perfect business. The only constant is that things will change. Things will be volatile today, tomorrow, the next day. I believe that this is the spice of life. It’s the amazing adventure, the amazing ride that we’re on.  

I read something from a study by Cornell. It was done in 2005, 2006, that shows that the majority of what we fear and are anxious about has to do with the future but here’s the catch. In this study, 85% of the things that people worried and were afraid of never happened. Participants in the study, they usually will use a good sample size, so it’s not skewed or biased. The participant said that up to 15% of the events that did happen in the future, that they were anxious and afraid of, they either learn something or they handled it better than they thought they would when they were afraid and anxious about it.  

My question to you is, what if your entire life, all your experiences, your thoughts, your parents, your neighbors, people have influenced you, was to prepare you for a life-changing experience? What’s on the other side of that experience if you showed up with that belief? I’m not saying that you need to believe it but I want you to consider that it might be true. What if everything in your life prepared you for something that was supposed to happen and experience? Based on how you showed up on the other side of it could have been an amazing emotional experience, a meaningful conversation, a business opportunity, an investment opportunity, a relationship, an inspiration or motivation, a breakthrough. What if that was on the other side?  

One of the first things you learn in economics is that there’s no such thing as “free”.

 As I’ve looked at my reaction to life’s events, typically what’s going on around me, what’s in business, the markets, news, social media, I connected with something. These are things that are always going to happen. The degree, the scope is greater than it’s ever before but I believe that leads to amazing opportunity because on the other side of how you show up is where wealth truly is. It’s where growth is. It’s where the uncertainty and the beauty, the excitement of life is. That’s where I’ll bring to the next point. What if wealth wasn’t a dollar amount in the bank? What if it wasn’t cashflow?  

What if it was bringing your best self to life? Meaning, you bring your game every day, every experience. To life is you wake it up. What if that was wealth? Through that vehicle, your being who you are, you’re able to experience what you want. Growth, enjoyment, relationship. It wasn’t next week. It wasn’t when you’re 65. It’s today. It’s tomorrow and the next day. I’m not saying that this is possible every day but what if it was something that you became aware of, something new? Do you allow yourself to be in a routine where it woke you up to life? What would be different?  

I look at my experience and the  dollars I’ve spent on personal development trying to understand myself, understand what I want, understand why I say, do, believe, or feel certain ways. My discovery has been I have so much to be grateful for. I have so much that is valuable. When I start to focus on those items when I start to focus on what I can bring as opposed to what I can get, life completely changes. I believe that a lot of the events that will continue to unfold is for people, the human being inside of us. Not the human doing but the human being wakes up. It allows us to exercise what we’re capable of. Human beings are not meant to sit back, get a stimulus check, spend it on Netflix and movies. It’s not meant to scroll through social media. It’s not meant to be isolated in an apartment, in a house, even if you’re living with people.  

I believe the circumstances that we’re in are allowing people to live a lax life and I think that’s anti-life. I think that’s anti-human. I think that’s one of the greatest tragedies of 2020 is that the solution wasn’t the human being. The solution to the challenges that were faced, and there were macro challenges on a big scale, I think there were some cool things that happened that allowed companies more leeway to innovate, to solve problems. I think on the micro-level, on the individual level, there was a huge tragedy with the loss of opportunity to adapt, to change, to think, to solve problems. I’m not saying that this is absolute but I was hoping that the exception wouldn’t have been this. The rule became bailout, supplement, aid, help so that people don’t have to help themselves rather than it being the rule and the exception being those that are in dire circumstances.  

The scary part is that there are some habits that have been formed and that is going to lead whether it’s student loan bailouts, whether it’s prolonged unemployment, whether it’s free education. There are going to be some unintended consequences from that but that leads to more volatility. The ability for you to ride that volatility and take advantage of tremendous opportunities because there’s a lot of cool things happening in our world. Whether it’s advances in transportation, advances in medicine, advances in entertainment, advances in energy, advances in food, it’s incredible what’s going on if you open your eyes to it. When you approach life and you’re trying to find the opportunities, you are trying to find the lessons. You’re showing up as your best self and realizing that your one smile, one conversation, one acknowledgment, one text, “How are you doing”?  One written thank you note, “I appreciate you for showing up in my life,” one step away from a completely new experience of life, a completely new business, a completely new profession. 

Hopefully, this is a mentality that you feel you want to embrace. It’s not easy. The first step is being aware. The second step is doing what it takes to ground yourself. It could be a morning routine. It could be a new habit of simply writing down what you’re grateful for. If you embrace this, I challenge you to do something, commit to something, put something on your calendar, because if you don’t, the human spirit in all of us will go right back to the way that it was and you’ll forget the conversation. You’ll forget the inspiration. You won’t embrace it.  

Embracing requires you do something because it makes it real. It turns it into something. That’s an idea floating around. “I should.” Do something right now. It could be as simple as, “I’m going to write down the ten things I’m grateful for every single morning. I’m going to write a thank you note every single day to somebody.” Maybe three times a week, but something. That is showing up as your best self. You’re able to take advantage of these extreme volatilities of life.  

 There was once a solution to your problem, whether it’s higher taxes, whether it’s a provision like the removal of the step-up in basis. There are always solutions and there’s a big one. The point is with everything that’s going to be volatile, everything’s going to change. All of these new initiatives, instead of looking at glass half full, I’m looking at it as a loss or a cost. Find the opportunity.  

My point on all of this is there are going to be some extremes going on. We’re going to respond to them, react to them, it’s going to be frustrating, it’s going to be mind-numbing to an extent, but I want you to be aware of that reaction and shift gears to where the opportunity is. I look at wealth and the achievement of more money, of more investment, of more cashflow, that is a small portion of wealth. It isn’t the foundation of wealth. Foundation of wealth is to experience life and to experience it at the highest level. It’s to take your best self that I know is in you. God knows that it’s in you. Your spouse knows it’s in you. Your husband, your wife, your kids, your neighbors know it’s in you, bringing that as often as possible, showing up, creating value, making a difference, experiencing the little things at a whole new level. That’s wealth. Money magnifies that.  

If you don’t have that foundational piece, it’s going to be a frustrating journey accumulating more and more money. It makes the experience worse in my opinion. Consider that as a possibility. Consider that the volatility gives you the opportunity to make new decisions about how you show up, to find opportunities, to bring out that human being inside of you that’s there. These are the opportunities that allow it to rise. Without these opportunities, you’re going to sit on the couch, go to the beach, and not contribute much to life. That’s, in my opinion, not the life that I want and I’m hoping it’s not the life that you want.  

Volatility gives you the opportunity to make new decisions about how you show up to find opportunities and bring out that human being inside of you.

 Life is incredible. We don’t have to worry about going and hunting for food or chopping wood to feed the fire. We don’t have to worry that our kids are going to contract some gnarly disease and die when they’re young. We have access to medicine. We have access to health. We have access to information, entertainment, relationship, more so than ever in the history of mankind, yet there’s a lot of evidence out there that points to people still complaining about life. They are complaining about their circumstances, complaining about Biden, complaining about Trump, complaining about this, complaining about that.  

Life doesn’t have to be that way. I think if you realize that number one, life is always going to be volatile. This utopian view of things, that doesn’t exist. It’s a mirage. The beauty of life can be experienced by those simple choices that we make, those simple decisions that we make. I truly believe that you’re one decision away from a completely new life. Thanks for joining me. Go out there and make someone happy. Love is what we’re all after in the end. Go love somebody. Go create some value and make a difference.

Patrick Donohoe

The Wealth Standard

Your Source of Inspiration on Finance, Economics, & Building True Wealth

The rollout of a vaccine and the likelihood of more federal COVID-19 relief measures in the near term will help sustain the apartment sector.

The multifamily sector weathered the storm in 2020, living up to its reputation as one of the most stable commercial real estate asset classes. The forecast for apartments in the new year is also bright. And even with where things sit today with the still raging pandemic and the terrifying scene that unfolded in the nation’s capital last week, observers point to the continued rollout of vaccines and the likelihood of new COVID-19 relief measures with the new administration and Democratic control of Congress as reasons for high hopes for the balance of 2021.

Economists expect the average apartment community to remain close to fully-occupied in 2021 with relatively stable rents and stable collections. Investors ended 2020 on a brisk buying clip fueled in part by capital providers remaining more than willing to finance the sector. Hopes that working vaccines against the coronavirus will eventually be distributed have helped offset—so far—the recent jaw-dropping spikes in new infections, hospitalizations and deaths. Hopes that Congress might provide more support to people and business hurt by the pandemic—and emergency assistance passed in December 2020—should make up for the expiration of vital programs in the second half of 2020.

“Multifamily remains a very stable investment with a very stable outlook,” says John Sebree, senior vice president and national director of Marcus & Millichap's Multi Housing Division, working in the firm's Chicago office.

The biggest exceptions to this stability are all the new apartments still opening in the downtowns of expensive, “gateway” cities, where rents are likely to fall again in 2021. “You have to talk about that market… a few urban, core markets like San Francisco and New York City… and then you have to talk about everything else,” says Sebree.

Despite a slow rollout, the vaccine is coming

Doctors diagnosed hundreds of thousands of new coronavirus infections every day on average in the first weeks of 2021. The panic caused by the pandemic weakened a recovery in the U.S. economy—and also weakened the demand for apartments.

“Job losses in the December figures do not bode well,” says Andrew Rybczynski, managing consultant at CoStar Group, based in Boston. “Employment correlates well with apartment demand, and so while the jobs figures remain weak, it is reasonable to remain wary… Progress slowed over the past few months.”

However, the demand for apartments has already survived a lot since the coronavirus struck in early 2020. Apartment managers continued to lease apartments even in the first months of the pandemic. Markets in the U.S. absorbed 71,493 apartments in second quarter, according to CoStar. That’s surprisingly strong considering most of the U.S. economy was shut down to slow the spread of the virus, though it is also the weakest absorption in years for a second quarter—usually the busiest time of year for the apartment business.

