CARNM

The multifamily housing market is showing promising signs of recovery, with recent data from CoStar Group revealing a significant increase in demand and stabilization of vacancy rates.

Absorption rates have notably risen from 118,000 units in the first quarter to 166,000 in the second, fostering optimism among industry experts about a potential shift from decelerating fundamentals to a growth phase. “We’re seeing a very good movement in demand upward from the levels that we saw in 2023,” CoStar’s national director of multifamily analytics, Jay Lybik, told GlobeSt.com. “The spread between supply and demand has been the lowest we’ve seen in the last 11 quarters,” Lybik added.

Despite these positive trends, challenges remain, particularly in the Sun Belt region where oversupply continues to hinder rent growth. As the market navigates these complexities, the outlook for 2025 is pivotal, with expectations for a peak in vacancy rates followed by a gradual decline, setting the stage for renewed investment and expansion in the multifamily sector.

While the market absorbed 166,000 units in the second quarter, 189,000 new units were delivered, leading to a slight increase in the vacancy rate to 7.9% by the end of the second quarter, up from a low of 4.8% in the third quarter of 2021. The vacancy rate is anticipated to peak at 8.1% in early 2025 before declining, according to Lybik.

This anticipated peak and subsequent decline are attributed to improved demand and a slowdown in new deliveries as the construction pipeline contracts.

Meanwhile, rent growth has been modest, with the national rate inching up 1.1% at the end of the second quarter, and is only projected to rise to 1.7% by the year-end. “We think that rents are going to start to increase in the second half of this year,” due to a combination of decreasing supply and robust demand, Lybik said.

The Sun Belt region has been struggling, with the ten worst-performing markets in terms of rent growth located there, led by Austin with a 5.7% drop at the end of the second quarter.

In contrast, the Midwest and Northeast are performing better, with projected rent growth rates of 4.7% and 3.9%, respectively, for 2025.

Market stability has led to increased investment activity, with notable portfolio purchases by Blackstone and Lennar. As a result, institutional investors view the market as poised for recovery and expansion, Lybik said, driven by stable asking rents and a slight decline in the 10-year Treasury yield, which has spurred acquisition interest.

In short, the market is on a path to recovery, with demand outpacing supply, leading to stabilizing vacancy rates and moderate rent growth, Lybik said. “I feel very optimistic about the direction of the market right now… multifamily is definitely poised to go from decelerating fundamentals to stable to expanding fundamentals in the next six to 12 months.”

Source: “New Multifamily Data Points to a Stabilizing Market”

In the shifting post-pandemic work landscape, companies have focused on creating office environments with shared spaces and high-end amenities from catered lunches to modern outdoor spaces, all with a goal of enticing employees back to office buildings.

However, while a majority of workers are interested in working at least a few days a week in the office, it isn’t necessarily these types of amenities that are bringing them back, according to Lincoln Property Company’s latest office report. In fact, what employees say they want in an office space often varies by generation, and no one-size-fits-all solution is likely to be successful.

One thing employees of all generations agreed on is the value of dedicated seats and private offices, signaling a preference for productivity, efficiency and a sense of belonging, the report found. Even Gen Z respondents, who the report identifies as the most likely cohort to value work/play amenities, said dedicated work space is a high-value feature. Beyond office amenities, the traditional motivators to return to the office continue to include increased compensation, workplace functionality, colleague relationships and career development.

“Employees’ strong preference for dedicated workspace underscores the importance of corporate executives listening to their workforce and prioritizing functional and supportive work environments to boost employee engagement and retention,” said Terence Kirk, EVP within Lincoln’s CAS team. “Our survey suggests that continuing to invest in a plethora of upscale amenities that don’t meet these core needs could be a costly mistake for corporate occupiers.”

Commute time is also a key factor in employee attitudes about working from an office. All cohorts included in the study placed a high value on shorter commutes. Approximately three-quarters of respondents say they would not consider going into the office if their commute was longer than 45 minutes roundtrip. Baby Boomers are the most averse to longer commutes, with more than 60% saying commute time as their most important location feature and only 4% considering a commute longer than an hour and fifteen minutes roundtrip.

“Location will become increasingly important for occupiers as they evaluate office spaces, especially as employees weigh the productivity of working at home against the time spent commuting to the office,” Kirk advised.

