Real Estate Updates // March 10, 2024

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:

• Multifamily starts are predicted to reach 379,000 this year, marking a 20% decline compared with 2023 , according to the National Association of Home Builders. There are currently about 1 million units under construction, but tight lending conditions and loan costs "continue to hinder additional multifamily housing production".
• When YIMBYtown launched in 2016, it was largely a conclave of young urbanists associated with the Yes In My Backyard movement. But last week in Austin, Texas, the annual pro-housing conference drew more than 600 activists, policy wonks and elected officials from across a wide political spectrum, including a contingent of conservatives. In a deeply divided America, the affordable housing crisis has become a bipartisan issue, drawing an unlikely coalition of politically diverse advocates and lawmakers to advance zoning reform and encourage more housing construction. Such diversity, though, isn’t without tensions, which were on full display in Austin, a city facing soaring rents and housing prices.
• Construction Spending : Total construction activity for January 2024 ($2,102.4 billion) was 0.2 percent (+/-0.8 percent)* below the revised December 2023 ($2,105.8 billion).
• January 2024: -0.2* % Change
• December 2023 (r): +1.1* % Change
• The rental market turned a corner this month, with prices rising 0.2% nationwide in February and trending up for the first time in half a year. On an annualized basis, rent growth remains negative at -1%, meaning that on average, new leases remain marginally cheaper than they were one year ago. But we expect the coming months to bring steady, moderate rent growth as housing demand improves but is partially offset by new construction.

• Rental costs continue to be a significant contributor to the government's inflation data , even though Apartment List is reporting that rent actually fell for six straight months before a modest gain in February. One reason for the split may relate to the way that the Bureau of Labor Statistics gathers and calculates its metrics.

• New Home Sales : Sales of new single-family homes increased to an annual pace of 661,000 in January, gaining 1.5% from the revised tally for the prior month, according to the Commerce Department. Economists in a Bloomberg survey had forecast a rate of 684,000.
• January 2024: +1.5* % Change
• December 2023 (r): +7.2* % Change
• Elevated housing inflation remains a persistent issue for the Federal Reserve as it monitors pricing pressure in the overall economy . Data from the private sector differs from official measures, and it's not entirely clear when a convergence will occur. "There's clearly something that's happening that we don't yet understand".
• Case-Shiller: National House Price Index Up 5.5% year-over-year in December. The MoM increase in the seasonally adjusted (SA) Case-Shiller National Index was at 0.19%. This was the eleventh consecutive MoM increase, but the smallest increase since prices declined (SA) in January 2023.

• "With the recent stimulus from the federal government, sponsors and investors have the opportunity to access a $45 billion fund for office-to-residential (O2R) conversions. This has led to a significant increase in interest in financing, designing, developing, and converting commercial buildings into residential properties."
• A new effort from the Biden administration is focused on improving housing supply and affordability, as well as encouraging transparency in the rental market. The initiative involves a $225 million funding opportunity for manufactured housing as well as provisions such as a tenant bill of rights for military members.
• In many cases, acquisition costs are still too high for office-to-residential conversions to work financially , according to a Goldman Sachs report, which predicts that the annual conversion rate will rise only modestly during the next four years. In some metro areas, acquisition costs would have to come down by about half to make these projects work, the report suggests.

• Apartment developers are building taller properties due to a combination of factors, including cities' willingness to relax zoning requirements, cost considerations that make bigger buildings more profitable and support from institutional investors for projects in smaller cities. High-rise properties accounted for 14% of new multifamily supply in 2022, up from 2% in the 1990s.
• Activity in the housing market could be picking up, with mortgage applications to purchase a home rising 11% last week compared with the prior week, according to the Mortgage Bankers Association. However, demand was still down 8% on a year-over-year basis.
• The Mortgage Bankers Association's index of mortgage applications dropped last week as the contract rate for 30-year fixed-rate mortgages remained slightly above 7%. "Higher rates in recent weeks have stalled activity," while also noting that "the lack of existing inventory is the primary constraint to increases in purchase volume."
• Jamie Dimon said problems in commercial real estate will be contained to “pockets” of the sector as long as the US avoids a recession. "Many property owners can handle the current level of stress". Lower valuations tied to higher interest rates is “not a crisis, it’s kind of a known thing”.
• Nearly 50 banks have multifamily loan issues : At the end of 2023, 49 financial institutions had apartment nonperforming loans greater than 5% of total multifamily loans, according to a report from Fitch Ratings.

• The Green Street Commercial Property Price Index ? was unchanged in February. The all-property index (a measure of pricing for institutional-quality commercial real estate) is down 7% over the past year and 21% since its March ’22 peak. “Property pricing has stabilized over the past couple of months”. “Commercial real estate is now fairly priced relative to corporate bonds, so pricing should hold at current levels.”

• On the same note, it is believed that stress in certain corners of commercial real estate is unlikely to lead to major problems in broader financial markets , says Marcus & Millichap's John Chang, who notes that CMBS delinquency rates are generally lower than during periods such as the global financial crisis. In addition, the economy has beaten expectations as inflation has eased, and the Federal Reserve is expected to start cutting interest rates this year, Chang notes.

• Watch NHMC "Multifamily Customer Experience: What’s Next for 2024?".
• Watch Moody's "Q4 2023 CRE Quarterly Economic Briefing".
• Watch AEI "The Workforce/Middle-Income Housing Tax Credit". Congress is considering expanding the Low-Income Housing Tax Credit (LIHTC) and creating a new Workforce or Middle-Income Housing Tax Credit (MIHTC). In response, the AEI Housing Center gathered leading housing experts to discuss the LIHTC’s poor record and propose more effective market solutions.