Archives for June 2023

Titan Development last week unveiled the firm’s new, 158-unit multifamily complex at Journal Center, a business park in Northeast Albuquerque.

The project, Allaso Journal Center, is part of Titan Development’s Allaso series of projects and was constructed by Pavilion Construction and ORB Architect. Located at 7800 Headline Blvd. NE, the development, which cost $35 million, stands four stories and is 175,000 square feet.

Pavilion’s VP of New Construction Karl Smith said the first two stories are fully constructed, with the remaining two floors set to be completed by mid-August.

The building features one- and two-bedroom apartments, starting at $1,716 and $2,071, respectively, Greytstar Regional Property Manager Justin Stone said, However, rent prices are not set in stone and will fluctuate based on demand, he said.

Amenities includea resort-style pool, spa, cabanas and barbecue grills. Allaso Journal Center uses smart-lock company Latch to provide secure complex access.

“This is the kind of luxury living people want and are looking for if they’re going to see apartments go up,” said District 4 City Councilor Brook Bassan. The Journal Center is located in District 4, Albuquerque’s Northeast Heights.

The development caters to residents looking to live, work and play in the same area. Journal Center Corp. President Lowell Hare said the newly created, mixed-use development will encourage economic activity and improve public safety.

“Allaso will begin a transformation of a suburban office park into a mixed-use development, which will create walkability and transform an area from a 12-hour to an 18-hour activity area,” he said.

In addition, Titan is developing another multifamily complex just south of the Dekker Perich Sabatini offices. The Senary by Allaso will add another 209 units of housing to the Journal Center community, Rogers said.

Principal of Titan Fund Management and Partner of Titan Development Kurt Browning said the firm has 11 multifamily projects in Albuquerque, seven that are completed and four under construction. The Allaso Journal Center Project was made possible by Titan’s Fund II, which closed in 2020 after raising $95 million. The fund is being used toward other Allaso projects such as Allaso Vineyards and Allaso High Desert.

Last year, the real estate development firm closed Fund III at $122 million. The fund will be used to continue industrial and residential development in Texas, Arizona, New Mexico, Florida, Southern California and Colorado. Since 2017, the firm has raised a total of $329 million for projects, according to a news release.

Source: “Titan Development unveils $35M multifamily complex at Journal Center“

Expenses are rising faster than revenues for multifamily affordable housing properties, a trend that will likely continue to accelerate, according to a new report from S&P Global Ratings.

Property owners saw net income per unit increases, however, as rent growth was as high as 37% from 2020 to 2022.

Growth has slowed considerably in 2023, though. GlobeSt.com this week reported that the median US asking rent fell 0.6% YOY to $1,995 in May. That nationwide drop is the largest since March 2020, attributed to a building boom that increased supply and economic challenges that lessened demand.

Markets continue to reflect regional and local variations in their asking rates with the Northeast/Midwest posting rises of 5%, even as numbers nationwide declined from a year earlier in May, according to Redfin.

On the expense side, meanwhile, property insurance premiums are an increasing percentage of total expenses with the average property insurance costs rising from $387 in 2020 to $590 in 2022 and several insurers have announced plans to significantly increase premiums in California in 2023 and 2024 or limit their exposure in states with elevated environmental risks.

Repairs and maintenance costs rose from $816 to $1,045 and utilities spiked from $1,487 to $1,693.

Paula Munger, Vice President, Research, National Apartment Association, tells GlobeSt.com that based on a few very informal polls she has taken of owner/operators this year through early June, the results have been fairly consistent in that fewer than one in 10 are expecting NOI to decrease or go negative this year.

“It’s not happening, but it absolutely is top of mind for them in thinking that it might happen in the near future,” Munger said. “If the Federal Reserve truly is done raising rates, inflation continues to trend downward, the industry adjusts to higher for longer, the job market stays strong, and we manage to skirt a recession, I could see rent growth getting stronger next year.”

Karlin Conklin, Principal, Co-President & COO at Investors Management Group, tells GlobeSt.com, “Bid farewell to the days of double-digit rent growth when rising expenses were an afterthought.

