Archives for April 2023

No question, there’s a housing shortage across the U.S., and housing prices are soaring. To combat this, several states and municipalities have proposed rent control measures to make housing more affordable. But as we’ve seen, rent control doesn’t work the way it’s supposed to.

Some of the common sense arguments against rent control include the following economic and social factors:

• Reduces the quantity of existing available housing—People are less likely to move if rents are controlled, which also results in even fewer opportunities for new tenants to secure housing.
• Subsidizes residents who don’t need it—A recent study by the National Apartment Association showed that nearly 60% of housing providers are directly aware of higher-income tenants who benefit from rent control. This counters the misunderstanding held by half of Americans that rent control is meant to primarily provide housing assistance to moderate- to lower-income families.
• Reduces the quality of available housing—With a limit set on rental income and increasing operating costs, margins shrink for building owners. This forces them to absorb the expense of essential maintenance and makes it more challenging to invest in property improvements. NAA’s research shows that “67% of housing providers have deferred or expect to defer nonessential maintenance and improvements due to rent control.”
• Limits new construction—In areas with rent control, there’s less incentive for property development. The developers surveyed in the NAA’s research said they avoid investment in locations where rent control is in place. Many developers prefer to build in areas where they can respond to local economic factors and control their own rents. And when the cost to build is already so high and the new construction process so complex, it becomes less attractive for builders to construct new housing for moderate- or low-income families where rent is controlled.

At IREM, we recognize the importance of housing choice and access to quality housing that is affordable. We’ve seen how rent control undermines both of these things, making it financially challenging for property owners and real estate managers to meet the needs of their tenants.

Rent control proposals at the state level

There’s been a significant increase in rent control proposals across the country. In 2022, several states introduced rent control measures and we expect that even more states will introduce similar legislation in 2023, including the following:

Colorado: Rent control legislation is regularly introduced in Colorado. To date, such efforts have stalled. Another push is possible in 2023.​

Florida: Lawmakers in St. Petersburg and Tampa considered measures to place rent control before voters on the 2022 ballot, but those efforts stalled. In Orange County, which includes Orlando, a ballot measure implementing rent control passed, but a state judge blocked election officials from certifying the results. In 2023, it’s possible that these and other cities and counties will again pursue workarounds to rent control preemption.​

Maryland: Efforts to impose rent control in Montgomery County are expected to continue. The Washington, D.C. suburb is home to more than 1 million residents.

Massachusetts: The Boston City Council recently voted to advance Mayor Michelle Wu’s rent control proposal to the state legislature. The proposal would cap Boston rent increases at 6% plus the change to the Consumer Price Index, to no greater than 10%.

Nevada: In Nevada, the powerful Culinary Workers Union (CWU) backs rent control supporters statewide. And while CWU-backed elected officials will push hard for statewide legislation, rent control proponents were dealt a blow to their efforts after the sitting governor, Steve Sisolak, a supporter of implementing rent control measures, lost his election to Republican Joe Lombardo. Still, we expect a strong push in the state legislature, which only convenes in odd-numbered years, like 2023.​

Rent control proposal at the federal level ​

​Unfortunately, rent control proposals are now also being considered at the federal level. In January, the White House issued a “Blueprint for a Renters Bill of Rights,” which lists a set of actions the administration believes would strengthen tenant protections and encourage rental affordability. These include the Federal Housing Finance Agency examination of proposed actions involving renter protections and limiting egregious rent increases.

The administration is also launching a Resident-Centered Housing Challenge, a call to action to housing providers and other stakeholders to strengthen practices and make independent commitments to improve the quality of life for renters.

IREM’s advocacy

IREM responded to this call to action by collaborating with the National Association of REALTORS (NAR) to create resources that highlight ways for property management companies to incorporate resident-centered practices in their businesses. Practices would include a range of examples that have proven effective, such as advertising to prospective residents that Housing Choice Vouchers are accepted at their property, providing information about rental assistance and using alternative credit scores for applicants without a detailed credit history.

IREM, along with our real estate coalition, issued a statement on how the proposal would create duplicative and onerous federal regulations that would interfere with state and local laws meant to govern the housing provider and resident relationship.

