Multifamily Market Strong Despite Headwinds
The U.S. commercial real estate market is now eight years into expansion mode, which is lengthy by historical standards. Still, many experts see more room to grow, but there may be headwinds in the multifamily sector.
“The biggest challenge apartments face in most markets is new supply aggressively seeking tenants,” says Ken Riggs, President of Situs RERC.
New construction is creating excess supply and putting more downward pressure on rents, especially in Class A properties. According to Riggs, construction in the top 82 markets studied surpassed 200,000 units in both 2015 and 2016.
“However, while occupancy and revenue performance will be a lot lower than it has been, apartments will still be a favored asset class because of the long-term stable income characteristics and the diversity of tenants within income streams,” Situs’ Riggs says. “While the primary markets may have reached their peaks, there is still room for opportunity in secondary markets, such as Austin, Nashville and Charlotte,” he adds.
Vacancy rates likely bottomed out at 4.6 percent in 2015 and are now inching higher due to the heavy load of new supply. Vacancies are expected to tick higher to 5.2 percent by the end of the year, increase slightly to 5.3 percent in 2018, and 5.4 percent in 2019, according to the ULI Forecast.
Multifamily rental rate growth slowed significantly in 2016, growing just 0.2 percent after six straight years of growth over 3 percent. Rental rate growth is expected to increase to 2 percent this year and stay ﬂat at 2 percent in 2018 and 2019.
Fannie Mae started off the year with a bang, producing $17.4 billion in multifamily financing in the first quarter, up about 38 percent compared to the first quarter of 2016. The quarterly total was also up 20 percent from its fourth-quarter 2016 production.
Compared to its counterpart, Freddie Mac had a slower start to the year, producing $12.7 billion in the first quarter, down about 28 percent from both first-quarter and fourth-quarter 2016.
This comes as the Ten-X CRE Nowcast indicates that property prices continue to struggle amid higher rates, policy uncertainty and lack of consensus over the sustainability of this long economic cycle. The All-Property Ten-X Nowcast dipped 0.3 percent in June, as prices were mixed across property segments. This was the second consecutive monthly decline and brought the year-on-year Nowcast growth below double digits.
Two property segments posted solid gains in June: apartment and retail. However, while the 0.9 percent increase in the Ten-X Apartment Nowcast indicated a continuation of solid price increases for this property segment, the 0.9 percent increase in retail was a partial recovery from a sharp downdraft in May.
Apartment vacancies hit midyear slightly higher but still in the low-4 percent range, allowing rents to continue to increase, though they have decelerated. Retail, on the other hand, keeps getting whipsawed by news regarding store closings and the unrelenting threat of e-retail, with the news of Amazon’s purchase of Whole Foods taking the battleground between brick-and-mortar retailers and e-retail to a new arena.
The weakness in June was centered in the hotel and office segments.
Riggs points out every apartment market and class of apartments have their nuances, so it’s important to get robust market information and work with a trusted advisor such as Situs RERC.
Wake-Up Call to Mortgage Industry: Millennials Crowdfunding Their Homes
For most millennials, buying a home is more like a nightmare than the promised American Dream.
Eighty percent of millennials — defined as those born between 1980 and 1995 — say they want to buy a home, but most have less than $1,000 saved a for a down payment, according to ApartmentList.com.
So, enter a new model: Crowdfunding.
One company, Fundrise, has developed a new investment platform, called the eFund, that aims to alleviate housing costs for young people. Prospective homebuyers purchase shares that fund housing renovations and new developments. These investors then get notified through the “eFund Pool” about finished homes, which are offered at up to a 10 percent lower price than it would be if they were going through a broker.
“Traditional housing and mortgage companies need to take notice of this and other innovative ideas,” says the Collingwood Group Managing Director Tom Booker. “The eFund is an example of innovation. The problem of home availability and affordability have always been a challenge for new homeowners. eFund has been inventive, using an understanding of the demographic, investment principles, and new technology-based approaches to address home affordability/availability. Successful or not this, is an example of an effort to solve the problem with market-based principles that millennials and others may find attractive, actionable and do not rely on investors taking on more risk, or originators adding to their regulatory burden. Good news!”
Within the first week of launching, nearly 6,000 people have invested at least $1,000 each in the Fundrise LA eFund, according to the company. Most of these investors are younger than 35.
The money raised through the new eFunds goes toward land, renovation and construction. Fundrise estimates that the program could build between 250 and 750 new homes over the next five years, and 20 homes in Hollywood are already under construction.
EFund investors will have a period of exclusivity to bid on finished homes before they’re opened up to the general public. Even if they don’t purchase a home, they can make money on their investments over time.
Rising Student Debt Threatens American Dream
The struggle for young Americans to get a place on the U.S. property ladder is intensifying.
A new report issued by the New York Federal Reserve found that up to 35 percent of the recent dramatic decline in home ownership can be explained by the rising piles of loans millennials are taking out to finance their education, doing so at a time when government funding for colleges is waning and colleges are, in turn, subjecting students to massive hikes in tuition.
