Archives for October 2022

(Bloomberg)—After a record surge in housing costs and ballooning expenses for everything from food to energy, America’s renters have had enough.

Rent gains are finally starting to slow in many parts of the US, cooling a years-long boom that sapped affordability from coast to coast. Landlords have little choice but to ease off big increases: Demand from tenants is suddenly sinking.

It’s a dramatic reversal from just months ago, when people were fighting over a limited supply of apartments, getting on waiting lists or paying multiple application fees to land one home. Now, particularly in pandemic boom markets such as Las Vegas and Phoenix, the application piles have thinned out and listings are lingering longer. Measures of US household formation have turned negative.

Young people who otherwise might be striking out on their own are instead staying with the parents or, like 18-year-old Coleby Hillenbrand, cramming into apartments with multiple roommates.

“I was able to round people up and make rent affordable,” said Hillenbrand, who lives with his girlfriend and another couple in a tiny two-bedroom outside of Kansas City. “People our age aren’t making enough money to afford rent on their own.”

In a US housing affordability crisis that’s only worsening as mortgage rates rise for homebuyers, any sign of a rental cool-off is welcome news. Yet it’s also the product of economic turmoil as people struggle with soaring costs of goods and services and wages that aren’t keeping up. With a recession looming, the safe move is to stay put. For the Federal Reserve, aggressively raising interest rates to curb inflation, an easing of one of its key measures would be a positive sign.

“Rents have had a historic run-up, way beyond what fundamentals would justify,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School. “The Fed will not ease up until inflation abates, which requires rents to slow, the sooner the better and the harder the better, for quick relief.”

Rents nationally increased 7.5% in September from a year earlier, above pre-pandemic levels, but down from a peak jump of nearly 18% at the start of the year, when vacancies also were lower, according to Apartment List. Preliminary October data show a dropoff that’s faster than the typical seasonal decline and would be the steepest in month-over-month data dating back to 2017, said Igor Popov, the listing platform’s chief economist.

A cooldown has yet to show up in the consumer price index that’s closely watched by the Fed, about a third of which is tied to the cost of shelter. That measure of rents rose at a record annual pace last month. But it will be slow to reflect more recent shifts because the index tracks what renters are paying as well as the costs homeowners would incur if they had to rent back their homes — rather than new leases that are more apt to change.

These indicators lag the actual market. It might be six or nine months before the more recent slowdown is reflected in the CPI, said Mark Zandi, chief economist for Moody’s Analytics.

But renters are feeling the strain of inflation now. Unlike homeowners who can fix mortgages for 30 years, they can face rent increases every year, or sooner if they’re on a month-to-month lease. And they’re more likely to have less stable jobs and incomes.

The average American would have had to put in more than 64 hours of work in September to pay the typical monthly rent, according to an analysis by Zillow. That’s just a hair below the August level, which was the highest in data going back to 2015.

“Rent became unaffordable for people in lots of markets,” said Jeff Tucker, a senior economist at Zillow. “We shouldn’t be surprised that fewer people will go out and sign a lease. Throw on other inflationary challenges and that’s going to shrink rental demand.”

Demand is slowing the most in metropolitan areas such as Phoenix, Atlanta and Las Vegas, where rent growth was especially dramatic in recent years, said Jay Parsons, chief economist for RealPage, a rental-data tracker.

Household formation is freezing up, sending apartment demand negative for the first time for any third quarter in at least 30 years, according to RealPage data dating back to 1992. Tenants are leaving rentals at normal rates. The problem for landlords is that a lot fewer are moving in, Parsons said.

On her 25th birthday in July, Rachel McIntyre Smith, a multimedia coordinator in Chattanooga, Tennessee, moved back in with her parents. She loved the freedom of living alone until her landlord jacked up the monthly rent on her $1,100 one-bedroom by another $200, swallowing half her salary with utilities factored in.

“The last few months I was constantly thinking about how I was going to shrink my grocery bill or gas budget,” Smith said. “Now I can sleep better.”

The slump in the for-sale market would seemingly help landlords because sidelined homebuyers would need to live somewhere. But rents have shot up so high that many are instead looking for cheaper alternatives, like living with family, according to Apartment List’s Popov. And frustrated homesellers are listing houses for rent instead, increasing supply.

The slowdown is widespread, with rents falling month-over-month in September in 69 of the top 100 US cities. But it varies widely by geography, and many markets are still quite heated. Rents in the New York, San Diego, Miami and Orlando, Florida, areas, all jumped by at least 12% last month from a year earlier, according to Apartment List data, still gangbusters relative to pre-Covid levels.

It’s normal for rents to dip in the months leading into the winter holidays. But if demand doesn’t return by next spring, problems for landlords will worsen, Popov said. There’s a near-record amount of newly-built apartments under construction and heading for completion, adding to the rental inventory.

“The question is where is the economy in March, April, May, when people are normally out looking for apartments?” Popov said.

