Real Estate Updates // July 25, 2023

Greetings,

I would like to share a few headlines and a brief analysis of the Real Estate and [Housing] Development industry from the last few days. I hope you find them insightful:

• “The U.S. is at risk of losing nearly 200,000 affordable housing units over the next five years, as a wave of low-cost rental apartments funded by a 30-year government tax credit become eligible for conversion to market rate. Without new subsidies or incentives, building owners will likely take advantage of the recent hot market and raise rents to meet the rising costs of maintenance, insurance and property taxes. Some cities could lose large shares of their low-cost rentals. In the Dallas area, about one in five tax-credit-built apartments could lose its affordability protections by 2027, according to Moody’s. Chicago and Houston also look especially vulnerable to losing a large amount of their affordable housing.”
• Office-to-housing conversions are gathering interest in multiple cities, and Boston is looking to encourage the process with tax incentives, according to Mayor Michelle Wu. It's part of a public-private partnership to rejuvenate downtown areas with office tower owners offered reduced property taxes and streamlined city approvals for conversions.
• Single-family rental REITs and other institutional investors in the space are contributing to the nation's housing stock by developing properties as well as providing housing at more affordable price points than homeownership. REITs are also supporting neighborhoods by reinvesting in homes and working with local vendors. The single-family rental sector "provides a way for people to live in the neighborhoods that they want to live in," said Laurie Goodman, a fellow at The Urban Institute. "They are filling a market niche."
• Senate Democrats have introduced a bill that could discourage investors from purchasing homes for rental income by disallowing certain tax deductions if they have purchased 50 or more single-family rentals . The bill also provides incentives designed to encourage properties to be sold to homeowners or community nonprofits.?
• "High mortgage rates are dissuading American homeowners from selling and giving up the low rates they have now, leaving new construction as the only game in town for would-be buyers. In May, sales for all home builders were at their highest level since early 2022. That month, newly built homes accounted for nearly one-third of single-family homes for sale nationwide, compared with a historical norm of 10% to 20%. Sales of existing homes in May were down 20% from a year earlier, while sales of new single-family homes were up 20%. So far, the home-building revival is providing only minor relief to prospective buyers. For builders, it has been a lifeline."

• Read the full CBRE report on Cap Rates for Prime Multifamily Assets Stabilize in Q2.

• Existing home sales reached an annual rate of 4.16 million units in June, a decline of 3.3% from the prior month, according to the National Association of Realtors. The pace of sales was the lowest for the month of June since 2009.?
• The single-family rental industry saw investment fall from $44 billion in 2021 to $13 billion in 2022, and $2.3 billion has been invested so far this year, according to John Burns Research and Consulting. Interest-rate hikes, construction costs and other factors are affecting investment, although experts say demand will sustain the sector in the longer term.
• Housing recessions tend to start before a general recession kicks in:

• Rent growth for single-family rental homes reached 3.4% on a year-over-year basis in May, moving back toward levels seen in the years before the pandemic, according to CoreLogic. Rent grew more quickly for properties in the lowest price tier than for properties in the highest price tier, the report found.
• The ongoing rebound in the housing market is putting upward pressure on growth and inflation at a time when the Fed is trying to slow down growth and inflation, see chart below.

• "There are a near-record 1.698 million units under construction. Red is single family unit. Currently, there are 695 thousand single family units (red) under construction (SA). Blue is for 2+ units. Currently there are 994 thousand multi-family units under construction.?This ties the record set in July 1973 of multi-family units being built for the baby-boom generation."

• Net demand in the apartment market reached 83,449 units nationally in the second quarter, marking a five-quarter high, according to RealPage data. However, quarterly net absorption is below its typical level, according to RealPage's Carl Whitaker, and the market is set for a record number of apartment deliveries in 2023.?
• “Multifamily completions are on track to top 520,000 units this year, which would be the most since the late 1980s , according to a projection by CoStar Analytics. Most of the increase will be in the southern U.S., the company predicts.”
• Construction spending climbed 0.9% in May , with the better-than-expected gain driven in part by a 1.7% increase in expenditures for single-family homebuilding, according to the Commerce Department. Meanwhile, spending on multifamily housing projects was down 0.1% for the month. Overall, outlays for private construction projects rose 1.1%, and expenditures for public construction projects gained 0.1%.
• Inflation and increased losses tied to natural disasters have made securing property insurance coverage more challenging, particularly in states such as California, Florida and Louisiana. Kilroy Realty has had to approach about 40 separate insurers to put together sufficient coverage for its office portfolio, said Scott Ritto, a Kilroy vice president.
• The Biden administration is highlighting what it sees as problematic fees that renters are sometimes charged, such as for credit checks and trash removal. As part of the effort, Zillow, Apartments.com and AffordableHousing.com have agreed to provide information about these sorts of extra costs. In addition, the Department of Housing and Urban Development has offered research on what could be done to lower these fees.
• CMBS loans in the amount of about $103 billion will mature in the second half of 2023 , and another $126 billion will mature in 2024, according to Trepp. Trepp found that much of the debt due over the next 18 months may need to be refinanced at a higher rate.