Renee M. Savage is 2023 president of IREM. She also serves as president of SavageCRE Inc, a consulting company supporting the commercial and multifamily real estate sectors. She has more than 34 years of experience in property and asset management and corporate operations.

Source: “Rent Control Won’t Make Housing More Affordable“

Over the last three years, Covid-19 extended the timeline for residential and commercial real estate projects to be completed–and its aftereffects continue to slow momentum. The multifamily housing category has been no exception.

Part of the reason for the slowdown has been a shortage of workers; another, the shortage of materials. And though such pandemic challenges have waned, they’re far from over. This is now causing a shift in thinking that it may take longer for new housing to be completed and absorbed and at different rates depending on individual real estate market trends, according to a recent report from Cushman & Wakefield.

The U.S. Census Bureau reported that 926,000 units were under construction at the end of last year, higher than at any time since at least 1970. That’s also twice as many as the number that preceded the Great Recession. Nearly 60% of markets have more than three years of supply underway, leading to more projects being delivered in the near term, even if not immediately. Before they undertake more construction, developers might weigh how much more inventory is needed in their area given the numbers and the possibility of a recession, a widely debated topic.

To keep pace and avoid an under- or oversupply, multifamily developers might also scrutinize their construction risks both in the short- and long-term and weigh what types of buildings to undertake. Once popular garden-style apartment buildings are constructed less often than the now more sought after mid- and high-rise buildings, which take longer to complete. In fact, the National Association of Home Builders (NAHB) found the average time to finish an apartment building has increased by 5.5 months between 2013 and 2021.

What further extends these timelines are delays for permits, shortage of materials, availability of labor and financing needs. One report from the National Multifamily Housing Council’s (NMHC) Quarterly Survey of Apartment Construction & Development Activity found that only 13% of respondents reported facing no construction delays last December. Construction prices also increased for supplies–except lumber, which extended lead times between construction starts and completion. And construction financing rose too as interest rates did and 70% of senior loan officers stated they were tightening lending standards for construction and development loans.

One result may be completions of projects underway peaking this year, then deliveries declining over the next few years. But that could change if deliveries are delayed for all the previously stated reasons, plus undercapitalization.

Because real estate has become so much more local, each market needs to be separately focused on for the most accurate picture on its housing starts, completed buildings and housing shortages. For example, cities like Nashville and Charlotte in the South and Denver in the West will face mounting supply-side pressure in coming years whereas Indianapolis, Sacramento and Cleveland anticipate smaller construction surges. And even in each city, supply and demand may vary. Nashville, for instance, has seen much more construction downtown than other areas with smaller pipelines.

One overall trend worth noting is a shared anticipation toward normalization over the next few years.

Source: “Multifamily Developers Need to Rethink Their Supply-Side Risk“

Last week, Moody’s Analytics pointed out that moderate changes to office cap rates and cash flows could cause big problems. This week, the company digs in more to recognize that a threat for CRE isn’t uniform and the question those in the industry should look at is vulnerability and how much sway concerns with banks could hold.

For example, there is the number that $2.3 trillion in commercial real estate debt is held by “small” banks. First, says Moody’s, look at the entire field of CRE financing. The firm built up and then whittled down the totals, looking at Mortgage Banker Association estimates, and ended with $1.75 trillion of income-producing real estate held by FDIC-insured entities.

If one expands the number of “large” banks beyond the top 25 and add regional banks with more than $10 billion in assets but less than $160 billion, together they would hold almost 70% of CRE loans. But for smaller banks, CRE loans are 13% of total assets, while they are 4% of the largest 25 banks.

Topping this, most maturing CRE loans were made 10 years ago when rates were cheap and leverage, plenty.

“These loans now need to be refinanced at a much higher interest rate,” Moody’s wrote. “Borrowers would need to see rent levels increasing to keep the debt-service-coverage-ratio (DSCR) at adequate levels. Also, cap rates for office properties are increasing and will likely move higher, implying further value declines are expected. Coupled with the fact that banks are tightening their lending policy in response to the recent turmoil, commercial real estate is in a precarious position.”