Cynthia Woodward says she’s juggling more vacant homes than any time in her 11 years as a Las Vegas property manager. Normally, out of the 130 homes she manages, a few will be empty.  But now she’s got a dozen, including one that was broken into in the dark of night, the thieves leaving with a new washer, dryer and refrigerator.

“Lately activity is ice cold,” Woodward said. “Where are the people?”

–With assistance from Vince Golle.

Source: “Renters Hit Breaking Point in a Sudden Reversal for Landlords“

While the core commercial real estate sectors including industrial and multifamily have garnered the attention of many investors, smaller asset types, such as, cell phone towers have flown under the radar screen despite logging a solid track record in their own right. Fewer real estate investors play in this space, but sellers of cell phone towers and antenna arrays still have no shortage of buyers for these assets.

“They may just have five entities lining up to buy rather than 10,” says Jason Lund, leader of technology infrastructure for JLL, working in the firm’s office in Charlotte, N.C. “There is still a lot of investor money chasing too few assets.”

The long list of potential buyers ranges from infrastructure REITs to private equity funds to telecommunications companies themselves. Committed investors have built up strong relationships pools of dedicated capital to create portfolios. “Fluctuations in U.S. and global lending rates won’t necessarily affect a wide swath of telecommunications and infrastructure investors,” says Lund.

REITs focused on cell phone towers controlled nearly 75 percent of the wireless communication infrastructure in the U.S. in the third quarter of 2022, according to data from Hoya Capital. American Tower owned 35 percent, Crown Castle 30 percent and SBA 10 percent. Private investors and others owned just 22 percent of these assets.

These infrastructure REITs spent more than $557 million to buy assets in the first half of 2022, according to the Nareit. That’s a fraction of the huge total of more than $10.2 billion purchased in the first half of 2021, including many portfolio deals. But the investment in the first half of 2022 was still about twice the volume of deals in the same period of 2019 and 2020.

The four infrastructure REITs had total returns down 27.19 percent through September—performance inline with the REIT sector as whole. In 2021, infrastructure REITs posted total returns of 34.41 percent.

Private buyers including infrastructure private equity funds also continue to bid for assets. “Investors see the benefit of towers as representing a cornerstone of a private market portfolios,” says Noi Spyratos, managing director and head of private infrastructure portfolio management for CBRE Investment Management.

It helps that the three largest telecommunications companies that use cell phone antennas – Verizon, T-Mobile and AT&T—are still growing their 5G networks. In addition, additional companies like Dish and Google are building out new telecommunications networks.

“The telecommunications and technology ecosystems are still in a growth cycle,” says Lund. “Demand for cell phone towers and antenna arrays is as strong as it was a year ago from the buyer’s side—with so few assets available, perceived pricing is still relatively stable.”

As higher interest rates and growing investment yields spread through the world economy, fewer new investors feel the need to break into a complicated niche business to earn a little extra investment yield.

“The kind of investors that might leave the infrastructure markets are ones that have capital that was not raised specifically for investment in this type of product,” says Lund.

Enough committed investors still bid on the limited number of assets and portfolios available to buy to support high prices. Cap rates are still close to lows reached early in 2022, averaging around 5 percent according to dealmakers, though individual deals vary widely.

“We expect cap rates on towers to remain relatively well-insulated in the long-term due to asset scarcity,” says Spyratos. “We believe there will continue to be strong investor appetite for the long-term, stable and protected cashflows.”

Infrastructure investors build relationships to build portfolios

Deals to buy these infrastructure assets tend to negotiated directly between buyers and sellers. “Large, third-party facilitators don’t exist,” says Lund. “Without facilitation the market tends to be very opaque and difficult to enter.”

Some investors have negotiated longstanding relationships with both landowners and antenna operators. For example, CBRE Investment Management has created a partnership with CitySwitch, a developer and operator of built-to-suit cell phone towers, and CSX Transportation, Inc., a railroad company and a landowner with sites across the country.

Over the last four years, CitySwitch has built and leased over 200 new cell phone towers and is actively developing a pipeline of another 300—including many along the CSX right of ways. These projects provide consistent opportunities to invest for CBRE Investment Management, a global real assets investment management firm with $146.9 billion in assets under management as of June 30, 2022.

“The challenge for investors now is to find the right team with a strong track record, an established operating portfolio and an attractive pipeline to execute over time and grow to scale,” says CBRE’s Spyratos.

Source: “Cell Phone Towers Log Solid Returns as an Alternative Real Estate Investment“

A combination of strict zoning requirements, unfavorable building-to-land coverage ratios, and municipal development restrictions has confined many developers to traditional industrial properties, suppressing additional supply.

Therefore, existing IOS facilities “have become increasingly coveted by industrial users,” the firm said.

IOS vacancy fell under 3 percent in mid-2022, below the historical average, while IOS rents have advanced by nearly 30 percent on average since the end of 2019. General industrial rents rose 24 percent during the same span.

IOS Investors Seek Shorter Lease Terms

Mark Grossman, investment sales broker and IOS specialist at Northmarq, following the acquisition of Stan Johnson Company, tells GlobeSt.com that industrial outdoor storage has grown from a small niche asset class in the industrial market to a top industrial product type, now with its own subsets and niches.

