Archives for April 2024

The national median asking rent rose for the third consecutive month in March to 0.8%. It’s a pattern driven by a number of factors, including the rising costs of buying a home, a new Redfin report revealed.

“Many people are delaying home purchasing plans because monthly payments for homebuyers are near their record high. That’s bolstering rental demand, and as a result, rent prices,” Redfin noted. “The median asking rent in March was just 3.3% ($67) below the record high of $2,054 in August 2022.”

Once again, gains in the Midwest and Northeast far outstripped gains in the South and West. Indeed, rents in the South were largely flat and even fell slightly in the West. That’s largely because these regions have seen a significant increase in apartment supply.

In contrast, median asking rent in the Midwest climbed to $1,456 in March – a hike of 5.3% from the previous year, and a new record. The Northeast also saw a boost of 3.8% to $2,504. With less supply, landlords in these regions were under less pressure to lower rents to fill vacancies, and competition for apartments kept rents up.

The Midwest benefited from being one of the most affordable parts of the country, which helped increase housing demand. And its low unemployment rate coupled with an influx of major tech companies like Google in Kansas City also worked in its favor, Redfin said.

The good news for renters across the country is that rent growth has slowed since the pandemic, remaining below 3% since early 2023, and rents are more predictable. And as households try to curb their spending, they are also resisting rent increases, presenting a challenge for landlords, Redfin said.

Source: “Apartment Rents Rise for Third Consecutive Month“

Goodwin Procter, one of the largest law firms in the world, said commercial real estate is ready to rebound. Rate cuts will boost real estate development.

WASHINGTON – AI, operational real estate and office conversions are among the commercial real estate trends grabbing Goodwin’s attention ahead of our annual Real Estate Capital Markets (RECM) conference.

Brighter days could be coming for the commercial real estate industry after a cooldown in recent years.

Private real estate investment funds remain highly attractive to investors globally, with 39% of them intending to put more money into private real estate this year compared with last year, according to PERE, an investment publication site.

The Federal Reserve could cut interest rates in 2024, making financing more affordable and boosting real estate development. If this happens, the lower cost of borrowing could also juice the broader economy, in turn driving up business expansions and demand for commercial properties.

At Goodwin’s RECM conference on March 27, which was co-host with Columbia Business School, real estate thought leaders offered insights on some of the forces set to spur growth in real estate this year and beyond.

Here is a breakdown of some of the pressing real estate trends Goodwin is thinking about:

Real estate firms embrace AI

Chief among the growth drivers is AI, particularly given the proliferation of generative AI (gen AI) tools, the need for infrastructure and real estate to support the expansion of AI, and the increased provision of meaningful data analytics.

Real estate firms are far more likely to spend money on AI than on other emerging technologies, according to a 2024 Deloitte survey of global real estate leaders. Seventy-two percent of survey respondents said their firms are piloting, starting to implement, or producing with AI. By comparison, just more than half of firms said they are investing in the metaverse.

Gen AI could produce $110 billion to $180 billion or more in annual value for the global real estate industry, according to estimates from consulting firm McKinsey. Real estate companies and investors are seeking to tap the power of gen AI to drastically speed up investment decisions, enable prospective tenants to visualize themselves in a property, and improve customer service.

Investors can seize on the fast-growing operational real estate sector

Operational real estate (OpRE), or real estate investment in which management and operational performance directly affect returns, continues to rapidly expand. OpRE investors might manage hotel, hospital or senior-living facilities, with investment returns tied to property operations. The financial returns of investing in senior-care homes, for instance, would depend on the quality of care provided.

Many OpRE investments, such as healthcare facilities, are expected to remain strong regardless of how the economy fares because they provide services that are always needed. Some will also benefit from long-running demographic trends. An aging US population will keep demand for senior-housing services growing, for instance, irrespective of the economy’s ups and downs.

OpRE investors may turn to renewables as environmental, social, and governance initiatives remain an industry priority. Hotels, for instance, can increasingly use renewable energy to appeal to environmentally conscious guests and aid the transition to a low-carbon economy.

More offices to undergo conversions

Remote work remains far more common than before the pandemic hit four years ago. Perhaps more surprisingly, work-from-home time is down only slightly from two years ago, when the pandemic was still disrupting back-to-office plans, according to survey findings from Stanford University Professor Nicholas Bloom and co-researchers.

The shift to remote and hybrid work has driven up office vacancy rates while creating new opportunities for cities to reshape downtowns. Many older buildings without modern facilities will likely convert into apartment buildings or condos, according to CBRE, a commercial real estate investment firm. The federal government is aiming to boost such office-to-residential conversions through grants, low-interest loans, and tax incentives.

More office-to-residential conversions in downtown office districts will help offset some of the drag from office vacancies. Momentum is already building. CBRE expected about 100 offices in major US cities would convert into other types of spaces by the end of 2023, up from 56 office conversions in 2022. Nearly half of last year’s projected office conversions were to multifamily projects.

Vacant office buildings also provide an investment opportunity. Value-added funds can acquire empty offices and renovate them to increase their leasing value, according to investment data company Preqin.

Retail remains resilient

American shoppers returned in earnest to stores and restaurants as the pandemic eased. Meanwhile, the availability of retail space remained limited, reflecting a dearth of new construction following the 2008-09 recession.