Demand for apartments strengthened through the rest of the year. Markets absorbed a net 114,000 apartments in the third quarter, one of the strongest third quarters CoStar has ever recorded in multifamily. And the fourth quarter was the strongest since 2015, based on preliminary data, says Rybczynski.

So far, relatively strong demand helped managers keep most buildings fully-occupied, despite the pandemic and competition from a flood of new apartments. The percentage of occupied apartments inched slowly downwards to 93.16 percent in the fourth quarter of 2020 from a peak of 93.84 percent in the second quarter of 2019, according to CoStar.

That’s a decline so slight, it is almost difficult to see in the data. If you round to the nearest whole percent point, the occupancy rate doesn’t change from 93 percent throughout 2020, according to CoStar.

In the last months of 2020, health officials approved two vaccines against the coronavirus. “The vaccines undoubtedly make tenants, landlords and nearly everyone more hopeful,” says Rybczynski. “There is certainly a light at the end of the tunnel… though the [slow] rollout does not suggest that the end of the pandemic is right around the corner.”

“Our economic forecasts already assumed sluggish job production in the first half of 2021 and then more robust expansion in the last half of the year,” says Greg Willett, chief economist for RealPage, Inc., headquartered in Richardson, Texas. “The introduction of vaccines has made us more confident in that outlook.”

More stimulus dollars not a moment too soon

Housing advocates warned millions of renters could be evicted if federal programs like enhanced unemployment benefits expired at the end of August 2020. Many who lost jobs in the pandemic were still out of work, and millions had already fallen behind in their rent, especially at smaller, less-expensive apartment properties. Well, Congress let the most of the supports created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act expire, and did not renew or replace them until December 2020.

A federal moratorium on evictions has protected the vast majority of unemployed tenants from formal eviction—but many seem to have moved out anyway, according to CoStar. Rents in less-expensive, began to fall in class-C apartment buildings as the year ended—though these rents had been stable for much 2020.

“The end of the CARES Act coincides too closely with the start of weakness in one-star and two-star [Class-C] rents to be ignored,” says Rybczynski. “It is possible that additional stimulus will buoy those households renting at the lower end of the market.”

Competition from new apartments hammers overbuilt downtowns

Developers still plan to open thousands of new, luxury apartments begun before the pandemic in some of the most overbuilt and most expensive downtown submarkets in the U.S.

"The areas scheduled to get some of the biggest increases in deliveries are the gateway metros where performances already are struggling,” says Greg Willett.

Developers are expected to open 403,644 new apartments in 2021, with much of that concentrated in downtowns already crowded with new apartments, according to RealPage. Even if thousands of those units are delayed, 2021 will be the biggest year for multifamily construction in decades. It will be up 17 percent from 2020, when developers finished 344,380 new apartments despite the pandemic—which seemed like a huge number at the time. In comparison, developers finished less than 200,000 new apartments a year in most years since 2000, according to RealPage.

“The run-ups in completions are especially pronounced in New York/New Jersey, Los Angeles, the Bay Area and Seattle,” says Willett. “Even though we think demand in those locations improves in 2021, it appears likely that rent cuts continue due to the negative influence of all the new supply.”

“The end of the CARES Act coincides too closely with the start of weakness in one-star and two-star [Class-C] rents to be ignored,” says Rybczynski. “It is possible that additional stimulus will buoy those households renting at the lower end of the market.”

Competition from new apartments hammers overbuilt downtowns

By now, you probably realize that life, business, and investing seldom go as scripted. There are far too many variables. That’s why it’s smart to have contingency plans.  Burning bridges, going all in to do or die sounds good in a motivational speech. But, in the real world when stakes are high, it’s prudent to have a backup or two or three.  It is why skydivers wear two parachutes, buildings have back doors, soldiers have handguns, loans have foreclosure provisions, and people carry insurance.  Contingency plans give you the flexibility to pivot in response to the MANY things in life you can’t predict or control.

The bad news is that for many people, backup options are limited due to lack of resources or control over one’s time.  Of course, a great way to solve this problem is to create large streams of passive income. And passive income covers your living expenses, you're at critical mass.  That's good. But while it might mean a nice retirement, it could be MUCH more.  After all, once you’re no longer trading time for dollars you have the capacity to focus on growing your wealth and freedom bigger and faster.

For many people, Plan A is to work hard, pay taxes, live frugally, save small, and invest slowly. It works, but it takes a L-O-N-G time to get to critical mass.  Worse, if you only have one source of income and your job or business suffers a severe setback, then Plan A falls apart and you end up consuming your savings. That's bad.

But there is GOOD news …

There are ways to combine earning an income with your investing.  Most people do each separately. Worse, because earning an income is needed to live, yet is the most taxed, many earners spend 40-60 hours a week simply trading time for dollars. Then, IF they have any extra time and money, they use their precious personal time to invest often giving their investing part-time attention.

But when your full-time "job" is a business YOU own and it's about creating partnerships with private investors to do bigger deals you can actually get PAID to invest.  Even better, you earn profit sharing from your total pool of capital you're managing. And a small percentage of a HUGE number is better than all of a small one.  It's called "syndication" and it's arguably the BEST opportunity in both business and real estate investing, especially RIGHT NOW.

Syndication is a great Plan B for any small business owner, corporate manager, or salesperson in an industry suffering from what’s happening.  Think about it; Like it or not, the folks in charge are pumping trillions of dollars into the system. Some goes into bonds and keeps interest rates down. That’s good for real estate.  Some goes into the stock market to keep the green lights flashing. Yet many stock investors are nervous the party could turn ugly, fast. Because it could.  Some of those trillions of dollars will be looking for a more stable Plan B - real estate is an attractive option.

The great news is that if your current Plan A income is working, you can get into the syndication business part-time.  Of course, if your Plan A falls apart, then you’ll have your syndication business to save the day. More likely, your syndication business will become Plan A.

That's because very few people have a job or business with the same upside as real estate syndication. Do you? But even when syndicating becomes your MAIN thing, it still has a lot of Plan B inside it. That's because when you syndicate across markets, niches, and investors, you have multiple Plan B’s built into your Plan A.

That is to say, syndication is both scalable and diversified. Most people's incomes and investments aren't. 

1)Consider the path YOU are currently on going into 2021, does it have a lot of upside? Or

2) Are you limited? Are you balanced and diversified or is there single-point failure?

3) Are you at risk of being laid off or closed down? Or 

4) Can you write your own ticket?

(transcripts from a conversation between Patrick Donohoe CEO of Paradigm Life and James Rickards: Jim Rickards is Editor of the Strategic Intelligence newsletter, bestselling author of Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos, Currency Wars: The Making of the Next Global Crisis, The Death of Money: The Coming Collapse of the International Monetary System, The New Case for Gold, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, and the new books The New Great Depression: Winners and Losers in a Post-Pandemic World and The Ravens: How to prepare for and profit from the turbulent times ahead, which was co-authored with Robert Kiyosaki.)

 

Intro: 2020 will forever live in history books as the COVID-19 year. More than the health crisis, it has brought on an economic crisis that will greatly impact the future. What did people do to survive it? What lessons can we learn from those who did that will help us face the challenges that are to come? Patrick Donohoe has someone with the answers. He sits down with none other than James Rickards—an American lawyer, economist, investment banker, speaker, media commentator, and author on matters of finance and precious metals. He brings with him his book, “The New Great Depression: Winners and Losers in a Post-Pandemic World”, to share what you can do to not only survive but also thrive during these uncertain times. From predicting this economic chaos in his 2019 book, James is now pointing us towards the future, telling us about the things to anticipate this 2021 and what we can do to get through it and prosper.

Patrick: I’m glad that you had dedicated time to inform yourself, becoming more aware of what’s going on and subsequently prepare yourself for a strategic response as opposed to an insane emotional reaction, which seems to be the rule these days. Hopefully, you find yourself in the group of exceptions. My guest is Jim Rickards. Jim has written a number of books. He’s held some internal roles with the government. He has worked with the CIA, has worked with central banks. He’s worked as a consultant in other areas as well. He’s had a front-row seat for several decades to be able to speak intelligently about monetary policy, fiscal policy and what’s going on, not just in the US economy but also the global economy.

His books include Currency Wars, The Road to Ruin, The Big Drop, The New Case for Gold. Aftermath is his other one. He has a brand new one called The New Great Depression. Not the rosiest of titles but at the same time, sometimes we need to be smacked a little bit in the face in order to become aware of something that was already there. Jim is a great guy. He spoke at our Cashflow Wealth Summit a few years ago, and he has some interesting things to say. We get into a lot of that and give a preview of his new book if you can go to JamesRickardsProject.com. You can also go to Amazon and purchase all of his books. We operate our lives in an economy and environment that is already established and being aware of it allows you to position yourself to respond to circumstances, respond to experiences strategically, as opposed to what has become the rule, which is to emotionally react.

I understand and I can sympathize to an extent. It has been a challenge and that challenge is not going to go away. That’s part of life. It’s a little bit more extreme now but I look at what’s occurred in 2020 and what that has done to create some ripples into what’s going to happen in 2021 and beyond. The world has changed. From a psychological perspective, from an environmental perspective, your awareness is going to allow you to show up. Show up to be successful, show up to make wise investments and overall show up to live a more meaningful life. I hope you enjoy this episode. Jim’s website is JamesRickardsProject.com. You can also go to Amazon where all of his books are available and I believe he has all of them on Audible as well for you, audiobook listeners. Thank you for joining. I appreciate the support. Now, onto my interview with Mr. Jim Rickards.

