Archives for January 2023

Yardi Matrix has revised downward its apartment rent forecast for 2023 to 3.1% from 3.5% and expects to see all that growth in the first two to three quarters of the year, according to Andrew Semmes, senior research analyst.

However, Semmes said that he’s not at the point where he expects nonseasonal broad-based rent declines.

“Rents did fall month-over-month in November, and likely will again in December, but that is not unusual; month-over-month asking rents fell in November 2011, 2016, and 2019, and the magnitude of the decrease this year (two-tenths of a percent) is also not out of the ordinary,” Semmes said in prepared remarks.

Yardi Matrix says job destruction and a recession beginning in the third or fourth quarter of next year is likely, but that it will not be particularly deep or lengthy.

“At that point, we will likely start to see broad declines or stagnation in average asking rents, but not enough to offset the gains that we expect in the first half of 2023,” Semmes said.

Moody’s Analytics’ chief economist Mark Zandi said Jan. 4 that even if the U.S. avoids a recession in 2023, American consumers and investors could face a grinding slowdown that likely won’t let up until 2024, according to a new outlook published by Moody’s Analytics, as reported in Marketwatch.

RealPage: Market Has Shifted to Favor Renters

RealPage has downgraded its 2023 forecast for effective asking rent growth to 3%, with rent movement varying materially by asset class and by submarket, according to Jay Parsons, head of economics & industry principals, RealPage.

Parsons tells GlobeSt.com that he expects better apartment demand in 2023 compared to 2022, “though certainly not of 2021’s record levels.”

With a multi-decade high in lease-ups hitting the market, Parsons said demand is “highly unlikely to keep up with supply – and that’s creating a market that has rapidly shifted in the favor of renters. Especially upper-income renters, who Class A operators are going to be competing for with this big wave of new lease-ups.”

Parsons said RealPage believes that Class B will outperform Class A in 2023 due to the wider-than-ever gap in rents between Class B and new lease-ups.

“The old ‘flight to quality’ strategy – luring Class B renters into pricier lease-ups with concessions – won’t be as widely effective as it was in past decades. In some markets, it’d take 5 to 6 months’ worth of ‘free rent’ to bring lease-up rents on par with Class B rents.

“Of course, in the long run, we need a lot more housing – so more supply is a good thing in the bigger picture. Supply is structural, and demand is cyclical.”

Dropping Rents, Offering Concessions

David Fletcher, Excelsa Properties’ managing director and head of acquisitions, tells GlobeSt.com that after minimal seasonality in 2020 and 2021, the winter leasing slowdown in 2022 has come on “ferociously.”

He said leasing traffic has slowed, timely rent payment has slowed, and, across market surveys, competitors are dropping asking rents or offering concessions.

“Whether these conditions will translate into a true leasing slowdown throughout 2023 or are just the first evidence that normal market conditions are back is unclear,” according to Fletcher. “The spring leasing season will be the true test.”

3% to 4% Growth ‘Very Supportive’

Neil Schimmel, CEO, Investors Management Group, tells GlobeSt.com that the Yardi Matrix forecasts line up with his firm’s experience as an operator with a national portfolio.

“We saw the red-hot rent growth from early 2022 begin to cool off as the year continued,” Schimmel said. “Some rent softening was the result of record rental housing deliveries and part was a cooling economy from Fed interest rate hikes. Rent growth nationally in the 3% to 4% range over the next couple of years is still very supportive.”

Property Values, Debt Will Affect Rents

Quentin Green, partner and director of development at Downtown Apartment Company in Chicago, tells GlobeSt.com that the Chicago rental market is healthy.

“Rents have normalized to near pre-pandemic rates for the most part,” he said. “Based on the amount of new construction on the horizon in the next three years, rents will likely stay relatively reasonable. A lot of the rent increases we experienced were primarily demand driven.”

Green said property values and the increased cost of debt will affect 2023 rents.

“Typically, rents lag increases in property value and increases in debt because of the long-term nature of leases,” he said.

“If interest rates remain elevated, new construction and multifamily properties that have refinanced in the past year or will be refinancing in the future will need to pass on higher rents to compensate for the larger debt burden. If we see values stay flat and rates stay flat, I could see rents surprising to the upside.”

Source: “Downward Rent Growth Revisions Favor Tenants“

Distressed office loans will likely “pile up” into 2023, according to experts from Trepp, who predict there will be billions in unresolved office loans by year-end.

“Maturity dates will come and go; loans will reside in CMBS purgatory for months; negotiations will take considerable time; and ultimately many loans will be extended,” says Manus Clancy, Senior Managing Director at Trepp. “Borrowers will be happy to lock in lower rates for longer and special servicers will rejoice.”

