Archives for January 2021

The Metrics You Should Be Watching in 2021

January 12, 2021 by CARNM

Job cuts and the Texas ratio will matter.

When the Bureau of Labor Statistics (BLS) publishes its monthly jobs numbers, the world takes notice. Markets move and politicians tweet. But for commercial real estate professionals, K.C. Conway, chief economist for CCIM Institute, thinks there are more insightful indicators that, taken together, would provide a better understanding of what’s ahead for the CRE industry. First, he suggests focusing on two forward-looking employment reports that precede the monthly BLS jobs report: ADP’s National Employment Report and Challenger, Gray & Christmas’s monthly job cuts report. ADP foretells what is happening with private employers, whereas the Challenger, Gray & Christmas numbers provide insight as to where the size of the workforce of private employers is headed ― and the subsequent demand for CRE space. “CRE rents and occupancy rates rise and fall on what happens with employment,” notes Conway.
But those aren’t the only places industry professionals should be looking for information on what promises to be a turbulent 2021. Conway suggests following transportation metrics such as airline passenger counts from the Transportation Security Administration and rail traffic from the American Association of Railroads. As goes the business traveler and intermodal rail traffic, so goes the travel and leisure industry and supply chain, an area that impacts consumers, retailers, manufacturers, and logistics infrastructure alike.
After employment and transportation, Conway advises to then take the pulse of CRE capital activity. TREPP offers data on the volume of loans being transferred to special servicers and delinquency by property type, which are good proxies for the ripple effect of COVID-19 on the health of CRE debt. For bank debt, Conway looks at FDIC reports on bank failures. Additionally, Conway suggests CRE professionals monitor the Texas ratio, which is the percentage of a bank’s capital tied up in bad loans. A healthy bank would have a ratio of less than 5%. The double whammy of COVID and a destructive season of natural disasters have left some banks with Texas ratios reaching 30%.
“As much as Trepp CMBS delinquencies are a good proxy for what’s coming at you in CMBS, the Texas ratio is a good proxy for what to expect in terms of problems in the banks,” Conway says. “And that ratio is telling us that there’s substantial erosion occurring.”
Finally, Conway is encouraging CRE investors and participants to know the fiscal conditions of their state and local governments. The 2017 Tax Act brought into focus the impact of state and local taxes on business and workforce migration patterns. Pre-COVID-19, the trend was moving away from high tax states. This general movement accelerated during the pandemic as workforce migrated away from higher density (and higher tax) areas. Expect this trend to continue as companies discover they can “ditch a lot of the office” and attain skilled workforce in affordable secondary cities.
This challenging environment has Conway recommending that CRE professionals become “capital advisers” in 2021, with a keen focus on the why, where, and financing elements of CRE decisions.
“Usually, we say location, location, location,” Conway said. “Now, I believe it’s equal parts location, employment, and capital. Understanding the why and where of businesses, as well as their capital needs, will help CRE professionals more accurately determine NOI, value, and demand for commercial real estate.”
Source: “The Metrics You Should Be Watching in 2021“

Multifamily Properties Are Positioned for a Strong 2021

January 12, 2021 by CARNM

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.”
Source: “Multifamily Properties Are Positioned for a Strong 2021“

Vacancy Climbs As Rents Fall Across Asset Classes

January 11, 2021 by CARNM

Most metros are seeing “bleak” fundamentals in apartments, office and retail, according to a new Moody’s Analytics.