Jim, thanks for joining me. It’s a pleasure. I have spoken extensively about your books. I went up and found a couple of books that you’ve written in the past. I don’t have all of them here. A couple of them were at home but you have a new book that’s coming out and it is timely because it relates to COVID-19 and what impact that has made on the economy. We’re seeing some impact right now but also there’s a lot more to come. I’m excited to talk to you about your new book. Congratulations.

Jim: Thank you, Patrick. It’s great to be with you and thanks for showing the other books. The great thing about having a new book is that a lot of people, if they haven’t read my books before, they like it or they’re interested, they’ll go back and look at the old books and that’s helpful too. Those are all still timely. The book is called The New Great Depression: Winners and Losers in a Post-Pandemic World. It’s available on Amazon, Barnes & Noble and bookstores. It’s doing well. It’s interesting, even in pre-order on Amazon, we’re the number one ranked book on money and monetary policy, the number one ranked hardcover in economic policy and the number one ranked hardcover in wealth management. Those are the three categories or buckets that Amazon puts me in. We’re number one in all of those number one hardcover, number one new release. We’ll see how it goes but we’re off to a good start. The book is generating a lot of interest.

Patrick: That’s a great tailwind going into a new year. The timeliness of the election and potentially new president and new makeup of Congress. There’s going to be a lot going on. I know you’ve spoken to monetary policy in the past in all of your books but you do it in a way that is understandable. I’m hoping for those new readers, they’ll also go back and look at what you have written in the past. Also, it was your book before this one, Aftermath, where you actually talked a little bit about the potential pandemic and how that could be one of those tipping points to create some chaos in the economy.

Jim: Not just the economy but also riots in the streets. You’re right, that was my last book, Aftermath. Thank you for mentioning it. It came out in July 2019 but if the readers have it or you’ll get a copy of it, turn to page 290 and right there it says, “The odds of a pandemic in the next several years are 100%.” The way I put it, the odds of not having a pandemic are close to zero, meaning there’s going to be a pandemic. That will be followed by armed militias and riots in the streets. There’s nothing that’s happened in 2020 that you should have been surprised by if you had read that book in 2019. Now the question with the new book, The New Great Depression, we’re taking it forward, talking about what’s going to happen in 2021 and 2022. We’ll prepare you for what’s coming, which is what I aim for in all my books.

We're not getting back to normal; we'll get through it. Life will go on, but it will not be the same.

Patrick: Let’s speak to that. Is this a continuation of some of the previous books that you’ve written or is this something that speaks to what’s going on based on COVID-19?

Jim: It’s surely both. Pandemics don’t come along every day, certainly not of this magnitude. It’s interesting. There was one of the studies I cited in the book and I tease people. I say Amazon or Barnes & Noble has a certain price then that’s fine. The more books they sell, they lower the price. You’d think they’d do the opposite but the price gets lower, which is a good sign in terms of sales. One of the things I mentioned to people is that the pandemic didn’t cause the depression. The pandemic is a pandemic. The virus caused the pandemic. It was the policy response that caused the pandemic because you didn’t have to make all the choices we made. There was one study I cited in the book and I tell people it’s worth the price to get the endnotes.

I hope you love the book and I enjoyed writing it. In the end, those are a valuable source of primary material for people who want to look a little bit deeper. There was a paper prepared by the economists of the Federal Reserve Bank of San Francisco. Two academics flew there from the University of California, one of the top schools and some collaborators, and they had a 650-year time series. That’s my time series. A lot of people will do a one-year, two-year time series, do the correlations and regressions. I consider that junk science because 1 or 2 years is not long enough to identify trends. With 650 years, now you’re talking. They went back to the Black Death in 1350 and they look at every pandemic beginning with the Black Death in which 200,000 or more people died.

There were only fifteen. I guess fifteen is a lot but they identified fifteen that met those criteria. The two biggest of course were the Black Death, in which about 75 million people died and the Spanish Flu of 1918 in which about 100 million people died according to the best estimates. After that, there were two with about two million fatalities and then it drops off. They were looking at 100,000 or more, there were fifteen pandemics that made the list. COVID is going to end up being number three. Right now, it’s about 1.8 million fatalities but it’s nowhere near over. It’s going to go past two million. It’s going to be the third greatest, third-most fatal lethal plague pandemic in 650 years. That’s how bad this is and what they show is that, because they were economists but they had the pandemic data, they said, “When did the economy get back to ‘normal?’” We’re not getting back to normal. We’ll get through it.

Life will go on but it will not be the same. When did interest rates, employment rates, output things normalize after the pandemic? The answer is it took 30 to 40 years, not 30 weeks. It’s not 30 months but 30 years. When I hear J Powell say, “We think interest rates are going to be zero until 2023,” I’m like, “Fine, J. Why don’t you try 2043 because that’s more like it?” The effects of this will be intergenerational. As an example, I grew up in the 1950s, early ‘60s, which was a very prosperous time in the US economy. I did not live through The Great Depression but my parents did and my grandparents did.

I was raised with a Depression mentality, even though I didn’t live through the Depression. We used to go out as a nine-year-old with our wagons and go door-to-door and collect tin cans and newspapers. We weren’t doing it for environmental reasons. Maybe it was good for that but we were recycling. There was steel in that tin. You could melt it down and make battleships and airplanes. We had that mentality. That didn’t change until the late 1960s when the Baby Boomers came of age. It was like party, rock and roll, credit card, spend. Things changed but the Depression mentality, the adaptive behavior, lasted through the ‘50s and ‘60s. That lasted for 30 years, which is exactly what these economists have demonstrated using other examples.

I make the same point. I have a number of grandchildren. While they get ready for school in the morning, the mother says, “Put on your hat, your coat and put on your mask.” They put a mask on because they’re very adaptable but that is going to have a lifetime impact. You’re going to remember, “When I was a little kid, I wore masks to school because there were germs in the air.” It affects everything you do for the rest of your life. The effects will be intergenerational. They’ll last for decades, not years. Another example, in 1929, the stock market crash. A lot of people know that was the start of The Great Depression. The stock market went down 89.2%, almost 90% between 1929 to 1932.

You ask me, “When did it get back to normal? When did the stock market get back to where it was before the crash?” The answer is 1954. It took 25 years to get back to where it was. It doesn’t mean you couldn’t make money in the meantime. If you bought the bottom in 1932, you could have made a lot of money in 1933 and some people did, but the point is it didn’t recover. It’s all high for 25 years. A lot of people around 1929 were dead by then. Don’t believe in the V-shape recovery. Don’t believe it when you hear about pent up demand. None of that is true. It’s going to be a long, slow recovery. We’re probably in another recession right now. We’re probably in a double-dip recession. We had a recession from the first and second quarter of 2020. We’re probably in another recession after a partial recovery in the third and fourth quarter. That’s the world we’re living in.

Patrick: The 650 years of history is incredible. Was there a trend where the recovery sped up because now, arguably, we have a different way in which society operates? From a communication standpoint, from an innovation standpoint, is that going to have an impact on the potential? I agree, we’re not going to recover to where we were, but is there going to be a speedier rebound than there has been in the past?

Jim: I doubt it. There’s a good book on the subject by professor and author, Robert Gordon. It’s like a 700-page book. It’s a doorstop but I read the whole thing and a lot of others have as well. He makes the point that the greatest period of productivity in US history, roughly 1870 to 1940 and then the continuation of that as late as 1970 so about 100 years. This was the age of the light bulb, the phonograph movies, airplanes, etc. That transformed things. For 5,000 years of civilization, prior to 1870, what did women do? Women or 50% of the population spent 75% of their time hauling water. We had to get it from a well, a stream, a lake, a pond or someplace and you hold the water in. You used it for cooking, bathing, cleaning, boiling and lots of other things. Half the population spent three-quarters of their time hauling water.

1870 was when indoor plumbing began. It took 70 years to network everything. There’s a network for you. The plumbing network is way more powerful than the internet when it came to the impact in terms of productivity. All of a sudden, half the workforce with a lot of brainpower, women specifically, didn’t have to haul water. They could do a million other things and they did. In the last few years, productivity has been declining. Everyone’s like, “Look at all this technology. We’re going to be more productive than ever.” It’s not true. It doesn’t show up in the numbers. Why is that? I talked to one guy who is a guru of technology and he said, “We have a lot of technology but we’re using it to waste time.”

How much online shopping do we need? How many emails do you answer where you’re being polite but it’s not exactly what I was planning to do? I’m not necessarily talking about playing video games. That’s an even bigger waste of time. There’s some evidence that all the technology that we’re connected and we’re networked, sure but we’re not using it for productive purposes. That may be dragging down productivity. That’s the best case. The worst case is that because of lockdowns and shutdowns and the failure of small businesses and unemployment going up, it’s not the unemployment rate. Remember, it’s the labor force participation.

There are over ten million able-bodied Americans between the ages of 25 and 54 who are not working but they’re not counted as unemployed because they’re not looking for a job. They’re not in the labor force. That was always a good reason for some people not to be in the labor force. You could be a student, you could be a spouse with three kids at home and that’s your job so to speak but not to that extent, not that number. If you add that group, able-bodied, working-age Americans not looking for a job, add them to the unemployed, the unemployment rate is more like 15%, not 7% or 8%. That’s the reality.

Look at the impact. You’re alluding a lot to the psychological impact of previous pandemics where lots of people died and it was a big scare. Even in 1929 with stock market fallout and very tough economic times, it impacts psychology long-term and it takes a while to get out of that. As I reflect on 2020, we were, in essence, forced into behaving a certain way whether it was staying home, wearing masks, not being near people, not being in an office. Fear sometimes solidifies in people an understanding of how things are. It’s not going to go away anytime soon. You’re right. From collective psychology, you’ve had so much distraction where even though there was a lot of fear and people were home, they were distracted by entertainment, Netflix, games, etc.