“We continue to see private and institutional capital specifically target IOS assets, and new investors are entering the market quickly.

“A noticeable trend in recent years is that investors are getting smarter about how to analyze this market and are investing creatively.

“Perhaps counterintuitive to the net lease sector – where the longer the lease used to mean greater value – we are seeing IOS investors seek shorter lease terms as a value-add play.

“There are so many advantages to IOS that make it attractive, but there are barriers to entry as well. This continues to be a fragmented market, there’s low vacancy, very limited supply, low expenses, and significant value-add opportunities. These characteristics are drawing sophisticated and smart money to this space.”

Same-Day Delivery Should Grow 25% Through This Year

Marcus & Millichap said that the global same-day delivery services market is expected to grow by 25 percent through 2022, creating additional demand for last-mile storage.

“Rising fuel costs have also caused firms to place further emphasis on consolidating operations, making the infill nature of IOS particularly attractive. In either case, IOS will play a major role in supporting firms’ operations, efficiently linking the wider supply chain to individual municipalities,” according to the report.

Source: “Existing Industrial Outdoor Storage Highly Sought“

Last week, the Department of Labor released a long-expected proposed rule that attempts to more clearly define the characteristic and status of independent contractors — a category that includes the construction industry and realtors. That designation of self-employed people goes far beyond the example of gig platform workers, like rideshare drivers. Although estimates vary, the numbers typically run into the tens of millions and include many in the commercial real estate industry.

The concern on the part of many is that the new rule, though a combination of suggestive wording and DOL interpretation, tries to implement a controversial strategy. President Biden, even during his campaign as well as during his tenure in office, and many Democrats and unions have championed a standard that would effectively eliminate much legitimate independent contractor business under the claim of protecting workers.

This ultimately is an outgrowth of California’s AB5 bill from 2019 that went into effect 2020. That law, using the dated so-called ABC test from the 1930s, presumed that all people working were employees unless proven otherwise. Governing status was a three-part test in which the worker is free from the control of the hiring entity, the worker performs duties outside of the usual course of the hiring entity’s business, and the worker is engaged in an independently established occupation or trade that is the same as the work being performed.

The law, pushed through by unions and union-affiliated legislators, used employee mischaracterization as its rationalization. There is a long history of companies treating people who should be employees as independent contractors to avoid such things as payroll taxes, benefits provision, and regulatory compliance. Federal and state statutes already prohibit the practice and labor regulators regularly take against companies that break such laws, though there is a question of whether they have the resources to more fully address the issue.

There are also political concerns that split on Democratic/Republican, labor/management lines. As many companies want to reduce financial burdens of having employees, many unions want to create conditions under which companies can’t use workers outside of union ranks, reducing competition for work.

Ultimately, California effectively put many self-employed people out of business as clients in the state, wary of draconian penalties, wouldn’t do business with them. The legislature ultimately put in many exemptions by profession into the law and there were numerous legal challenges.

Some other states tried to implement similar legislation, a notable example being New Jersey in which the Senate president, who was also a full-time high-ranking union official, tried to push a measure through but was ultimately stopped by grassroots efforts by multiple independent contractor and corporate employer groups.

At the same time, Democrats and unions had tried to push through the PRO Act, an attempt to modify the National Labor Relations Act and make union organizing easier. The PRO Act also included the ABC test to treat independent contractors as workers in the light of unionization. But there were lawyers, representing corporations on one side and employees and unions on the other, who said the inclusion could potentially allow courts to impose the standards in other areas of law. The biggest concern of many was the potential effect on the basic law of employment, the Fair Labor Standards Act of 1938, which has never included a definition of independent contractor status.

The PRO Act became a big “must” for unions that had heavily supported Democratic candidates for years. Although it passed in a House Democratic majority, it stalled in the 50-50 count of the Senate in which a filibuster could easily torpedo a bill. So, when the Biden administration came in, it withdrew a rule under Trump’s DOL that would have made it easier for businesses to treat someone as an independent contractor. Instead, it planned a new rule, which is what was finally released last week.

The filing for the rule explicitly said the agency considered including the ABC test but realized it likely lacked the legal authority to do so. Instead, there is a proposed multi-part “economics reality” test. But as multiple experts have noted, the language, along with the examples of how the DOL would interpret the rule, “clearly aims to place a thumb on the scale in favor of more workers being deemed employees under the FLSA,” as lawyers from management-side employment and labor law firm Seyfarth Shaw wrote.

“[T]hese tests — which date back to 1947 — do not adequately account for the growth of the gig economy, the increased desire among workers to control their work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, which cumulatively  have contributed to a greater demand for the flexibility that comes with and independent contractor relationships,” the lawyers wrote.

If put into effect, the rule could force companies to treat many people, traditionally independent agents, as employees. That would include the construction industry and realtors.

The DOL is accepting comments on the ruling from the public through November 28, 2022.

Source: “Department of Labor Proposed Rule Takes Aim at Independent Contractors“