Student loans now average about $37,000 for graduates of the Class of 2016, with monthly payments for those loans preventing them from saving for a down payment and making monthly mortgage payments, freezing them out of the residential home market.
The millennials are either turning into a permanent renter class or boomeranging back to childhood homes to live with mom and dad. Nearly 45 percent of people in their early twenties live with their parents, up from 33.5 percent in 2004, the Fed said.
Home ownership among young consumers dropped off rapidly following the Great Recession, from 32 percent in 2007 to 21 percent in 2016. This occurred at a time of record-low interest rates when in most U.S. housing markets it was cheaper to buy a home than to rent.
That’s a chief reason why homebuilders have increasingly turned toward move-up and luxury home building and away from starter homes: the buyers are just not there.
read more: Reuters
Citi Reportedly Chooses Frankfurt Post-Brexit
Citigroup has chosen Frankfurt as the post-Brexit hub for its European sales and trading business, according to people familiar with the matter.
The decision by the US banking giant is likely to see around 200 London-based jobs move to the German city before Britain leaves the European Union in 2019.
Citi’s decision will bolster Frankfurt’s position as the city most likely to benefit from London’s banking migration after Brexit.
Standard Chartered, as well as Japan’s Nomura and Daiwa Securities, have already picked the German city as their EU headquarters, while Goldman Sachs, JPMorgan, Morgan Stanley and Deutsche Bank have all said they would increase staffing in Frankfurt.
London could lose 10,000 banking jobs and 20,000 roles in financial services as clients move €1.8rillion of assets out of the UK after Brexit, according to think-tank Bruegel.
Citi’s decision is significant because the bank has operations across Europe and could have moved its EU sales and trading business elsewhere.
People familiar with the situation said Citi considered several other cities, including Paris, which has been aggressively courting London-based firms, and Dublin, which will become an important hub for some of the US bank’s other businesses. Frankfurt won because Citi already employs more than 300 people there and has a good relationship with BaFin, Germany’s financial regulator, insiders said.
Under the plans, Citi will move part of its broker-dealer – the main vehicle for its sales and trading business – to Frankfurt. The German entity will become responsible for Citi’s sales and trading business with EU-based clients, which accounts for around a third of the volume of trades handled by the division in Europe, the Middle East and Africa.
read more: fnLondon
U.K. Resumes Brexit Talks With EU
The U.K. and the European Union began Brexit talks in earnest Monday, with a four-day negotiating session on a set of thorny issues the EU wants largely resolved before discussions turn to a future trade deal.
U.K. Brexit Secretary David Davis and the EU’s top negotiator Michel Barnier returned to the negotiating table in Brussels for the first time since the official opening of talks on June 19, with the focus on U.K. and EU citizens’ rights after Brexit and how much London must pay to cover the U.K.’s outstanding financial commitments to the bloc.
The two sides also are due to discuss how to manage the U.K.’s border with Ireland after withdrawal, expected in March 2019.
The EU has insisted progress must be made on these and other separation issues before it will consider discussing future economic ties to the U.K., highlighting the challenge of agreeing to a far-reaching settlement on Brexit within the 18 months remaining for talks.
“We made a good start last month, and as Michel says we are now getting into the substance of the matter,” Mr. Davis said, adding that it is “time to get down to work and make this a successful negotiation.”
Mr. Barnier said he and Mr. Davis will remain in touch throughout the week as their teams get to work and will reconvene “to take stock” on Thursday.
Mr. Barnier said last week there are major differences on key points. The EU proposed granting EU citizens in the U.K. and U.K. citizens in the EU rights to work and benefits similar to those that they already enjoy. The U.K. countered with proposals offering EU citizens “settled status” that confers many but not all existing rights as well as a pathway to British citizenship. There are around 3 million EU nationals in Britain and more than 1 million U.K. nationals living in the union’s 27 other member states.
Despite such differences, analysts say that the two sides should be able to reach a deal on citizens’ rights, but a much bigger disagreement looms over money.
The EU estimates the U.K. is on the hook for upward of €60 billion euros ($69 billion) in spending pledges made but not yet fulfilled.
The prospect of payment on such a scale is political dynamite in the U.K., where advocates of Brexit won last year’s referendum in part on a promise to stop sending Brussels any money at all.
read more: Wall St Journal
Three New REITs Prep for Public Launches
Last month’s rapid pace of new publicly traded REIT launches is continuing this month with two new mortgage REIT filings and a publicly held landowner/developer announcing plans to convert to a REIT.
Publicly traded REITs have relied heavily on the capital markets this year for funding, having raised $43.18 billion by the end of the second quarter, representing a 19.1% increase from the $36.27 billion raised in the same period one year ago, according to S&P Global. U.S. REITs completed 13 offerings in June raising a total of $3.36 billion, of which six were new REIT launches.