That does not lead to productivity and solutions. It’s interesting. What are some of the primary ways in which our global society has been impacted in this psychological way that won’t necessarily come back? You and I were talking before we started about the commercial real estate market. That people aren’t going to go back to work and be willing to work in an office the same way they’ve done in the past, which is going to impact prices. Where do you see some of those primary areas that are going to be impacted long-term?

First of all, you’re right about the mental health and behavioral aspects of this. I have an entire chapter on that in my book, The New Great Depression. Chapter Five talks about the mental health aspects. Normally, when you start writing a book, you start with your research and then you build your outline and then you write the book but this is the first book that connects the pandemic and the Depression. There weren’t any other books I can pick up. Here’s another book on this. This is the first book that tackles the subject. To form a baseline, I went back to the Spanish Flu of 1918, which there were five or more excellent books on that.

Lockdowns don't work. They do not stop the spread of the virus, and they kill more people than they save.

Interestingly, they’ve mostly been written in the last twenty years. You would think that people in the 1930s and 1940s would have been writing about this, they weren’t. It was almost as if there was general amnesia about it or people didn’t want to talk about it. It was probably too horrific with 100 million dead. Now scholars and journalists have tackled this and there were some good books on that. In looking at that, I realized that one of the great under-reported, underestimated aspects of it were the mental health aspects of this. I make the point that the lockdowns, first of all, lockdowns don’t work. They do not stop the spread of the virus and they kill more people than they save. In theory, you could find some people who were saved arguably but they kill a lot more people.

Here’s why. Suicide rates have tripled, drug abuse, alcohol abuse, domestic abuse. The mental effects, the psychological effects of the lockdown are anger, depression, anxiety. Sometimes it manifests itself in violence. When I look at the summer of 2020, Antifa and other groups burning down US cities, Kenosha, Seattle, we all know the stories. We saw it on the news and supposedly all that related to George Floyd. George Floyd might have been a catalyst. At least some of it was this pent-up depression and anxiety that came out and manifested itself in this violence. We’re saying it now that violence has broken out on Capitol Hill, the demonstration, turned into an assault. I see breaking news and I see somebody was shot.

They got the vice president out of there and took him to another location. Violence is bad. Property destruction is bad. I’m not condoning any of it, period. The fact that it’s happening comes as no surprise because it is one of the effects of everything we’re talking about. That’ll stay with us. That was the point I was making, which is we won’t get back to normal. It will be a new normal. As far as investment decisions are concerned, one of the anecdotes I tell in the book and this is in chapter five going into chapter six. A lot of the readers will be familiar with the Weimar Republic Hyperinflation in Germany in the early 1920s. That story is well-known but there was an individual, his name was Hugo Stinnes, and he saw it coming and he took out massive loans.

He borrowed a ton of Reichsmarks, which was the currency and invested in hard assets. He bought coals, steel, railroads, shipping lines, transportation, etc. Hyperinflation came. He paid back his loans, I would say pennies on the dollar but it was like thousands of a penny on the dollar. Basically, it was worthless but technically he paid back the loans in worthless Reichsmarks and he kept the assets. He became the richest man in Germany. I don’t speak German but his name in German was the Inflationskonig, which means the Inflation King. I tell that story to make a point, which is that even in the most horrific hyperinflation devaluation in the history of developed industrial economies, one guy became the richest man in Germany because he saw it coming and made the right moves.

Joseph P. Kennedy was another one. Joseph P. Kennedy, what did he do in the 1920s? They got together in a gang with big Mike Meehan and a few others. They ramped the stocks. They bid them up and then all the suckers came in and bought them. They dumped them on the suckers and walked away with all the profits until October 1929. He could see the crash coming and he’s short of the stock market and made another fortune in the early ‘30s. He was one of the richest people in America. One guy becomes the richest guy in Germany in horrific hyperinflation and Kennedy becomes one of the richest people in America during the greatest stock market crash in history. My point is that even in adverse markets, even in disaster scenarios, if you have the right analysis and you can anticipate the move, then you can at a minimum, preserve wealth and possibly even prosper enormously.

I look into 2020 being one of the highest retail sales in history, yet you had a lot of those in-person retailers go bankrupt. There have been entrepreneurs who have bought those and bought branding and use the internet and have crushed it. There’s always an opportunity. The environment is always going to change, maybe not to these extremes but now we’re in it where there’s no going back. Now it’s having the right mindset and mentality to look for those opportunities. Where else do you see things changing? I heard a statistic too, which is one of those unintended consequences because when you locked down these Western countries, even Europe and Asia, you inhibit travel, you inhibit tourism, which economies around the world rely on. Those aren’t probably going to come back for a long time and people are dying of starvation, let alone mental illness-wise. Where else do you see these cloggings of the economy that you write about in your book that is going to have an impact eventually? They may not seem that dire but the wheels were in motion so that there are going to be some dire end results.

That’s why the subtitle of the book, The New Great Depression: Winners and Losers in a Post-Pandemic World. We have both. We know who a lot of the losers are, air transportation, cruise ships, resorts, gambling casinos and a lot of others. We moved and bought a new TV set for our new apartment. I was in Best Buy. I was talking up to the salesman. I said, “How’s business?” He goes, “Never better because everyone’s staying homes. They’re buying TVs, stereos, DVD players, whatever.” I said, “That makes sense.” They’re one of the winners. The airline industry is a good example because it was originally down 80% to 90%. It’s come back a little bit but nowhere near all the way.

 

The New Great Depression: In 2020, we were, in essence, forced into behaving a certain way.

It’s still down over 50% from where it was this time in 2020. The bigger question is will it ever come back? This is where the doubt of behavior comes in. Once people get used to working from home using Zoom or maybe the airlines say, “We’ve got plans. We’re back to our normal schedule,” nobody wants to go anywhere because they’re still worried about the virus. The pandemic is far from done, by the way. We’re not even out of the pandemic stage. In fact, it’s getting worse. The caseload and the fatalities and the hospital utilization right now are worse than they were last March and April 2020. Obviously, things were pretty bad but some of these things may never come back. Even if restaurants reopened, they made it this far or people racing to go out to dinner.

I like going out, I’m not sure most people are. A lot of people are afraid. They’ve been scared. They’d been lied to by government officials and others who don’t know what they’re talking about. By the way, I tell people, whenever anyone wags a finger at you and says, “Follow the science or the science is settled,” they don’t know anything about science. If you know anything about science, you know that science has never settled. Einstein didn’t think Newton had the last word, and Neils Bohr didn’t think Einstein had the last word and they’re still debating it. That’s okay. That’s what good science is. The idea that there’s some science standard out there and can pull it off the shelf and wave it at somebody and tell them what to do, it’s not true.

The politicians go through the motions and it does have, as I say, very disastrous consequences. Commercial real estate is a disaster. It will stay that way for a while. I wouldn’t touch it until maybe 2022, maybe later at the earliest. We’re depopulating the cities. The cities are the greatest wealth-creating mechanisms in the history of civilization. What is the city? You bring together all this diverse talent. You’ve got bankers, lawyers, accountants, engineers, artists, writers, dancers and everyday people with all different backgrounds. You bring them all together and then the ideas start flowing. As I say, they’re these incredible wealth creation machines. The cities are depopulating. We’re seeing an exodus as we’d never seen before. Where are they leaving? They’re leaving New York, Los Angeles, San Francisco, Portland, Seattle, Chicago, Baltimore, Philadelphia and a few other cities.

Where are they going? They’re going to Miami, Austin, Boise, Nashville, Phoenix, Scottsdale, etc. We know where the flow is. Talk a little bit more about residential real estate instead of commercial real estate. Residential real estate is collapsing in places like New York and Los Angeles but it’s booming in Miami and Nashville. I’m up here in New Hampshire. We have no income tax, no sales tax. That’s a little bit hard to beat but people like the weather. I like cold weather but if I feel like warm weather, I go to Florida, Texas. The fastest-growing city in the United States is Nashville because Tennessee has no income tax. You could do well in residential real estate in the places people are moving to. Commercial real estate is bad across the board. Let’s say, for example, you had ten floors, you’re a big company.

You have ten floors in a prime office building in Midtown Manhattan or any other major city. Companies would never have voluntarily adopted the work-from-home model but they had to do it. They had no choice because of the pandemic. What they discovered is that it works, and it works well. I like socializing with people but everyone did what they had to do. It’s not that the company is necessarily going to pull out but they’ll go from 10 floors to 2 floors and they’ll say, “We’ll have a locker room. It will be a nice one. It won’t be like a high school locker room but every employee will have a locker to keep your laptop, sport coat and tie or scarf or whatever you’ve got in there. It will be nice offices that you’ll reserve in advance like a hotel room.

You’ll say, “I need two days next week because I have some out-of-town clients coming in.” You’ll show up, go to your locker, grab your laptop, your sport coat, sit down, have the meetings and then go back and work from home. You go from 10 floors to 2 floors in my example. The landlord takes it on the chin, but what about the maintenance people, the cleaning people, reception, the food trucks, the restaurants, the bars, the shopping, the lunchtime shopping, public transportation, that whole ancillary cloud around the fact that you’ve cut your office space capacity by 80%? That all goes down 80%. The ripple effects of this are huge, it impacts all those derivatives.

I like residential real estate in places people are moving to. I don’t like commercial real estate at all for the reasons we mentioned. I always recommend gold for about 10% of your portfolio. People want to put words in your mouth like, “Jim Rickards sells everything and buy gold.” I’ve never said that. I don’t believe that. A 10% allocation is about right. I recommend a big allocation to cash, about 30%. That surprises people like, “Why would I want cash? It has no yield.” A couple of things. Number one, deflation is a greater danger than inflation right now. In deflation, cash could be your best performing asset because it has no yield. If you have 2% deflation, the real value of your cash went up 2% because your purchasing power is greater. Number two, cash is the opposite of leverage. Leverage increases volatility. That’s good if you’re making money but it’s horrible if you’re losing money.