Solid demand combined with a lack of supply helped drive down retail vacancy rates, keeping the sector strong over the past year despite higher interest rates. The US shopping center vacancy rate hit 5.3% in the fourth quarter of last year, the lowest for records tracing back to 2007, according to Cushman & Wakefield Research.

The outlook for retail remains bright, particularly for neighborhood shops and suburban shopping centers, which are benefiting from the shift to remote work. More consumers are making trips to stores near their homes during the workweek.

The outlook for retail remains bright, particularly for neighborhood shops and suburban shopping centers, which are benefiting from the shift to remote work. More consumers are making trips to stores near their homes during the workweek.

Commercial real estate market defies the odds

Last spring’s series of bank failures triggered some analyst projections for an imminent commercial real estate bust. Such a crisis never materialized—and might not.

In one sign that financial stress remains minimal, the delinquency rate—or the share of commercial loans that are past due—is still historically low, despite ticking up last year. The low delinquency rate aligns with other signs of economic strength, including a low unemployment rate and stronger-than-expected growth in gross domestic product.

Though some regional banks will still face challenges as their maturing loans come due, several factors could help alleviate bank risks, including strong rent growth, lower rates of new construction, and less leveraged lending, according to an analysis from Moody’s Analytics. Further, commercial real estate is a diverse market, with some sectors, such as retail, thriving.

Source: “What’s Hot In Commercial Real Estate“

The outlook for the U.S. office market remains bleak, with the national vacancy rate hitting another high in the first quarter of this year and losses continuing to mount on loans backed by towers across the country

The vacancy rate reached 19.8% in Q1, a new record by Moody Analytics Inc. standards and a rate that’s 50 basis points higher than the recessionary peaks in 1986 and 1991. Effective rents fell by 0.04% in the first quarter, while asking rents inched up 0.14%.

The national office market has struggled since the onset of the Covid-19 pandemic more than four years ago, but the market continues to add direct vacancy and sublease space, prompting questions of when the bleeding may stop.

There are, however, some office buildings nationally that are bucking the larger trend, even if they might be too small to register on a macro level.

Moody’s recently analyzed 7,000 U.S. office buildings that saw high rent growth between 2022 and 2023 relative to their markets’ performance, finding certain suburban office buildings to be outliers in their respective markets.

The industrial sector has probably held up best of any in commercial real estate post-pandemic and during the fall in transactions, values, and rent growth.

According to data from Yardi Matrix, the national average rent in February was $7.68 per square foot. That was down four cents from January but still up 7.5% over the previous 12 months. The average rate signed in the last 12 months was $10.31. The average vacancy rate was 5.0%.

“Record levels of new supply coming on line simultaneous with demand cooling have sent vacancy upwards and provided some much needed breathing room to the most in demand markets,” Yardi wrote.

Looking at in-place rent growth, the Inland Empire saw the highest at 12.7%, but with a 6% vacancy rate. The region has topped the Yardi Matrix rent growth since the company began reporting in 2021. The vacancy rate is a sign that the area is cooling, as it had been below 3%, and even for a time below 2%, much of the previous three years. “To meet booming demand, developers rushed to bring new space to the market, delivering 100 million square feet (16.2% of stock) since the start of 2020.”

Second was Miami’s 12.0% rent growth with a 4.6% vacancy. Orange County and Los Angeles were third and fourth, both with 11.4% in-place growth and respective vacancy rates of 4.5% and 4.8%. In fifth place, New Jersey with 9.1% growth and 4.7% vacancy. Then came Seattle (8.6% in-place growth, 6.1% vacancy), Phoenix (8.4%, 3.2%), and Boston (8.4%, with the highest vacancy rate of 8.6%). All others had under 8% growth.

Things shape up differently when looking at the average rates per square foot signed within the last 12 months: Orange County ($19.64), Los Angeles ($19.37), Bay Area ($18.27), Miami ($16.32), Inland Empire ($15.01), New Jersey ($14.00), Seattle ($13.79), Boston ($12.49), Bridgeport ($12.04), Portland ($11.11), Phoenix ($11.03), Baltimore ($10.62), and Philadelphia ($10.15).

For construction of new industrial supply (across a broad set of subtypes), the national amount under construction is more than 419.8 million square feet. That’s 2.2% of stock under construction; under construction plus planned construction is 5.4% of stock.

By far, the top five metros for amount of construction are Phoenix (42.7 million square feet, under construction is 11.1% of stock, under construction plus planned is 28.2% of stock); Dallas (27.2 million square feet, 2.9%, 8.2%); Charlotte (13.0 million square feet, 4.1%, 8.4%); Chicago (11.4 million square feet, 1.1%, 2.6%); Kansas City (11.3 million square feet, 4.1%, 16.5%); and Memphis (10.0 million square feet, 3.4%, 3.9%).

“Increased interest rates, tightened standards for construction loans, normalizing demand for industrial space and economic uncertainty have combined to cool the industrial pipeline, which reached record levels in 2021 and 2022,” they wrote. “New construction starts fell more than 40% between 2022 and 2023, with 341.9 million square feet breaking ground last year. The deceleration of the pipeline has continued in the early stages of 2024, with Yardi Matrix logging only 20.0 million square feet of starts during the first two months of this year. While there is a lag in collecting all starts data, this is a significant slowdown from previous quarters.”

Source: “Industrial Markets With the Best Fundamentals“