Now three more REITs are preparing to join them:
read more: CoStar
What The Future Of Money Means For Real Estate
When the Ming dynasty popularized bank notes in the 14th century, it revolutionized commerce. Merchants no longer had to carry around heavy metal coins, and the government’s guarantee of value printed on paper money hugely expanded the influence of the state.
Today a similar revolution is happening: physical money is disappearing. The rise of electronic payment methods is having a fundamental effect on real estate, particularly retail.
The British Retail Consortium revealed that electronic payments account for more than half of all transactions in the U.K. There have been predictions that the Netherlands will become the first cashless society, maybe as soon as 2030. Sweden and Denmark are not far behind. Even the U.S., where cash is more persistent, is moving that way — in a survey in April conducted by bank ING, 38% of U.S. respondents said they would be willing to go cashless.
The weakening of cash’s power has created stores that need virtually no staff, and technology allowing easier electronic payments is liberating small retailers and traders from needing stores at all. The next step will be bespoke cryptocurrencies created by retailers themselves. It behooves retailers to get on board the electronic payment train: when consumers do not use cash, they spend more. Swiping a card or clicking on a purchase does not feel like spending money the same way handing over cash does. This intuitive feeling is backed up by academic research.
Alongside deals such as the purchase of Whole Foods, the trial shows how Amazon is looking to go beyond online or physical retail and create a business that dominates the sector as a whole. “It further emphasizes the move from different retail channels, to omni-channel, to just retail,” said Mark Robinson, founder and property director of convenience shopping centre owner Ellandi. Writing on the stores, Andrew Melville, strategist and consumer experience designer at product and service development firm Continuum, also said Amazon is blurring the boundaries between different types of retail. He thinks Amazon will look to provide the technology it is developing to other retailers in exchange for them using its Amazon Payments platform.
But this comes with a warning. “I’m reading a book that I’m sure a lot of people have read called ‘Rise of the Robots,’” Robinson said. “It’s got an anecdote about Henry Ford touring a newly automated factory with one of his union reps and remarking, ‘this is great, now I won’t have to pay all of those union dues.’ To which the rep snapped back, ‘yeah, but who’s going to buy your cars?’”
read more: BisNow
Target Sees Same-Store Sales Growth After Year of Declines
Target says rising store traffic helped turn comparable-store sales growth positive for the first time in a year, giving the retailer an early win in its bid to improve stores and lure shoppers with new brands.
The retailer now expects a modest increase in comparable sales in its second quarter compared with prior guidance of a low- to single-digit percent decline.
Target also gave a rosy earnings outlook, citing tax benefits from its supply-chain operations. The company now expects earnings per share to come in higher than prior guidance of 95 cents to $1.15.
The Minneapolis-based company, like retailers industrywide, has been coping with the effects of decades of overbuilding and falling foot traffic as e-commerce becomes increasingly popular.
read more Wall St Journal
‘Google Effect’ Knows the Way to Downtown San Jose
(Click to Play the Song While You Read Along)
A new example of what might be called the “Google effect” is leading real estate speculators to drop big money on properties in downtown San Jose.
East Coast investors just bought an $80 million office building near the Diridon Station, not far from where Google is set to build a huge new campus.
The building sits at the crossroads of Almaden and San Carlos streets.
But the sale of 303 Almaden also crosses a price line never seen in the downtown area. “What’s significant about 303 Almaden is that it broke the $500 per square foot mark,” said Mark Ritchie of South Bay real estate agency Ritchie Commercial.
Commercial real estate expert Ritchie said it shattered the previous record by about $90 per square foot. The deal may have already been in the works before Google announced plans to build an 8 million-square-foot transit and tech village near Diridon Station.
But it comes amid speculation of a “Google effect” that would be transformative for San Jose. “I don’t think anyone yet has a handle on how significant that will be, said Ritchie. Because Google is effectively coming into downtown and building as much space as exists in the entire rest of downtown San Jose.”
Just blocks away, tech company Zoom Video Communications is glad it just finalized a leasing deal for two more floors just blocks from 303 Almaden and the Google project.
“Timing is everything, right? So I’m glad we locked up some of the leasing already, especially with this new news,” said Zoom Video Communications spokesperson Greg Holmes.
read more: CBS SF
BOOM: Hamptons Property Asks $150 Million
In New York’s Hamptons, a roughly 14-acre beachfront property with multiple houses and two putting greens is asking $150 million.
On Meadow Lane in Southampton, the property is an assemblage of four parcels and includes several houses, according to listing agent Harald Grant of Sotheby’s International Realty. He declined to name the sellers or specify why they are selling, but said they purchased the parcels over the past few years with the intention of demolishing the existing homes to build a new family compound.
The combined properties offer about 700 feet of direct frontage on the ocean, Mr. Grant said. One of them, on 3.5 acres, includes a roughly 12,000-square-foot house, built in the 1990s, with eight bedrooms and an indoor pool.
read more: Wall St Journal
Have a prosperous day ahead. Enjoy the Hamptons or wherever this fine summer day takes you!
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