Leverage increases volatility.

Cash is the opposite. You can have volatile assets over here, gold or fine art or whatever and volatile assets over here, stocks and bonds. That’s crazy enough. If you have cash, it reduces the overall portfolio. Volatility helps you to sleep at night but this is the third benefit to cash. It has embedded optionality. You can be nimble. Right now, visibility is not great but it will improve over time. You could throw your money into a private equity fund or venture capital hedge fund or something right now. I’m not saying that’s a horrible decision but what you can’t do is get it out. Try getting your money back from Henry Kravis before seven years, you can’t do it. You’ve got to cross the bit off or pay extra fees or maybe you can’t do it at all.

If you’re the person with cash, visibility improves, you can pivot into whatever might be a lot more attractive based on some later information. That’s valuable in and of itself. Gold, cash, residential real estate, ten-year treasury notes will do well. Trade yield to maturity is probably going negative. That has nothing to do with the fed funds policy rate. I don’t think the Fed will go negative on the policy rate but ten-year notes, the yield to maturity is set in secondary market training. You get principal and interest back. You know what that is but if I’m selling a ten-year note, the minute somebody buys it from me and pays a premium that’s greater than the coupon and the principal, they have a negative yield to maturity. They’re not going to get all their money back. They’re going to get the principal and interest but they paid more than that. They’re not going to get all their money back.

Why would you do that? Two reasons. One, you might think you could sell it to somebody else. Maybe you can. Two, if you’re a European investor, you could lose money on the other maturity but make it on the currency because the dollar could get stronger against the Euro. In Euros, you would have more profit that way. It’s not as crazy as it sounds. Ten-year German government bonds and Japanese government bonds have negative yields. The US isn’t there yet. Now we’re about 95 basis points on a ten-year note, take down to negative 50, it’s going to produce huge capital gains on your ten-year note.

Patrick: Do you think that’s where we’re going?

Jim: I do.

Patrick: The monetary policy, that was a question that I had because it seems that’s going to be the general response as the economy sputters along into this post-COVID world. Now you have Janet Yellen most likely go in as Treasury Secretary. Do you see monetary policy changing? Where do you see it going? Do you speak to that in the book?

Jim: I do. In chapter four, I talked about what monetary policy will be, what fiscal policy will be and why neither one of them will work. Don’t call us stimulus. You can print money and you can have deficit spending but it will not stimulate the economy. It won’t work. There’s a reason for that. Let me be very specific. The Fed’s balance sheet was about $3.6 trillion at the start of the pandemic. Now it’s around $7.5 trillion. They’ve printed $3 trillion of money. That’s real money. They did print it. They did give it to the banks but money does not cause inflation. Money does not stimulate the economy. Milton Friedman was wrong about that. The Austrians, the Neo-Keynesians, they were all incorrect. It’s spending. It’s the turnover.

The New Great Depression: If you have the right analysis and you can anticipate the move, then you can, at a minimum, preserve wealth and possibly even prosper enormously.

 Velocity is the technical term. The Fed prints the money by buying treasury notes from dealers. They take the treasury notes, put them on the balance sheet and give the money to the dealers. What do the dealers do with the money? They give it back to the fed as excess reserves. It sits down on the balance sheet. I tell people, “Nominal GDP equals money supply times velocity.” What’re $7 trillion times zero? It’s zero. Meaning if you don’t have velocity, you don’t have an economy. That’s the problem. Velocity has been declining for many years, by the way. It started in 1998. Money printing can be done.

My friend, Stephanie Kelton, she’s the big brain behind Modern Monetary Theory. She was Bernie Sander’s economic advisor. She’s a big voice in the Biden administration. They may take their balance sheet to $10 trillion. I wouldn’t rule that out but it won’t work because there’s no turnover. When you get to fiscal policy, the same problem. The Keynesian multiplier. I borrow $1, I spend $1 and I get $1.25 of GDP because of turnover. That’s the Keynesian multiplier but the evidence is now in. This is Ken Rogoff, a professor at Harvard and Carmen Reinhart, who was at Harvard, now chief economist of the World Bank and their collaborators. They’ve shown very convincingly that Keynesian multiplier does exist in different measures up until around a 90% debt to GDP ratio. Take the total debt divided by GDP. That’s your debt to GDP ratio. Up to 90%. Beyond 90%, you’re through the looking glass. Now what happens is you borrow $1, you spend $1 and you get $0.90 of GDP, not $1.25.

You don’t even get your buck back. It goes $0.80, $0.70, etc. Why is that? It’s because people see the debt to GDP ratio. They know that’s not sustainable. They start doing what’s called precautionary savings. People are saying, “I don’t know what’s going to happen. I don’t have a PhD in Economics but it’s going to be bad. They’re either going to raise my taxes or to fall on the debt, there’s going to be inflation or something. I better save more or invest in inflation hedges like gold and real estate.”

When you do that, you’re not consuming. It’s a consumer economy. Where are we? If 90% is through the looking glass, where are we now? The answer is 130%. You’ve got about $24 trillion, $25 trillion of debt. This is federal government debt. I’m not talking about total debt. $24 trillion of debt in a $22 trillion economy. That comes out to about 130%. It’s about $25 trillion of debt at this point, so you’re way through the looking glass. What other countries in the world had that debt to GDP ratio? I can tell you. Japan is one but the other three are Lebanon, Greece and Italy. You’re in the super debtor’s club.

What makes Japan different?

There are a couple of things. Number one, they’re free-riding on the dollar because the dollar does stabilize the entire global financial system. The Japanese can piggyback on that. Number two, the Japanese are a homogeneous society. They generally buy their own debt. The Japanese hold Japanese debt. I would say that’s not true. About 17%, 18% of our debt is held by the Chinese, the Japanese and the Taiwanese and some others. We’re much more vulnerable to foreigners basically dumping the US debt. Now the US banks can buy it up. I’m not saying that interest rates are going to go sky-high. They’re going to go lower actually. The point being, Japan is a special case. They’re all in it together.

I had an interesting conversation with Sakakibara who was the assistant finance minister of Japan in the 1980s. He was known as Mr. Yen if you ever heard the phrase “Mr. Yen” back in the day. We were talking in Korea and I said, “Sakakibara-san, we’re worried about the lost decade in the ‘90s. You’re starting your fourth last decade. What’s going on? What are you missing?” He said, “All your gross statistics are correct but the population is declining. When you calculate it on a per capita basis, instead of an aggregate basis, we’re actually doing okay.” I said, “You’re right. That’s true.” Japan is performing better on a per capita basis than on an aggregate basis because of fewer people. The philosopher in me came out. There was due ad absurdum. Sakakibara said, “Japan ends up with one person who owns the whole country and she’s the richest woman in the world.”

If you don't have velocity, you don't have an economy.

He laughed but it wasn’t that funny. That’s not going to work in the United States. We’re not going to have 30 years of no growth. We’re not going to have a declining population. If we will, people are not going to be very happy about it. I put Japan to one side, but the debt is not sustainable and is now a headwind to go. To summarize, you will have money printing and you will have deficit spending. You can print money and you can spend money but don’t call it a stimulus because it’s not going to stimulate anything.

Patrick: Where’s it going to go? You look at this next administration and Janet Yellen going in there. I’m not sure what impact she’s going to have but looking at the fiscal policy especially if there’s control of House and Senate, where do you see things going? To me, it seems like the writings on the wall but where will that lead? Additional printing and programs to try to stimulate, which won’t but will try. Do you see that same thing?

Jim: I talked about this in Chapter Six and also the conclusion of the book. I had this debate with my editor when we started writing. She goes, “Jim, you can’t write a book about a pandemic and a depression and not have a happy ending. You’ve got to give the reader something.” I said, “I agree with that. I don’t like that. I like being accurate and realistic. I don’t consider myself a mean person. I’m an optimistic person but I get this doom and gloom reputation. When I write, I don’t consider myself an optimist or pessimist, I consider myself a realist analyst.” We go through the pandemic and go to the depression but you have to give people something concrete. I do talk about that.

I talk about how to solve a problem in the conclusion. I tell people, “Central banks don’t understand this. They can buy my book if they want to figure it out. I doubt they’ll do it. Here’s the answer. Here’s the blueprint. I doubt they’ll do it but you can do it yourself. You don’t have to wait for central banks.” The answer primarily is to buy gold. I recommend 10% allocation. The only way out of the debt crisis is inflation. I’m not saying inflation is a good thing. I am saying that it’s the only way out if you’re not going default. There’s no reason for the US to default because we can print the money and taxes will too. If you think you can tax your way out of slow growth, good luck with that. Inflation works.

I talked about two cases in the twentieth century when that’s exactly what we did. Two different presidents, one Democrat, one Republican who did it. That’s my policy recommendation for the government in a way to be constructive. I say to individuals, “If the government doesn’t do it, you can. You can go out and buy your gold right now. It is going to go to $10,000 to $15,000 announced in a couple of years.” I tell people like, “We’re going to go to $15,000 now.” It will but it’s got to go to $3,000 before it gets to $15,000. You can be along for that ride. The sooner you buy, the better.

Patrick: There’s a logic there similar to what it’s been in your previous books where there’s that price increase because people no longer trust what’s going on with monetary policy and fiscal policy.

Jim: In Chapter Four, I talk about Modern Monetary Theory. By the way, Janet Yellen is the bridge there. It’s the Fed, it’s owned by the banks. It’s got a board of governors appointed by the president. Here’s the treasury, it’s a cabinet-level executive department, separate institutions, separate functions, etc. Modern Monetary Theory says nonsense, mash them up. The way you stimulate the economy is to have the treasury spend money, borrow the money by issuing notes and people won’t buy the notes. The Fed can buy the notes, put them on the balance sheet and hold them for twenty years. What’s the problem? I actually had a hard time answering that question. I’m like, “That’s all true. What is the problem?” The answer is there’s no legal prohibition on what I said.