Lonnie Hendry, SVP, Head of CRE & Advisory Services at Trepp, foresees a “measurable number of liquidations at steep discounts,” adding that so-called “bad” office properties will trade at significant discounts while “borderline” properties in strong markets remain in CMBS purgatory.

Trepp experts differ on where exactly the 10-year Treasury yield will end 2023, but agree it will be under 4%. Clancy says “the economy will slow enough so that long-dated Treasury yields will continue to drop,” while Hendry predicts the 10-year will remain above 3% in 2023 but will be less than 4%.

“Predicting the 10-year Treasury is like playing old-school lawn darts (ones with the metal tip that got pulled from the market after people were impaled),” says Stephen Buschbom, Research Director at Trepp. “We all love to play, but accuracy is low, and being on the wrong side of things isn’t pretty. We could see steep inversion between Fed funds and the long end as the market continues to price what comes next (2024 pivot if you believe the Fed). But, if inflation runs higher than 2% for longer, and there’s a general ‘risk-on’ sentiment for equities in the second half of ‘22, then a range of 3-3.25% seems feasible.”

According to Rob Jordan, Trepp’s Head of CMBS Product, a lower 10-year rate “would certainly help thaw” the slumping CMBS market.  Domestic private-label CMBS issuance nosedived in Q3 2022, with a total of 16 deals totaling $13.3 billion priced during the quarter, down 35% over Q2 and 39% year over year.  Meanwhile, the collateralized loan obligation market saw just four deals totaling $3.39 billion price in Q3.

Jordan notes that issuance of new CMBS product “takes a decent amount of time to line up,” adding that warehouse lines are harder to procure and bank balance sheets are becoming more selective.

“It may take longer than through the first half (of the year) to get to a point where borrowers and lenders are agreeing on pricing and leverage points, given the ongoing interest rate volatility,” he says. ” With approximately $450 billion of CRE mortgage maturities across lenders (only $15 billion in CMBS), it will be interesting to see which pockets of capital adjust the fastest to the new rate regime.”

His colleagues seem to agree: “ There’s little reason to think the second half of 2022 will make up for a weak first half,” Buschbom says. “It wouldn’t surprise me if we end up seeing issuance +/- 2020 levels.”

CMBS delinquencies will likely rise to between 4 and 5%, Trepp’s panel of experts agree.

“Loans unable to be refinanced push the number up steadily in 2023. Negotiated loan extensions/modifications keep the number from being higher,” Clancy says.  ”Conduit hotel and retail segment remain surprisingly resilient, but office and SASB markets underperform.”

Adds Hendry: “I think we could see the delinquency rate hit 5% by the end of 2023 if the office maturity wall collapses.”

Source: “What to Expect From the CRE Finance Markets This Year“

Yardi Matrix has revised downward its apartment rent forecast for 2023 to 3.1% from 3.5% and expects to see all that growth in the first two to three quarters of the year, according to Andrew Semmes, senior research analyst.

However, Semmes said that he’s not at the point where he expects nonseasonal broad-based rent declines.

“Rents did fall month-over-month in November, and likely will again in December, but that is not unusual; month-over-month asking rents fell in November 2011, 2016, and 2019, and the magnitude of the decrease this year (two-tenths of a percent) is also not out of the ordinary,” Semmes said in prepared remarks.

Yardi Matrix says job destruction and a recession beginning in the third or fourth quarter of next year is likely, but that it will not be particularly deep or lengthy.

“At that point, we will likely start to see broad declines or stagnation in average asking rents, but not enough to offset the gains that we expect in the first half of 2023,” Semmes said.

Moody’s Analytics’ chief economist Mark Zandi said Jan. 4 that even if the U.S. avoids a recession in 2023, American consumers and investors could face a grinding slowdown that likely won’t let up until 2024, according to a new outlook published by Moody’s Analytics, as reported in Marketwatch.

RealPage: Market Has Shifted to Favor Renters

RealPage has downgraded its 2023 forecast for effective asking rent growth to 3%, with rent movement varying materially by asset class and by submarket, according to Jay Parsons, head of economics & industry principals, RealPage.

Parsons tells GlobeSt.com that he expects better apartment demand in 2023 compared to 2022, “though certainly not of 2021’s record levels.”

With a multi-decade high in lease-ups hitting the market, Parsons said demand is “highly unlikely to keep up with supply – and that’s creating a market that has rapidly shifted in the favor of renters. Especially upper-income renters, who Class A operators are going to be competing for with this big wave of new lease-ups.”

