Real Estate Updates // June 11, 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:

• "Build in the Suburbs, Solve the Housing Crisis ". Read NY Times article discussing the housing shortage, driven in part by restrictive zoning codes that have long perpetuated racial and economic inequity.
• Middle-income Buyers Face the Most Severe Housing Shortage . "Middle-income home buyers in the United States are finding little on the market to buy, even if they can qualify and afford a mortgage. These would-be buyers face the most severe housing shortage of any other income bracket, according to a new analysis from the National Association of Realtors and Realtor.com that found the market is short more than 300,000 affordable homes for these buyers."
• More than 950,000 multifamily units are under construction across the countr y, according to the Census Bureau, and a recent Green Street report suggests that the Sun Belt could be particularly exposed to the new supply. The wave of development could affect rental rates, although both Camden Property Trust and MAA indicated during earnings calls that they expect any negative impact to be short-lived. Meanwhile, the state of the housing market could provide tailwinds for rental landlords, with Equity Residential CEO Mark Parrell noting during an earnings call that the costs of homeownership "remain high in our markets, especially relative to rents."?
• Single-Family Home Size Continues Downward : Median single-family square floor area registered at 2,261 sf. The average (mean) square footage for new single-family homes stood at 2,469 sf.

• City neighborhoods with a mix of residences, restaurants, bars, and other properties are doing well , according to foot traffic and rent data, even as some office districts grapple with remote work's impact. For example, certain residential areas of Los Angeles and Chicago have seen foot traffic rebound close to pre-pandemic levels, according to Placer.ai data.?
• Single-family home investors scaled back their purchases by 49% in the first quarter compared with the same period last year, according to Redfin. Investors still active in the market are generally targeting lower-priced properties.
• Home prices were up 0.4% in March from the prior month and gained 0.7% on a year-over-year basis, according to the S&P CoreLogic Case-Shiller National Home Price Index. "Two months of increasing prices do not a definitive recovery make, but March's results suggest that the decline in home prices that began in June 2022 may have come to an end".
• Total construction activity for April 2023 ($1,908.4 billion) was 1.2% (+/-0.7%) above the revised March 2023 ($1,885.0 billion).
• April 2023: +1.2% Change
• March 2023 (r): +0.3*% Change
• The Federal Housing Administration is set to propose a plan that will help temporarily reduce mortgage borrowers' monthly payments if they are behind without forcing them to give up loans made at low-interest rates. Under the plan, the FHA would essentially use its insurance fund to pay a portion of the monthly payment, with the borrower having to pay off the assistance as a second loan.?
• "Nearly $1.5 trillion in commercial mortgages is coming due over the next three years ", according to data provider Trepp. Many of the commercial landlords who borrowed the money are vulnerable to default in part because the loans are interest-only, with the entire principal due at the end. Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders’ reluctance to refinance these loans are raising the odds that many?won’t be paid back.
• Two years ago, the number of banks exceeding the FDIC’s CRE loan concentration guidelines was about 300. Today there are almost 700 , see chart below. In other words, US banks have become much more vulnerable to a decline in commercial real estate prices.

• While the Sun Belt has seen significant rent growth during the pandemic, much of it was driven by six Florida markets, which is why they’re classified separately. Salt Lake City and Denver in the Mountain region both exhibited the same overall rental trends as Sun Belt markets, which is why those two regions were combined. Urban hubs, the Midwest/Northeast, and Florida are all currently outperforming the Sun Belt/Mountain with year-over-year rent growth of more than 5% vs. 3.3%. These three regions also are forecast to outperform the Sun Belt/Mountain (4.3% expected cumulative rent growth) over the next two years before moderating to their long-run historical averages. As always, some markets will underperform and others will overperform the group average.??

• "Home insurers pull back on policies in risky areas ." Having already restricted new home-insurance business in California, American International Group plans to curb sales to affluent customers in some 200 ZIP Codes across the U.S. at high risk of floods or wildfires. AIG's moves follow Farmers Group’s little-noticed pullback from new home-insurance policies in hurricane-prone Florida. State Farm and Allstate, meanwhile, are retreating from California’s home-insurance market, too. The shift is making it hard for some home buyers to get insurance and is sparking fierce wrangling over what is most to blame: climate change, inflation or regulations
• The Green Street Commercial Property Price Index increased by 0.1% in May. The index, which tracks the pricing of institutional-quality commercial real estate, is down 15% from its March ’22 peak. “There’s not much transacting these days because buyers and sellers can’t seem to agree on pricing,” said Peter Rothemund, Co-Head of Strategic Research at Green Street. “These situations eventually resolve themselves, and usually it’s in favor of the buyers. Those buyers are demanding a roughly 15% discount from peak pricing, though that amount varies by property type.

• "Impact of Rising Insurance Costs in Major Coastal Multifamily Market : The price of insuring commercial real estate (CRE) properties has soared over the past two years. Increased construction costs, paired with the Fed’s consistent rate hikes in the last year, have pushed insurance prices to new highs. For coastal markets, however, properties are even more exposed to a rise in insurance prices, as rebuilding or repairing properties in coastal areas can be more expensive than in non-coastal regions due to increased risks of hurricanes, flooding, and other natural disasters."
• Watch Equity Residential President and CEO Mark Parrell says that "housing is expensive and undersupplied," creating opportunities for apartment owners. "The momentum is still very good in the rental business by and large," Parrell says. Parrell also discusses the impact of higher interest rates and an anticipated wave of apartment development, noting that the REIT mainly operates in geographic areas that will be less affected by that new supply.
• Watch the Realty Mogul Communities Multifamily 2023 First Quarter Review & Market Update.