The New Great Depression: If you’re losing money, cash is the opposite.

The Feds could take the balance sheets of $10 trillion. There’s no legal limit but there is a psychological limit. There comes a time when people wake up every day and say, “I’m not a PhD. I don’t get it but get me out of here. Get me out of the dollar. Get me into gold and silver land, real estate, fine art, natural resources, water, ag, something, anything other than the dollar where I know I can preserve wealth and possibly make money.” When that happens, the whole house of cards collapses but you want to be in like Hugo Stinnes. You don’t want to wait for hyperinflation. You want to do it first, be ahead of the curve, and the way to do it is now.

Patrick: I have one more question for you and then I know you have to go because you’re on this blitz of interviews. Did anything surprise you? What were maybe 1 or 2 things that stand out that surprised you in 2020 based on what happened?

Jim: I would say that nothing happened that I didn’t anticipate, but it happened faster than I thought. It’s the tempo of things. Even my wife, we talk about things over dinner or whatever. I told her a couple of years ago, “Do you know what this is going to come to? I know what the left-wing is doing. You’ve got to see the right-wing with open carry, which is legal, except in DC. Surround the Capitol.” I didn’t say storm the Capitol but I said, “What if one million people from Pennsylvania, Wisconsin or whatever showed up with shotguns and ARs over their shoulders, which could be illegal assembly and they looked like they were going to storm the Capitol?” They did storm the Capitol. I always hope I’m wrong but my track record is pretty good at getting these things right. If you asked me what surprised me, I would say the tempo was faster than I thought.

Patrick: Jim, it has been awesome. We could probably keep going but I know a lot of this is in your book. Any final words before we sign off?

Jim: I hope people buy the book and I hope you enjoyed it. I’ll let people enjoy it. I love the feedback but again, it’s a lot of grit in terms of bad news but there is some very concrete, optimistic investment advice at the end. Even in tough circumstances, you can at least preserve wealth, if not make money. Hopefully, the book will show you. I always tell people, “Maybe you can’t solve all the problems in the world but if you can shine a light on it, it’s a source of comfort for people.” I hope that’s the case.

Patrick: I think that there still remains a significant amount of ignorance out there as it relates to some of the underlying activities of government and central banks. People aren’t taught those principles and it’s evident. Hopefully, there is enough contingency to make an impact. Anyway, thank you for what you do because I know you’re trying to get the word out there and shine that light. Best of luck with your book launch. - James Rickards

The quarterly report indicates good sales volume, ongoing market tightness, and little change in debt financing.

The National Multifamily Housing Council’s Quarterly Survey of Apartment Market Conditions shows a mixed bag of market conditions as of January, based on responses from multifamily professionals.

The Sales Volume Index came in at 53, above the survey’s “break-even level” of 50, while the Equity Financing Index came in at 58. At 43, the Market Tightness Index indicated ongoing weakness, while the Debt Financing Index (49) showed little change from last quarter.

“We are continuing to observe a tale of two markets during the COVID-19 pandemic,” says NMHC chief economist Mark Obrinsky. “Despite higher vacancy and lower apartment rent growth overall, this weakness has been largely concentrated in high-cost urban areas. Many suburban areas, on the other hand, continue to benefit from an influx of ex-urbanites.”

The Market Tightness Index rose from 35 to 43 from one quarterly survey to the next but remained below the break-even point. Only 16% of respondents reported tighter market conditions than three months earlier, while 30% reported looser conditions and 53% reported no difference.

“Another silver lining to be gleaned from [January's] survey is that less than a third of respondents actually reported looser market conditions, compared to 49% of respondents in October, 71% of respondents in July, and 82% of respondents in April,” Obrinsky says. “Instead, a majority of respondents (53%) thought that market conditions were unchanged, suggesting that we may be nearing an inflection point in the market for apartment residences.”

The Sales Volume Index fell from 72 in October to 53 in January, still marking the second-best reading in this index in 2 1/2 years. Over one-third of respondents (35%) reported higher sales volume than three months previous, while 29% indicated lower volume and 31% reported sales volume was unchanged.

The Equity Financing Index fell from 62 in October to 58 in January. Twenty-four percent of respondents said that equity financing was more available than in the previous three months, while 8% said it was less available and 52% reported no change. The Debt Financing Index fell from 73 to 49 over the same period; 22% of respondents reported better conditions for debt financing, while 24% reported worse conditions and 46% reported conditions were unchanged.

An additional question in this quarter’s survey asked respondents how they planned to adjust their investment strategies, given weakness in top-tier markets. Very few—only 8% —said they plan on disinvesting in these markets. Twenty-three percent said they will continue to invest in these markets, while 48% said they are “investing carefully” and 24% have adopted a “wait and see” strategy. - Mary Salmonsen

2020 went off the rails in so many ways, but the multifamily industry proves to be more adaptable and resilient than ever imagined. We are almost 10 months into the pandemic and resulting economic downturn. It’s been a year for the history books with its unprecedented challenges for the multifamily industry and our residents. However, in this time, a few things have become clear.

Some segments of our industry are dealing with some serious hurdles today, and the outlook remains cloudy, at least in the near term, for the apartment market at large. But the silver lining is that the industry continues to adapt and innovate to meet the demand that is in the market, in every way, shape, and form.
The Threat of COVID-19 Still Looms

 NMHC Rent Payment Tracker figures have largely been encouraging given the severity of the economic downturn and rise in unemployment during the pandemic. However, Census Household Pulse Survey data clearly also show that renters, as a whole, are struggling to make ends meet and have precious little financial cushion available to them.
Also concerning, NMHC’s most recent Research Notes found that apartment residents are more likely to work in service sector industries such as tourism and hospitality, which have been some of the hardest hit during the pandemic. The more stubborn the pandemic, the greater the risk to our residents economically.

Throughout the last several months, there has been concern about the pandemic's impact on the industry and its residents. Top priorities of rental assistance, extended unemployment benefits, and an end to ongoing eviction moratoria are top priorities advocated to lawmakers.
Lessons Learned from the Pandemic

While attention is, by necessity, focused on the very real problems confronting the industry in the here and now, there is a very bright future for the industry. Over the coming months and years, integration of the experiences of the pandemic into the ways we do business, operate our communities, and interact with our residents. Here are just a few areas of marked changes:

• Clean is the New Green: The safety and security of residents has long been a top priority, but post-pandemic that will include the health of our communities and residents. Cleaning and sanitization will have increased importance in the day-to-day running of communities, necessitating new procedures, technologies, training, and resources, but also this becoming a requirement from the investment community.
• The New Work-Life Balance Will Impact Community Design: When it comes to community design, expect there will be greater emphasis on floor plan flexibility—especially in common areas and amenity spaces. Moreover, the likely long-term increase in individuals working from home may necessitate changes in unit layout with increased demand for dens or similar spaces that can be used as an office. Demand for reliable internet—already a top priority for residents—will also continue to grow as more and more time is spent online.
• Virtual Touring Is Here to Stay: Services that allow residents to experience a community virtually, whether it be digital or self-guided tours, are here to stay. Prospects will have a greater variety of options to evaluate communities going forward.
• The Urban Core Will Bounce Back: At a more macro level, the industry is clearly experiencing pain in urban cores while there continues to be strong, even growing demand for units in suburban communities. And while this is likely to continue over the short term—especially with projects currently in the pipeline coming online—I am hesitant to decry an “end of cities.” Urban areas have been the job centers that have powered the economy for the better part of the last two decades and will continue to do so following the pandemic.

Looking Ahead to 2021 and Beyond

At the end of the day, remain fervently confident about the health and future of our industry. Believe that because the fundamentals that have delivered so many years of growth remain constant and demand will remain strong.

But optimism goes beyond just economics and demographics. With every passing year, new talent enters the industry—making us more vibrant and dynamic—as well as more and more diverse. No one could have never predicted a year ago that our industry would be mired in the middle of a pandemic and a recession. And so, no prediction of exactly what we will be dealing with a year from now can be made. However, if the last several months have taught us anything, it’s that we should consider ourselves lucky to be in the industry we are, providing homes to millions of families. And, once we weather the current storm, we have much to look forward to.

By Doug Bibby; president of the National Multifamily Housing Council 

Multifamily professionals are seeing more favorable conditions in suburban markets

Apartment market conditions have shown some rebound from the impact of the COVID-19 pandemic, according to the National Multifamily Housing Council (NMHC). In the Quarterly Survey of Apartment Market Conditions for October 2020, most of the indexes have come in above the breakeven level of 50—Sales Volume, Equity Financing, and Debt Financing. However, the index for Market Tightness increased but still showed signs of continued weakness.

“The ongoing COVID-19 pandemic continues to constrain economic activity, resulting in higher vacancies and lower rent growth for apartments overall,” said NMHC chief economist Mark Obrinsky. “Still, industry professionals are observing more favorable conditions in many suburban markets. And, while this round marks the fourth consecutive quarter of deteriorating conditions, there was considerably more variation in responses compared to last quarter—less than half (49%) thought that market conditions were looser.”

The Sales Volume Index saw a notable change, increasing from 18 to 72, with 60% of respondents reporting higher sales. According to the NMHC, this marks the first time in over two years that respondents have reported increasing sales volumes. Sixteen percent reported lower sales volume, and 19% said they didn’t see any changes from the previous quarter.
“One of the biggest changes we observed in recent months is that after largely sitting on the sidelines following the outbreak of COVID-19 in mid-March, buyers of apartment properties have returned to the market, bolstered by historically low interest rates and a greater availability of equity financing,” added Obrinsky.

The Market Tightness Index rose from 19 to 35, with nearly half of the respondents, 49%, reporting looser market conditions than the previous quarter. One-third of the respondents felt conditions were no different, and 18% cited tighter conditions.