That is the environment. Now for office. One factor is in 80 primary metros, 31% of office buildings were built before 1980 and so are potentially “obsolete.” But even this is overly general. The metros with the highest percentages of pre-1980 B and C Class office stock are New York City, NY (34.7%); Rochester, NY (34.9%); Oklahoma City, OK (35.2%); Syracuse, NY (35.6%), and Wichita, KS (38.5%).

The ones with the lowest percentages are Las Vegas, NV (4.1%); Austin, TX (6.1%); Suburban Virginia (6.4%); Ventura County, CA (6.7%); and Raleigh-Durham, NC (6.9%).

But then, any analysis of a metro area has to include size due to sheer numbers. Or, as Moody’s pointed out, high concentration of tech businesses and cyclical volatility could increase the vulnerability of an area like Austin. Higher percentages of buildings with better amenities might face issues if the cost in money and time of commuting kept employees away.

“In short, astute property owners and employers are likely to focus on what’s in their control,” Moody’s added. “This includes revitalizing their buildings’ design layouts and incorporating modern amenities and collaborative workspaces to attract workers in such a tight labor market.”

However, it is important to add the rate at which changes happen and complexities of metrics complicate vulnerability assessment.

Moody’s noted that the 2022 Q4 pullback brought GDP down to 2.6% from an earlier estimate of 2.9%. As the firm said, it’s “still a healthy figure.” That was from the US Bureau of Economic Analysis.

The Federal Reserve Bank of Atlanta keeps a running non-official estimate of economic growth. On March 31, 2023, it was 2.5%. By April 3, it was down to 1.7%. This is a fast-moving roller coaster that is far from a fun amusement ride that you can forget about once you’re off.

As for complexity, Moody’s mentioned PCE growth falling to 0.3%. As Nationwide Chief Economist Kathy Bostjancic wrote in an email note last Friday, “Less encouragingly, core services less housing—the super core price measure—rose to 4.4% on a year-on-year basis from 4.3% in January and is only down slightly from the 4.7% peak in November 2021.”

It is difficult for experts in economics and finance to keep up, let along everyone else. Understanding CRE vulnerabilities is likely to be a moving target and one that could require attention and swift action.

Source: “Moody’s Analytics Tries to Handicap Office Economic Vulnerability“

Investors in real estate with a restaurant component are finding themselves in a glass half-full, glass half-empty kind of environment. On the one hand, strong demand for retail space from the food and beverage sector is pushing up rents. On the other hand, a shortage of retail space in desirable neighborhoods and rising rents are forcing some restaurants and bars to cut back on expansion plans or turn to new strategies to serve their customers.

These are among the findings of CBRE’s recent Global Live-Work-Shop report. The year 2022 saw the national average asking rent rise 2.5% to an all-time high of $22.78 per square foot, while the nationwide retail availability rate fell to 4.9%, according to the report. “In some cases, owners are receiving upward of a dozen offers on a listing, leaving many would-be restaurateurs unable to enter desired markets and putting significant pressure on the brokerage community to deliver results in hyper-competitive landscapes,” the report states.

These trends made 2022 one of the strongest years on record for the retail real estate market, CBRE found. At the same time, developers confront some challenges to future growth. Higher construction costs – predicted to rise 5.4% in 2023 – are affecting deal-making and rising interest rates are making financing more difficult. Competition for suitable sites is intensifying.

From the restaurants’ point of view, many retail locations that are available are either in undesirable areas, require significant capital outlay or have rents too high for the business to operate profitably — a situation unlikely to change if the retail development pipeline remains clogged, the report notes.

In addition to changing the way they operate by modifying their service options, CBRE expects restaurants to try to cut costs by investing more in drive-through or pick-up windows, as well as in new technology. They are also likely to focus on high-growth markets with lighter regulations. “They may also scale back expansion plans due to higher construction and financing costs,” the report states. And they may try to modify percentage rent clauses in leases based on revenue, on the grounds that their recent sales increases are driven more by inflation than profits.

It all adds up to an expectation of lower demand this year than in 2022. “Many restaurant companies have secured their real estate pipelines for 2023 and 2024 already, with a view toward 2025 and even 2026. Given the sparse development pipeline, investors will remain in a strong position, but may see some turnover as higher rents price out restaurants contending with slim profit margins,” the report concludes.

Source: “Restaurants Struggle to Find Affordable Space for Their Expansion Plans“