Parsons said RealPage believes that Class B will outperform Class A in 2023 due to the wider-than-ever gap in rents between Class B and new lease-ups.

“The old ‘flight to quality’ strategy – luring Class B renters into pricier lease-ups with concessions – won’t be as widely effective as it was in past decades. In some markets, it’d take 5 to 6 months’ worth of ‘free rent’ to bring lease-up rents on par with Class B rents.

“Of course, in the long run, we need a lot more housing – so more supply is a good thing in the bigger picture. Supply is structural, and demand is cyclical.”

Dropping Rents, Offering Concessions

David Fletcher, Excelsa Properties’ managing director and head of acquisitions, tells GlobeSt.com that after minimal seasonality in 2020 and 2021, the winter leasing slowdown in 2022 has come on “ferociously.”

He said leasing traffic has slowed, timely rent payment has slowed, and, across market surveys, competitors are dropping asking rents or offering concessions.

“Whether these conditions will translate into a true leasing slowdown throughout 2023 or are just the first evidence that normal market conditions are back is unclear,” according to Fletcher. “The spring leasing season will be the true test.”

3% to 4% Growth ‘Very Supportive’

Neil Schimmel, CEO, Investors Management Group, tells GlobeSt.com that the Yardi Matrix forecasts line up with his firm’s experience as an operator with a national portfolio.

“We saw the red-hot rent growth from early 2022 begin to cool off as the year continued,” Schimmel said. “Some rent softening was the result of record rental housing deliveries and part was a cooling economy from Fed interest rate hikes. Rent growth nationally in the 3% to 4% range over the next couple of years is still very supportive.”

Property Values, Debt Will Affect Rents

Quentin Green, partner and director of development at Downtown Apartment Company in Chicago, tells GlobeSt.com that the Chicago rental market is healthy.

“Rents have normalized to near pre-pandemic rates for the most part,” he said. “Based on the amount of new construction on the horizon in the next three years, rents will likely stay relatively reasonable. A lot of the rent increases we experienced were primarily demand driven.”

Green said property values and the increased cost of debt will affect 2023 rents.

“Typically, rents lag increases in property value and increases in debt because of the long-term nature of leases,” he said.

“If interest rates remain elevated, new construction and multifamily properties that have refinanced in the past year or will be refinancing in the future will need to pass on higher rents to compensate for the larger debt burden. If we see values stay flat and rates stay flat, I could see rents surprising to the upside.”

Source: “Downward Rent Growth Revisions Favor Tenants“

A few days into 2023 and it’s time for some bad economic expectations beyond what most have projected.

Bankrate’s 2022 Q4 survey of economists has come in with a consensus expectation that the Federal Reserve’s Federal Open Market Committee will take its benchmark interest rates up to between 5.25% and 5.5%. The average number that the experts offered was 5.35%, well up over the 4.71% average in the third quarter’s survey and the highest since 2001. The economists came in with peak rate expectations ranging from 4.75% to as high as 6.25%.

Most Fed officials, by the way, have said they expect rates to top out at between 5% and 5.25%. The lowest forecast from the Fed was 4.9%, while the highest was 5.6%. Previously, Federal Reserve Bank of St. Louis president Jim Bullard had made a case of at least 5% and potentially as high as 7%. Perhaps his views have changed. But then, as Bankrate noted, a year ago the Fed thought that inflation in 2022 would peak at 2.6%

As Oxford Economics noted on the newly released minutes from the Fed’s December meeting, “The Fed is going to return inflation to their 2% objective and if they can accomplish that without a recession remains up for debate. The minutes clearly highlight the Fed’s focus on inflation but also their displeasure with the loosening in financial market conditions, which they believed hindered their efforts to achieve price stability. Reading the tea leaves, the minutes stress that the Fed is going to reduce inflation at the risk of hurting the labor market and the broader economy.”

Currently, the target federal funds rate range is 4.25% to 4.5%. There’s a long way to go. And some time, as well, if the bulk of the economists polled are correct, as 62% don’t expect the Fed to cut rates until 2024. They also expect the 10-year Treasury yield to reach 3.99% a year from now.

That last bit is significant and can get lost in discussions about interest rates and CRE financing costs. While commercial rates do correlate to the federal funds rate to some degree, one of the big issues Fed monetary policy has caused is quantitative tightening. The institution bought bonds tied to residential mortgages, not commercial. So commercial rates have a stronger relation to the 10-year Treasury. That’s a jump from where they currently sit, meaning that high financing costs are likely to rise even more.

Source: “Expect Fed Rates to Exceed 5% in 2023“