The Equity Financing Index increased from 34 to 62—35% of the respondents reported that equity financing was more available than the previous quarter, 12% found it less available, and 42% said conditions remained unchanged.

The Debt Financing Index also increased from 60 to 73, with over half of the respondents, 51%, reporting better conditions than the previous quarter. Only 6% said conditions were worse.

The quarterly survey also examined how the pandemic is affecting renter preferences, with the results consistent with the recent narrative around residents wanting larger units in less dense areas. Respondents cited the highest demand for garden-style units with or more bedrooms, followed by garden-style studios and one-bedroom units, mid-rise units with two or more bedrooms, and mid-rise studio and one-bedroom units. High-rise units of any kind came in at the bottom of the list.

Nearly half of the respondents, 46%, said they expect these trends to continue for six to 12 months, while 31% only expect to see them last through the pandemic. However, 8% said they expect these trends to continue indefinitely.

New report from ULI and PwC US highlights increased interest in the suburbs and social justice.

The COVID-19 pandemic has made its mark on the real estate industry—from accelerating existing trends, like the reduction of retail footprints, to spawning new ones, such as a bigger focus on social justice and health and wellness.

A new report from the Urban Land Institute (ULI) and PwC US draws on proprietary data and insights from more than 1,600 leading real estate industry experts to highlight these evolving trends.

According to the Emerging Trends in Real Estate 2021 report, COVID-19 has made lower-density areas for both residential and commercial real estate more appealing and is accelerating suburban growth, especially in Sun Belt markets. Growth in the suburbs has been a consistent trend in the report for the past five years, but new work-from-home policies and increased family formation among millennials are furthering this shift. Home buyers will look for suburban locales with low taxes, affordable housing, job opportunities, and auto-oriented transportation. The report also predicts cost-conscious companies will gravitate toward cities that also are affordable and business-friendly with growing workforces.
“Times of great change always present significant opportunities,” said W. Ed Walter, global CEO of ULI. “In the near term, our suburbs will benefit from new growth spurred by shifting demographics and changes to living and working patterns resulting from the COVID crisis. Our cities will have the opportunity to respond by reimagining their public realm, building more resiliently, and reinventing assets, such as retail, that were already struggling before the pandemic. As an industry we have the opportunity to strengthen by truly embracing diversity and tackling the challenges faced by our communities.”

Heading the report’s list of the top 10 overall real estate prospect markets for investing is Raleigh-Durham, North Carolina, which is nicknamed the “Bay Area of the East Coast” for its tech jobs and reputation as an “education mecca.”

The top 10 list of markets is dominated by 18-hour cities, which ULI defines as second-tier cities with above-average urban population growth, an affordable cost of living, and a lower cost of doing business. These markets, according to the report, are powered by strong growth, home building outlook, affordability, and job markets.
Austin, Texas, comes in at No. 2, with a continued surge in the suburban office and home building sectors. Nashville, Tennessee; Dallas-Fort Worth; and Charlotte, North Carolina; Tampa-St. Petersburg, Florida; Salt Lake City; Washington, D.C., and the Virginia suburbs; Boston; and Long Island, New York, round out the top 10.
Other trends highlighted in the report include:

• The Economy: Most professionals, according to the report, anticipate that overall real estate prices will fall 5% to 10% as income is curtailed for several years. However, single-family homes, industrial properties, and data centers are expected to rise in value. Retail and hospitality are the sectors predicted to have the largest declines. “The long-term outlook in the real estate sector hinges on the country’s ability to reign in COVID-19,” the report notes.
• Social Justice and Racial Equity: 70% of respondents agree that the real estate industry can address and help end systemic racism. Solutions include promoting diversity, equity, and inclusion within the sector as well as ways to develop underserved communities. In addition, nearly half, 48%, of respondents disagree that real estate understands how past policies and practices have contributed to system racism.
• Affordable Housing: The pandemic has accelerated housing disparities in the U.S. with many low-income workers experiencing unemployment and potential evictions. While local and state governments are facing declines in revenues, experts agree that the federal government “has the wherewithal to provide programs and resources to the problem.” This includes the expansion of the low-income housing tax credit and Section 8 vouchers.
• Safety and Wellness: Over three-quarters of professionals, 82%, agree that health and well-being is here to stay and will become more important across all sectors of real estate. “The new focus on personal safety will lead to new services and advanced technology that provide cleaner buildings, improved HVAC infrastructure, sensors, touchless entry, and contact tracing apps.

“Now, more than ever, the real estate industry has the chance to take the lead in using planning and development skills and investment capital to reshape our work and lifestyle environments. These tools can used to address societal issues of safety, green space, and racial equity,” said Byron Carlock, PwC partner and U.S. real estate practices leader. “The gauntlet of responsibility is ours to embrace, and industry leaders see the opportunities and are responding with investment and leadership.”

After dipping in the previous two quarters to levels unseen in nearly a decade, the Multifamily-for-Rent outlook for design and construction firms returned to pre-COVID levels in the 3rd Quarter, according to the PSMJ Resources’ Quarterly Market Forecast (QMF). The market’s net plus/minus index (NPMI) reached 40% for the 3rd Quarter, following quarters of -2% and +7%, respectively, in the first half of 2020. The negative index in the 1st Quarter was the first for the Multifamily market since 2010.

"The entire Housing market is showing impressive growth potential based on A/E proposal activity,” said PSMJ Senior Principal David Burstein, PE, AECPM. “This view is reinforced by government statistics for housing permits and new home starts. Multifamily housing (apartment buildings) took a brief pause from its 10-year growth surge when the COVID-19 crisis first hit in March, but has since recovered quite nicely. The condominium market actually saw a significant dip this spring, but more recently is showing signs of recovery, albeit not to the same levels as Multifamily-for-Rent.” 

PSMJ’s NPMI expresses the difference between the percentage of firms reporting an increase in proposal activity and those reporting a decrease. The QMF has proven to be a solid predictor of market health for the architecture and engineering (A/E) industry since its inception in 2003. A consistent group of over 300 A/E firm leaders participate regularly, with 162 contributing to the most recent survey.
 
The Multifamily market returned to positive territory out of the Great Recession in the 4th Quarter of 2010 with an NPMI of 24%, then jumped to 44% in the 4th Quarter of 2011. It never dropped below 41% again until it plummeted from 54% in the 4th Quarter of 2019 to -2% in the 1st Quarter of 2020. 

“Many of the factors that drove Multifamily's growth pre-COVID remain in place,” adds Burstein. “Plus, there is now a new factor – the potential flight of many people from cities to suburbs – which is shifting the location of the demand. So we believe the Multifamily market will continue to be strong into the foreseeable future.”

 The Multifamily rebound was part of overall improving conditions for the Housing market, which paced all 12 of the major markets assessed in the QMF with an overall NPMI of 38%. Among other Housing submarkets, Single-Family Property (individual houses) also recorded a 40% NPMI (up from 9%), with Single-Family Development (Subdivisions) at 27%, up from -12%, and Senior & Assisted Living (Independent Living) at 26%, up from -1%,.

Among the 12 major markets surveyed, Water/Wastewater was a close second to Housing at 37%, followed by Healthcare (30%), Energy/Utilities (28%) and Light Industry (27%). Overall proposal activity across all markets and submarkets returned to growth mode in the 3rd Quarter with an NPMI of 22%, up from -10% in the 2nd Quarter. The three worst-performing major markets in the 3rd Quarter were Education (-36%), Commercial Users (-31%) and Commercial Developers (-21%).

PSMJ Resources, a consulting and publishing company dedicated to the A/E industry, has conducted its Quarterly Market Forecast for more than 17 years. It includes data on 12 major markets and 58 submarkets served by A/E firms.

*The National Multifamily Housing Council reports that 90.6% of households living in the country’s stock of professionally-managed market-rate apartment properties have paid rent for October as of the 20th. The latest results fall 1.8 percentage points under the 92.4% payment level recorded through October 20, 2019. Following the pattern seen historically, RealPage stats again show stronger collections in the Class A and B product sectors than in Class C properties, reflecting that more households live paycheck to paycheck in that Class C block of properties.