Apartments, office and retail are all following a similar trend: rising vacancy rates with declining rents. A new report from Moody’s Analytics calls the dynamic “bleak, but not dire,” noting that while most metros are following a similar pattern, most of the declining fundamentals are more moderate than originally expected.
The national apartment vacancy rate climbed to 5.2% in the fourth quarter, up nominally from 5.1% in the third quarter and 4.7% in the fourth quarter 2019. Apartment rents fell an additional 1.4% in the fourth quarter and are down 3.1% for the year. Major metros are bearing the brunt of the damage. Boston, Washington DC, San Jose, New York City and San Francisco had the most significant decline in apartment rents in the fourth quarter. New York and San Francisco are leading the pack with rents down 12.2% and 14.9%, respectively, for the year.
The national office vacancy rate climbed to 17.7% in the fourth quarter, up from 17.4% in the third quarter and 16.8% a year ago. Office rents have been slower to decline, falling .6% in the fourth quarter and only .7% for the year. Like apartments, New York City and San Francisco led in declining fundamentals with rents falling 1.9% and 1.5%, respectively. However, Orange County, California had the steepest declines in office rents, down 2.3% for the quarter alone. The report found the vacancy rate increases more concerning, noting that 54 markets had an increasing vacancy rate and 26 metros have a vacancy rate higher than 20%.
Of course, retail has been among the hardest hit commercial real estate sectors; however, fundamentals have not deteriorated more significantly than apartments of office. Retail vacancy increased to 10.5% at the end of the year, up from 10.4% in third quarter and 10.2% last year. Rents were down .4% for the quarter and 1.2% for the year. Of the 77 metros Moody’s reviews, 64 markets had a decline effective rent in the quarter.
It isn’t all bad news. Select markets had improving fundamentals this year. In apartments, some secondary markets—Chattanooga, Las Vegas, Sacramento, Ventura County, Memphis and Fairfield County—had effective rent growth of 0.7% to 1.1%. In office, five markets had an increase in effective rents, including Lexington, Raleigh-Durham, Tulsa, Milwaukee and Buffalo. Retail is perhaps the most impressive with 13 metros seeing rising rents, although the growth was moderate.
Unfortunately, Moody’s doesn’t have a better outlook for 2021. The report expects fundamentals to continue to decline this year, particularly in office and retail where tenants that have been locked into long-term leases have not yet had the opportunity to downsize or vacate the property.
Source: “Vacancy Climbs As Rents Fall Across Asset Classes“

Final Drone Rules Released

January 8, 2021 by CARNM

On December 28, 2020, the FAA released new final rules for certain uses of Unmanned Aerial Systems, (UAS, or drones), the result of a multi-year undertaking. These new rules build upon previous rulemakings which expanded UAS operations to allow for commercial use and eased restrictions for those operators, along with creating the small-UAS (less than 55 lbs) and micro-UAS (4.4. lbs or less) categories of vehicles. The new regulations do several things: 1) they require remote identification technology for UAS; 2) they expand UAS commercial operations to allow for over-crowd flights, creating different restrictions based on the category the UAS falls into (more below); and 3) they establish a system for allowing operators to conduct UAS flights at night.
Previously, the FAA had allowed commercial UAS flights only over people on the ground who were participants in the operation itself. Under the new regime, certain types of UAS will be able to fly over crowds regardless of their knowledge or participation in the operations; others will have more restricted abilities. To accomplish this, the FAA created new categories for UAS:
Category 1: The only category based solely on weight. It is for UAS weighing .55 lbs or less. These UAS can fly over crowds regardless of if they are participating in the operation or not, as long as remote identification technology has been enabled.
Categories 2 – 4 are UAS that weigh more than .55 lbs and meet certain FAA safety standards, with the standards for Category 2 being highest, then Category 3, and finally Category 4. As the standards are lowered by category, the limitations on what those UAS can do are raised.
Category 2: Can fly over crowds, but not over open air assemblies.
Category 3: Can fly over people participating in the operation or within an enclosed/restricted space and the people within have been notified that a UAS may fly over them.
Category 4: Requires an “airworthiness certificate” from the FAA (Part 21), and is restricted to operations allowed according to it.
In addition, UAS Categories 1-3, if eligible to fly over people, can operate over moving vehicles when in transit (sustained flights over moving vehicles are prohibited).
The new rule also allows for commercial small-UAS (less than 55 lbs) flights at night. To fly at night, remote pilots must either complete an updated initial test or the updated recurrent online training prior to conducting a night operation. In addition, their small-UAS must be equipped with operational anti-collision lights that can be seen for 3 statute miles and have a flash rate sufficient to avoid a collision.
These updated rules expand the legal operational capabilities of commercial UAS and provide flexibility for operators who use them in their businesses, including real estate professionals. The FAA continues to work on regulations to allow for commercial UAS flights that go “beyond-visual-line-of-sight” (BVLOS). NAR will continue to work with the FAA to develop UAS regulations and advocate for common-sense rules which allow UAS to meet their full potential for real estate professionals while protecting the safety and privacy of people on the ground.
Read the new FAA regulations executive summary(link is external)
Get information on Remote Identification requirements(link is external)
Read the over-crowds and night flights rule(link is external)
Read the remote identification technology rule
Source: “Final Drone Rules Released“