“Entering a new era of expense management requires a recalibration. Expenses are one of the main levers we can work on during a market correction, as we increase NOI by minimizing costs.

“Rather than pursuing new revenue streams, we’re staying focused on collections. Our priority is to offer our residents a quality living experience of great value. We’re aiming for a win-win, particularly during challenging times, by maintaining reasonable rents that don’t burden residents with excessive charges.”

Conklin said insurance has been the greatest noncontrollable expense across her national portfolio over the past three to four years.

“Insurable values have risen dramatically over the last few years,” she said. “As the cost of construction rises, so does the replacement cost of a building.”

Geography is playing a large role in expense and revenue management.

Kai Pan, Executive Managing Director in JLL’s Value and Risk Advisory Group, tells GlobeSt.com, “We’ve heard insurance increase named as a primary reason for buyer re-trades in many coastal markets, and it has scuttled transactions in many cases.”

In his appraisals, he’s seen insurance increase from $1,042 to $3,484 per unit (234% in Gulf Coast) and from $434 to $1,206 per unit (177% in Florida).

This is happening at large public apartment REITS as well, he said.

“Camden reported in their Q1 23 earnings call that they expect total insurance expense will increase by approximately 35% in 2023 due to exposure to coastal markets,” Pan said.

“Even Equity Residential (EQR), who has no Florida exposure, reported about 20% increase on insurance portfolio-wide.

“Part of the reason for the extraordinary insurance increase is due to inflation-fueled construction cost increase, which leads to a larger amount to be insured.”

Doug Faron, co-founder and managing partner at Shoreham Capital, a privately held real estate firm in West Palm Beach, Fla, tells GlobeSt.com that recently Florida has experienced an increased frequency of natural disasters that have forced insurance carriers to leave the state.

“That, combined with a multitude of new developers entering the market, high-interest rates, and a rise in construction-defect litigation, has caused insurance premiums to skyrocket,” Faron said

Faron said there’s been a “massive spike” in insurance costs in just the past 90 to 120 days, with premiums for a multifamily property currently averaging anywhere from $1,400 to $2,500 per unit, up from $600 to $800 per unit at the start of the year.

“It is no longer just a coastal issue either, with inland cities, like Orlando, also experiencing high insurance rates,” he said. “These ballooning costs have the potential to affect site selection, delay construction timelines, or even kill a deal in its tracks.”

Source: “Expenses Rising Faster Than Revenues for Many Apartment Owners“

A midyear review by a number of Green Street analysts shows improving prices in a majority of property types, as Michael Knott, managing director and head of U.S. REIT research opened with.

Yes, office, storage, and life science saw falls compared to March 2023. But prices were up for gaming, ground lease, healthcare, strip center, lodging, mall, data center, tower, industrial, and cold storage. In those sectors, there were stable cap rates and growing NOI. Private-market real estate was about 10% over estimated fair value, but listed REITs were fairly priced compared to bonds and inexpensive compared to the S&P 500 (though given the index’s structure, remember that is a comparison to a mix heavily overweighted with technology stocks).

Vince Tibone, managing director of malls and industrial, wrote that risk-adjusted discounted cash flow (DCF) expected return, after multiple adjustments, were on average 7.3%, ranging from data center at 6.9% to 7.7% for mall.

Paulina Rojas-Schmidt, strip centers analyst, said the property type was stronger after the pandemic, having emerged “revitalized” with strong tenant demand and limited new supply cementing landlord bargaining power.

Private market DCF is 7.1%, according to office analyst Dylan Burzinski, ranging from 6.1% for office to 8.4% for ground lease.

Data centers are seeing demand outpacing supply around the globe and will likely see an addition boost as AI deployments need more processing power. The demand imbalance will result in new projects, with supply growing over time, writes David Guarino, senior analyst for data centers and towers.

Michael Stroyeck, senior associate for healthcare, noted that demographic growth of those 80 and older create good demand for senior housing through the second half of the 2020s. Operating fundamentals will also improve with Covid receding in the minds of many.

