CARNM

The gap between homeownership and rental costs has continued to widen during the second quarter, according to Newmark’s most recent multifamily capital markets report. The gap increased 26.7% year-over-year to $1,114.

Meanwhile, MBA’s Mortgage Application Index, a housing and mortgage market indicator, has decreased 48.4% since March 2022 when the Fed initially increased rates. Applications are at the second lowest level in nearly a quarter century as the 30-year fixed mortgage rate hit 6.86% during the quarter. Borrowing costs for homebuyers are 43% above the five-year average, said Newmark.

Benefiting from decreased home affordability, multifamily demand increased 102% during the second quarter to 161,707 units, according to the report. Rolling four-quarter demand accelerated to 389,629 units, which has improved for five consecutive quarters, said Newmark. Demand was particularly strong in the Sun Belt – particularly Austin, Raleigh/Durham, and Nashville – where demand was 64.4% greater on average than the long-term average from 2014 to 2023. ​

Just over 157,000 units were delivered during the second quarter, topping the previous record units delivered of 126,591 during the first quarter of this year. New deliveries are expected to continue to accelerate in the third and fourth quarters of 2024, before slowing down in the first quarter of 2025, Newmark said.

Despite high levels of new supply, rolling four-quarter starts and permits have declined from their peak in 2022, which should lead to normalized levels of deliveries in 2025 and 2026. Multifamily units under construction declined to 880,000 in the second quarter, down 11.4% year-over-year. Units under construction peaked at 993,000 units during the second quarter of 2023, according to Newmark.

Quarterly rent growth rose to 1.1% in the second quarter of 2024, while year-over-year growth remained nearly flat at 0.2% for the third quarter consecutively. But year-over-year rent growth is projected to increase throughout the second half of 2024 and 2025 as new supply fears wane, said Newmark.

During the next two years, $669 billion in multifamily loans are scheduled to mature, primarily held by GSEs and banks. This is despite originations declining 32% and 22% year-over-year respectively. Commercial mortgage-backed securities have been a bright spot, with 167% year-over-year growth during the first quarter of 2024, said Newmark.

Sales volume rose to $38.8 billion in the second quarter of 2024, representing a 20.4% year-over-year increase in volume as a flurry of portfolio and entity-level transactions closed throughout the quarter. This also signifies the first sequential positive year-over-year change in volumes since the second quarter of 2022.​

Source: “Multifamily Demand Rose 102% in Q2”

Much of the discussion about commercial real estate through and after the formal pandemic has been a triptych. The asset classes include office, multifamily, and industrial. The first one quickly tumbled. The second and third were investment darlings. Retail was assumed to be on a crash-and-burn trajectory with extended and sustained pandemic closings.

Now? Retail is looking pretty good, according to an analysis by the Brookings Institution. A start to the story is retail having done surprisingly well during the pandemic while office did poorly. And multifamily — assumed to be an impossibly steady investment because people need to live somewhere, and houses are expensive — had comparable losses.

Using data from CoStar, Brookings noted that while CRE values usually move roughly in step, from 2019 to 2024, that has not held true. Office fell from $3.17 trillion to $2.43 trillion, a drop of $740 billion, or 23.3%. Multifamily went from $4.91 trillion up to an exaggerated height valuation beyond any other class of about $6.1 trillion. Then the asset class slid to $4.61 trillion. The end-to-end drop was $300 billion, or about 6.1%. But the drop from the high point to current value was almost $1.5 trillion, or roughly a 24.4% drop, a bigger dip than office.

Industrial netted an increase from $2.24 trillion to $2.91 trillion, an increase of 29.9%, the definite highflier. Retail had only a slight increase of $3.01 trillion to $3.03 trillion — up about 0.7%. But as Brookings separately pointed out. retail has been the most stable CRE asset class during the pandemic. In 2019, demand was $11.4 billion, with inventory at $11.92 billion. In 2024, demand is $11.61 billion; inventory is $12.11 billion. What makes the stability more remarkable is an interesting dynamic that becomes clear in the important net-lease segment.

