Build to Rent Construction Booming in all but 10 states.

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Fed Hikes Interest Rates to 22-Year High link

• The Federal Reserve has increased the federal funds rate by 25 basis points, reaching a 22-year high of 5.25% to 5.5%.

• Despite the resilience of the U.S. economy and a strong labor market, further rate hikes this year cannot be dismissed. However, slowing inflation and economic growth are likely to deter the Fed from further rate increases.

• Real estate capital markets and leasing activity are expected to remain subdued in the near term due to tighter lending conditions and a weakening economy. A clearer path for interest rates later this year is expected to boost investor sentiment, leading to increased capital markets activity in early 2024 and a revival in leasing activity.

CBRE - Main Insights From the U.S. Cap Rate Survey H1 2023 link

• Interest Rate Volatility: The report highlights that interest rate volatility has led to an increase in cap rates in H1 2023.

• Sectoral Differences: Retail saw the smallest cap rate increase due to improved fundamentals, income growth, and attractive pricing. Office cap rates widened most sharply as investors demanded greater pricing discounts amid an uncertain outlook.

• Cap Rate Expectations: The H1 2023 Cap Rate Survey reveals that many CBRE capital markets and valuation professionals believe yields will stabilize during H2 2023. This is a reversal from the H2 2022 survey, possibly due to progress on inflation and a belief that the Fed’s tightening cycle will soon end.

Build-for-rent construction rising in all but 10 states link

• Booming Construction: Most states are experiencing a surge in the construction of single-family homes specifically designed as rentals. However, 10 states are bucking this trend due to unfavorable market conditions.

• State Rankings: On a per-capita basis, Arizona leads with the most built-for-rent housing in the construction pipeline with 2,011 units planned or under construction per one million inhabitants. North Carolina and Texas follow with 1,071 and 856 units respectively. The nationwide average is 345 units.

• No Construction in 10 States: Despite the United States needing 4.3 million more homes to meet housing supply needs, 10 states including Oregon, Massachusetts, and West Virginia are not constructing any built-for-rent housing. This is likely due to unfavorable market conditions and restrictions on annual rent increases.

Senior housing investors expect rent growth in 2023 link

• Rising Rents: Over 75% of senior housing investors anticipate rent increases of 3.0% or more across most senior housing types through 2023, with assisted living expected to see the highest rent growth. No respondents expect any decrease in rent rates.

• Investment Opportunities: Active adult properties are considered the biggest senior housing investment opportunity this year by 37% of respondents, followed by assisted living at 29% and independent living at 13%.

• Challenges Ahead: Despite positive prospects, the sector faces challenges such as staffing shortages, higher borrowing costs, and constrained lending. However, rental rates are expected to trend upward due to the need-based demand and constraints on future supply.

Multifamily Sales Post Steep Year-Over-Year Decline for H1 2023 link

• Dramatic Drop: U.S. multifamily sales volume saw a significant decrease of 70.6% from the record highs of 2021 and 2022 in the first half of 2023.

• Market Turmoil: The past year has been characterized by spiking interest rates, increasing cap rates, and softening rents, leading to a slowdown in deal-making.

• Stabilizing Trends: Despite the turmoil, the market is beginning to find a new equilibrium, with rate hikes largely behind and increased investor clarity.

Commercial Real Estate Is in Trouble, Not Offices When You Look at Numbers link

• Shift in Focus: While the pandemic has led to concerns about the future of office spaces, the real concern should be multifamily residential real estate. This sector is facing a significant paradigm shift, with an $8 billion wave of multifamily commercial mortgage-backed securities (CMBS) due to start in the second half of this year.

• The Office Misconception: Despite concerns, office spaces only make up 15% of the commercial real estate market, equivalent to roughly $3.2 trillion. Delinquencies in office real estate are still under 5%, suggesting that the impact of the pandemic on this sector may be overestimated.

• Rising Rents: To offset higher operating costs due to increased debt, multifamily real estate conglomerates are raising rents. Asking rents have increased 17% year over year, with the average cost for an American to rent an apartment at a record high of $1,850 a month.

Apartment Developers Turn to Non-Bank Lenders for Construction Loans link

• Shift in Lending Landscape: With traditional banks scaling back on real estate activity due to rising interest rates and concerns over existing real estate debt, apartment developers are turning to non-bank lenders for construction loans. This includes Federal Housing Administration (FHA) loans and financing from private debt funds and commercial mortgage REITs.

• FHA Loans Gain Popularity: Despite a notoriously long approval process, FHA loans are becoming an attractive choice for developers. These loans are non-recourse, offer fixed rates, and automatically convert to a 40-year, fully-amortizing permanent loan once the property is finished and leased up. In fact, FHA recently increased its large loan threshold from $75 to $120 million.

• Private Debt Funds Step In: Private debt funds are providing high-leverage loans at a faster pace than traditional banks. For instance, Trez Capital provided a $26 million construction loan for a new apartment building in Seattle, covering 74% of the total development cost. This is significantly higher than what a conventional bank loan would provide, offering an alternative financing solution for developers.