Overall, 20% percent of workers preferred fully remote work while more than half said they’d like to work in the office four to five days a week, according to the report. Millennials and Gen X respondents showed the strongest preference for in-office work, while Baby Boomers skewed toward a preference for remote work and Gen Z favoring a hybrid arrangement.

Source: “What Employees Want in Today’s Office Space.”

While watching what types of artificial intelligence technology are in the CRE and general software in use at a CRE company, executives should pay attention to what might affect how the systems have an impact on operations.

There are technical limitations that can result from large language model hallucination (when AI makes things up), machine learning with a bad choice of training data, dependence on third-party data sets, and more. However, that is only part of what needs watching. Another big part is legislation.

There are federal attempts at regulating AI but put even that to the side for a moment and consider state legislation. Multiple organizations are tracking what the states are doing. Some law firms like BCLP and Husch Blackwell seem to have the most inclusive counts at the moment.

More than 30 states have proposed and maybe also enacted legislation. Some are directly pointed at AI usage. Some are focused on consumer privacy or other areas where actions will have implications on how AI programs can work and what you can do with them. Some of the states that have at least considered legislation include Washington, Oregon, California, Montana, Colorado, New Mexico, Texas, Oklahoma, Louisiana, Minnesota, Florida, Alabama, Georgia, South Carolina, Tennessee, Illinois, Indiana, Ohio, Kentucky, Western Virginia, Virginia, Delaware, Maryland, Pennsylvania, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, and Maine.

Texas, for example, passed the Texas Data Privacy and Security Act last year. It will allow consumers to opt out of profiling. Companies would also have to perform data protection assessments for high-risk profiling activities. What didn’t pass, but was at least introduced, was a law that would prohibit the use of AI to provide counseling, therapy, or other mental health services.

Washington State passed privacy legislation but hasn’t yet passed bills that would forbid employers from using AI systems to evaluate or make decisions on employment. Indiana also passed a consumer privacy law giving people the ability to opt out of inclusion but also has rules for profiling and automated decision-making. Kentucky legislators early this year proposed a bill that would prohibit bots from interacting with people with the intent of misleading them about the automated nature of the encounter as part of trying to sell goods or services. It hasn’t been enacted but could be in the future.

The list goes on. Some of the laws might not have direct effects on a CRE business, but then again, they might. Only by monitoring legislation and considering how it might affect your business can you know whether there are adjustments — simple or significant — that you’ll need to make.

Source: “CRE Firms Should Keep Track of State AI Legislation” 

Banks are eager to lend for certain high-performing properties, according to Michael Thom, attorney in the business and finance department at Obermayer. “Lenders are more eager to get the money on the street,” Thom told GlobeSt.com, who encourages property owners to explore financing opportunities that may have been unavailable in the past.

At the same time the commercial real estate market is undergoing a shift, particularly in suburban areas, Thom said, pointing in particular to the robust performance of commercial real estate around Philadelphia and parts of New Jersey. Thom emphasized the improved loan performance in these regions, attributing this uptick to a combination of factors, including declining interest rates and refinancing opportunities that have emerged over recent quarters.

Occupancy rates are another crucial factor driving the appeal of suburban real estate. “More tenants have returned to the office in some suburban markets because people live close to the offices,” according to Thom, indicating that lower vacancy rates make these properties more attractive to lenders. This trend is leading banks to show a preference for financing suburban properties over urban ones.

In recent months, there has also been a noticeable shift towards financing single-tenant properties, which offer more security due to long-term leases.

“If you have one tenant and it’s 100% occupied for a 10-year lease, it gives that lender some comfort,” Thom explained.

In addition, banks are showing a keen interest in financing specific types of properties, such as manufacturing, industrial, warehouse, and self-storage facilities, which are considered safer investments. “We’re starting to see some of the banks come back around to lending on more secure real estate,” Thom remarked.

None of this is to say banks are relaxing their stringent underwriting standards. “Banks remain cautious about the commercial real estate loans,” Thom said, adding that properties are being underwritten to higher standards to prevent defaults.  In short, banks are striking a careful balance to capitalize on promising opportunities while maintaining rigorous standards.

Source: “This Expert Detects a Shift in CRE Bank Lending”