After the subprime collapse, many investors became interested in multifamily. They bought, saw values go up, and then became exchange buyers, getting into retail and pushing up prices because they could afford to spend more to get what they wanted because of the tax advantages. “There were so many exchange buyers that they quite substantially moved the market,” Chris Lomuto, an associate vice president in Northmarq’s San Francisco region, told GlobeSt.com. Rising interest rates did away with the advantages and that money tap was turned off. There were far fewer exchange buyers willing to pay more, moderating prices and transaction sizes. That might also have become a stabilizing force.

Brookings looked at total returns — an estimate of the nominal rate of return on unleveraged property investments — by property type. The 2019-to-2024 comparisons of percentage return were industrial, 10.97% to 1.59%; multifamily, 7.26% to -6.54%; office, 4.56% to -5.02%; and retail, 5.3% to 3.56%. And at 4.08%, retail’s national vacancy rate was the lowest of the four asset types and at a five-year low, although the numbers can vary widely by locality.

The stability and resilience seem to have put retail in a good position for future investment.

Source: “The Often Overlooked Bright Future of Retail CRE”

Industrial net absorption for the second half of 2024 is expected to reach approximately 114 million square feet, up from 67.1 million square feet absorbed during the first half of the year.

First-quarter absorption was down substantially from its historic peak in 2021 when it totaled 749.3 million square feet for the year, according to CoStar data. It also lagged absorption recorded in the same period last year of 172.2 million square feet.

Absorption in 2025 is expected to be around 249 million square feet, and the figure in the first half of 2026 could be about 154 million square feet, according to the NAIOP Industrial Space Demand Forecast. The forecast assumes a soft landing of interest rates. If a hard landing materializes, net absorption could significantly underperform the forecast, said NAIOP.

With interest rates expected to start coming down over the next month, potential industry leasing activity going forward is substantial. High interest rates are a headwind to developers and investors as well as industrial space occupiers, the report noted.

In addition, retail sales remained strong in July, which drives the need for industrial space, and inventory levels have remained steady year over year.

Recent growth in demand for industrial space can be attributed to the resumed expansion of e-commerce, which reached 15.9% of total retail sales in the first quarter of 2024, up from 14.9% the prior year, said NAIOP. Notably, Amazon is once again expanding its logistics footprint with a significant increase in leasing and acquisition activity. E-commerce requires more space than traditional brick-and-mortar retail and its continued growth should support increased demand for industrial space, even if total retailer and wholesaler inventories remain unchanged, the report said.

As new industrial supply has hit the market, vacancy has risen slightly to 5.9% from 4.2% during the second quarter of 2023. However, asking rents have grown 4.3% year-over-year, consistent with a relatively healthy market, said NAIOP.

It expects rents to continue to grow, particularly in the South, which has absorbed 53.7 million square feet of industrial space. In every other region, completions outpaced absorption, driving vacancies to 6.5%, the report found.

Source: “Industrial Absorption Set To Grow on Rate Drop Expectations”

There’s evidence of some reversal in a pattern of property sales based on size from the middle of 2023.

Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it was a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.

In a new Real Estate Alert, Green Street wrote that in the first half of 2024, small property sales growth didn’t hold up as well as large institutional offerings. From January to June, properties in the $5 million to $25 million range fell 10.7% from $44.32 billion in the first half of 2023 to $39.58 billion in the first half of this year, according to the firm’s sales comps database.

Compare that to properties in the $25 million and higher category, where sales activity was down only by 8.6%. It’s the first time since the full year of 2021 that larger properties outperformed the less expensive category.

Green Street said there were a few reasons for the reversal: fewer distressed deals in the small-property space, increased focus by private investors buying more expensive properties while institutions wait out volatility and two giant apartment trades.

Kevin Aussef, president of investment properties in the Americas for CBRE, told Green Street that one reason for the lack of activity among smaller properties is less distress. Many private clients weren’t typically late-cycle buyers and they weren’t typically leveraged with mezzanine debt.

Or maybe there might have been greater opportunities for distressed purchases among larger properties. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.

“Usually that’s the sign that things are about as bad as they’re going to get. When people finally throw in the towel,” Matt Reidy, director of economic research at Moody’s, told GlobeSt.com. “We haven’t seen much of that in the larger transaction space until this most recent quarter. We didn’t see owners selling properties at really large dollar losses, like $100 million from when the property was acquired.”

 

Source: “In Switch, Large Property Sales Outperform Smaller Deals”