Alan Peterson, analysis for residential, said that permitting continues to be up in the Sun Belt and coastal markets, creating new highs. Coastal markets have low supply growth, ensuring revenue growth over the next 18 months. Single-family rentals will benefit from aging demographics and restrained renter abilities to purchase. A supply-demand imbalance will continue through the next 12 to 24 months and landlords have the negotiating edge.

Not all is good, though. Office analyst Dylan Burzinski said the sector “continues to be on shaky footage,” which shouldn’t be a surprise given uncertainty in the economy and how companies are navigating future use cases.

And changes to property prices since the March 2022 peak have been almost entirely down, with the biggest losers being ground lease off by 29%, office 27% down, apartments dropped by 21%, malls losing 18%, and net lease with a 16% decrease, noted Spenser Allaway, senior analyst for net lease and self-storage. On average, prices are down 15%. But with transaction volumes being down, prices have not always been truly representative of the market.

Source: “Prices Are Improving in Many Property Types“

After 10 consecutive interest rate hikes, Federal Reserve officials announced on Wednesday that they would pause their fight against inflation to figure out whether the US economy was fully absorbing all that harsh medicine.

Following the policy announcement, Fed Chair Jerome Powell noted that rate hikes typically filter through the economy with “uncertain lags.” In other words, the Fed has been playing an (educated) guessing game, taking action before it understands the results.

But the trick is the Fed doesn’t even know how long these lags may last between a rate hike and its effect on inflation. Now it wants to see some hard evidence.

As much as Federal Reserve officials wish they could, they can’t just wave a wand and lower inflation rates. Instead there’s a flow of monetary policy through the economy.

Here’s how the system works: First, the Fed raises interest rates for overnight loans between financial institutions.

Those hikes then filter through the rest of the economy as banks make up for pricier loans by increasing the cost of lending for households and businesses.

That makes household savings drop. It also makes businesses less profitable, and they typically hire less. That takes money out of the economy, and eventually spending will stall. Less demand for goods reduces incentives to raise prices and inflation rates will fall.

But there are a large number of factors that can get in the way of this system working properly, The economy is complex, things get especially fuzzy when you try to pinpoint the timing and size of an interest rate hike’s economic impact.

Timing the lag: “It’s an art, not a science,” said Jack McIntyre, portfolio manager at Brandywine Global, of the US central bank’s inflation-busting objective. Even in a normal economic cycle, “there’s no magic equation of ‘if I raise interest rates by one percentage point, inflation will fall by a certain amount,’” he said.

And this is not a normal economic cycle. Pandemic relief programs pumped extraordinary sums of money into the US economy and Covid-19 significantly altered the labor market. There’s no guidebook for how to deal with that, said McIntyre.

Another complication in determining how long the Fed’s actions will take to fix inflation: Federal Reserve officials are raising interest rates in a very different communications landscape than they have before. This is the era of social media, when news (and rumors) spread and swings markets at a rapid pace.

“It’s a challenging thing in economics,” Powell said in his press conference. “It’s sort of standard thinking that monetary policy affects economic activity with long and variable lags.” But these days, he said, “tightening happens much sooner than it used to in a world where news was in newspapers and not, you know, not on the wire.”

This is the first major hiking cycle in the age of social media and “interest sensitive spending is affected very, very quickly,” said Powell. “Financial conditions begin to tighten well in advance of actual rate hikes.”

A confidence problem: Financial markets have always tried to be forward looking and react to expectations, and banks regularly try to adjust credit policy against potential headwinds, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

The difference here is that there’s more tangible economic data made available than ever before. “I don’t necessarily agree strongly with what Chairman Powell said,” commented Ma. “I don’t think it’s that different than it used to be in terms of the speed with which these things take place. I do think however, it’s a bit less haphazard, and people can react to specific data points more than they could in the past.”

In other words, analysts, investors and business leaders are able to consider the same economic data as Fed policymakers in real time. That means they’re able to draw their own conclusions about the trajectory of inflation rates.

For the Federal Reserve, which counts public confidence as one of its most powerful tools, that spells more uncertainty ahead.

Source: “Why the Fed paused its rate hikes: It’s tired of playing a giant guessing game“