As political pundits debate debating, financial pundits are watching the 3D tennis match between President Trump, Speaker Pelosi and Chairman Powell. This trio has been volleying stimulus demands back and forth for quite a while … even though the last round of stimulus ran out.
Despite all this political pandemic pandering … so far, it’s not been very stimulating, except for perhaps Wall Street. Meanwhile, Main Street is lying face down with a lockdown knee on its neck pleading, “I can’t breathe.” Without relief of some kind ... either the freedom to go back to work at full speed, or another dose of emergency funding ... eventually, the damage could become permanent to the extent it's not already.
After all, cash is like financial oxygen. When you’re prevented from operating your business, you can’t take a breath of fresh cash. Wait too long, and it’s game over. Many are already there. You may or may not think the lockdowns are legal, warranted, or effective. Ditto for stimulus. But as we always say, it doesn’t matter what we think. What matters is what happens. And because we can’t control what happens, we watch and plan carefully for possibilities and probabilities.
As the picture gets clearer, we’re prepared to promptly pivot properly. It seems to us the most likely scenario is a tsunami of stimulus. And mostly likely, fiscal stimulus (government spending) versus monetary stimulus (lending stimulation from the Fed).
After all, what can the Fed do? Lower rates? They’re already at zero. So, it’s no surprise Powell is calling for more government spending. Presumably, Powell's proposing to print dollars to loan to Uncle Sam ... by purchasing Treasuries to provide for the spending. (Sorry, we had to P again)
(Yes, it’s a nifty racket the Fed has. They print dollars out of thin air to buy IOUs from Uncle Sam which are repaid by taxing Main Street workers … but that’s a creature to dissect on another day). Which brings us to the primary point of today’s pontification … the potential impact of Powell printing trillions of dollars. (Okay, we’re done P’ing now)
Peter Schiff says printing more dollars is in and of itself inflationary.
Meanwhile, Jim Rickards says the Fed doesn't count printing dollars as inflation until it shows up in the official Consumer Price Index (CPI). They don't disagree. At least Rickards doesn't think so. He's just saying the Fed is myopically focused on moving this one metric ... CPI. The challenge is that prices are derived from MANY components of cost ... including materials, energy, interest, taxes, regulations, and the biggie ... labor.
And as many of those other costs went up, it is no secret corporations invested a lot of time and money moving jobs offshore to reduce labor costs. Like real estate investors, business people are constantly looking for ways to structure their activities to increase revenue and decrease expenses. Sadly, labor is often the target.
Policymakers would be wise to focus on creating environments attractive to job creators. It's one of the things we look for when choosing markets to invest in. And in case you're not already keenly aware, it takes a healthy labor market to create a great real estate investing market. So, while the Fed wants to push consumer price inflation because it's a metric of strong employment and wages ... it's a result, not a cause. Giving people money to spend to force prices up doesn't create jobs any more than heating a dead body up to 98.6 degrees Fahrenheit creates life.
It's not the metric that matters. It's HOW you get it. As we've noted before, it seems to us President Trump's policies attempt to create an environment welcoming of jobs and capable of higher wages. Unsurprisingly, he approaches the challenge the way a real estate developer would ... by cutting other components of cost to make room for higher wages.
It's a tall order and comes at a price, American voters may or may not be willing to pay. But after 3-1/2 years of watching, it seems like that's the plan. Meanwhile, for the Fed to get the CPI to move up, consumers need both jobs and purchasing power. Sure, the Fed can print dollars so Uncle Sam can pass out "free" money ... and like a sugar-high, provide a temporary burst of consumer purchasing power. But each time the Fed injects new money into circulation ... directly or indirectly ... it dilutes the dollar. The danger is the Fed succeeds in raising prices, but not wages.
The first American Revolution was based on the complaint taxation without representation is tyranny. If policymakers aren't careful, a new battle cry may emerge ... inflation without wage growth is poverty. It certainly will be hard on tenants. But as long as it's easier and profitable to move jobs offshore or automate them away, it's hard to get wages to rise. We don't envy the folks trying to solve this problem. But we do need to think through what they're doing and how it rolls downhill onto our investing. The short of it is we think a diluted dollar is coming to a financial statement near you. The question is … How does a diluting dollar affect your real estate ... and how do you position your portfolio to prosper in spite of it? Of course, that's a giant question ... and you'd need a lot of smart people and a lot of time to talk it all out. But it sounds fun. (It is.)
For now, let's just pose some pertinent points to ponder, In the past, real estate has been an effective way to hedge inflation. And with mortgage debt as an accelerator, real estate is arguably still the BEST inflation hedge available to Main Street investors.
BUT ... real estate is influenced by incomes, lending, and mortgage rates. And it doesn't move fast.
A super bullish scenario (in a market with the right supply and demand dynamics) would be rising incomes, looser lending, and falling interest rates.
Mortgage interest rates are probably already about as low as they’re going to get. While we think it’s good to get all the cheap mortgages you can, we wouldn't borrow to buy hoping lower rates in the future will increase cash flow or equity. These might be the lowest rates you'll ever see. So best to focus on markets, niches and price points where you think rents have a reasonable chance to rise ... based on things YOU can control.
Meanwhile, it appears lending standards are tightening. This is a clue that lenders are nervous about the economy (jobs) and values (collateral). They care about getting payments ... and what they get if they don’t. When it comes to payments, lenders know it’s either going to be from stimulus or jobs. If you're a lender, which would you prefer? Stimulus isn't a long-term solution. In fact, with all the partisan bickering, it's not even turning out to be a short-term solution.
To no surprise, lenders are proceeding cautiously. This is probably why the Fed is asking the government to spend freshly printed money into circulation. Lenders are skittish about loaning it into circulation. Of course, if you’ve got good credit, documentable income, and equity, you’re sitting in a GREAT position ... if you move quickly. After all, the looming economic crisis might take your equity anyway. You might as well get it while it's there and the loans are cheap. Remember, CASH is king in a crisis. Equity is only there and useful in boom times. It hides when the going gets tough.
Hedging a Diluting Dollar
But as much as we love real estate, we know it’s not a one-size-fits-all cure-all for every economic pandemic that comes down the pike. Although each move (in dollar terms) independently from each other and from real estate … other asset classes also have some important things in common. First and foremost, they’re all real and essential. You probably already understand energy is essential. Anyone who’s run out of gas or lost power at home or work knows how essential energy is to daily life. Ditto for food. As for gold … up until 1971, for nearly all of civilized history, gold was money. Sure, people like gold for jewelry and it’s useful in electronics, but gold is primarily a monetary metal. That's why central banks own gold and protect it with armies. Maybe they know something you should know. Got gold?
After all, if the Fed is going to print trillions of new dollars to feed Uncle Sam stimulus cash, it dilutes all the dollars already out there. This dilution will show up in different places, but takes time to trickle into jobs, wages and real estate. Does that mean you should sit out real estate and wait for the big crash?
Some markets are already crashing, and others are booming. So, it's smart to always be looking for deals ... and then acting when it makes sense.
Another major thing to watch for is if and how fast the lockdowns end, and if the world is able to get back to work at full speed. It's notable the World Health Organization (WHO) just flip-flopped … telling world leaders NOT to use lockdowns as their primary weapon against the virus. However, there’s already been a lot of lockdown damage done. And who knows if WHO knows what WHO will do next?
And even IF everything opened up tomorrow, it’s going to take a lot of money from savings, investment, tax cuts, lending or stimulus to jump-start this stalled economy. If we had to bet on which funding source will be the lead horse, we think there's a lot more stimulus and dollar dilution coming ... in spite of all the bickering. That's because stimulus is the fastest and most politically expedient. We're not saying it's best ... or even a good idea…. it's likely.
So. while you're rearranging your balance sheet to hedge dollar dilution ... stay engaged with how well policymakers use the tax code, regulations, trade policy and other tools to direct the flow of funds into actual job creation and real wage growth. If they get it right, it could be a big boon for real estate ... potentially resurrecting some sleepy markets. The bad news is it will take time ... and that's good.
After all, we all need time to get in position. Hopefully, you're already making your moves.
Meanwhile, we’ll keep watching, talking to smart people, and thinking about how to take effective action.
We encourage you to do the same.
Robert Helms and Russell Gray
Hosts
The Real Estate Guys™ Radio Show

Industry experts say health issues need to be resolved before the economy can fully recover.

While the fundamentals are adjusting for the multifamily market, the foundation is still solid, and industry experts are optimistic looking ahead to the long term.

“As we go through this economic cycle and we look over the next year or two, I’m very optimistic about how multifamily is going to play out because I think the demand is going to remain extremely high,” John Sebree, senior vice president, national director at Marcus & Millichap, told attendees during the virtual Multifamily Executive Conference's Economic Outlook session at the end of September. “We can have a quarter or two that is soft with some uncertainty, but the underlying fundamentals are very strong.”

At the macro level, Ryan Severino, chief economist at JLL, noted that he believes the recession is over, with the data getting consistently better over time and a prediction for some positive results out of the third quarter. However, he said the nation is in a K-shaped recovery. “It’s an incredibly uneven recovery for households. The higher your wage is the better you are faring right now, and the lower the wages, the more people are struggling, especially with lower-wage service-sector jobs that are still struggling to come back.” He said he’s also seeing strong performance in the asset markets—stocks, bonds, and residential real estate—but only half of Americans are benefiting from this. “The uneven recovery will have significant implications for those of us who operate in the multifamily industry as we try to think about what the next couple of years will look like until we get fully on the other side of this,” he said.
Sebree and Severino both agreed that the health issue of the pandemic needs to be solved before the other pieces fall into place.

“The trajectory still depends on the pandemic,” said Severino. “Until we get past this, we are going to struggle to bring the economy fully back online.”

Looking specifically at multifamily, with the demand and fundamentals in place, even if the industry sees an increase in vacancy by a couple of percentage points, Sebree said it will be short-lived.

“Twelve months ago, we were talking about a workforce housing crisis since we’re not building enough,” he said. “What’s happening is the demand for workforce housing continues.” Sebree added that he’s seeing a waning demand for Class A luxury high-rises in urban cores. “Not surprisingly, high-rise has the highest vacancy and garden-style has remained essentially unchanged.”

Both Sebree and Severino said they don’t believe the pandemic will be the end of urban living.

“There’s a transition period until we’re on the other side of the pandemic,” said Severino. “This isn’t the death of cities. In the medium to long run, I’m still a big believer in cities.”
Sebree added that there’s been a trickle of millennials moving out of the cities for the past four or five years, with many kicking the can down the road—until the pandemic hit and they decided it was a good time to move. “That’s what has caused a little bit of a wave of people moving out of the urban core,” he said. “And it’s not just into the suburbs, it’s to other cities.” He said some of the cities where people are migrating to include Salt Lake City; Boise, Idaho; Denver; Phoenix; and Central Florida.

“People are moving to different areas for different reasons pulling people out of the urban core, but it was pent up demand,” he added.

ABOUT THE AUTHOR
Christine Serlin

Hi! I’m Pat

I’ve made a lot of mistakes while building my online business. It took me a while, but I eventually learned that mistakes and failures are a part of the entrepreneurial journey, and learning from those experiences and overcoming related challenges is what becoming a successful entrepreneur is all about.

If there was one mistake I could take back, however, it would be the one I made related to my email list:

I didn’t start one right away.

If there was a second mistake I could take back, it would be the other one related to my email list:

Not fully understanding how to use it.

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