Expenses Rising Faster Than Revenues for Many Apartment Owners and a tactic to optimize rents

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Prices Are Improving in Many Property Types Link

• Improving Prices: A midyear review by Green Street analysts shows improving prices in a majority of property types. While office, storage, and life science saw price falls compared to March 2023, prices were up for gaming, ground lease, healthcare, strip center, lodging, mall, data center, tower, industrial, and cold storage sectors.

• Stable Cap Rates and Growing NOI: In the sectors where prices were up, there were stable cap rates and growing net operating income (NOI). This is a positive sign for the health and profitability of these property types.

• Private-Market Real Estate and REITs: Private-market real estate was about 10% over estimated fair value, but listed REITs were fairly priced compared to bonds and inexpensive compared to the S&P 500. This suggests that REITs could be a good investment opportunity in the current market.

Expenses Rising Faster Than Revenues for Many Apartment Owners Link

• Rising Expenses: Expenses are rising faster than revenues for multifamily affordable housing properties. This trend is expected to continue to accelerate, posing a significant challenge for property owners.

• Net Income Per Unit Increases: Despite the rising expenses, property owners have seen net income per unit increases. This is due to high rent growth, which was as high as 37% from 2020 to 2022.

• Future Outlook: The report from S&P Global Ratings suggests that the balance between expenses and revenues will be a critical factor for the profitability of multifamily affordable housing properties in the future.

The housing market has about 40% fewer homes for sale than before the pandemic, and listings keep falling Link

• Significant Drop in Listings: The current housingmarket offers 39% fewer homes for sale than pre-pandemic. The total number of U.S. homes for sale saw the biggest decline in 13 months in the four weeks leading up to June 11. New home listings fell 23%, marking the 10th consecutive month of double-digit declines.

• High Mortgage Rates: Mortgage rates are now close to 7%, nearly double where they were at in 2021. High mortgage rates have discouraged homeowners from selling or moving, leading to a tight inventory. A significant 91.8% of homeowners in the U.S. have mortgage rates below 6%.

• Unaffordability for New Buyers: The housing market has never been this unaffordable for new buyers, according to the Mortgage Bankers Association. The group's Purchase Applications Payment Index hit a record high in June, suggesting a sharp deterioration in borrower affordability conditions.

Billionaire investor Ken Griffin says the US is still headed for a recession - but he's bullish on China despite a disappointing rebound Link

• US Recession Anticipation: Citadel founder Ken Griffin anticipates a US recession and expects the Federal Reserve to raise interest rates once more in 2023. He is looking towards high-yield credit markets as a source of opportunity during a potential downturn.

• Bullish on China: Despite a muted post-COVID rebound, Griffin holds a bullish view on China. He anticipates economic growth there to beat Beijing's own target, expecting an expansion of more than 5%.

• Credit Markets and Investment Strategy: Griffin sees the credit markets as a meaningful contributor later this year. Regardless of who wins the next US presidential election, Citadel's strategy in the region will not change, with Griffin noting the scale and scope of the Chinese equity market as incredibly attractive for investors.

Apartment Inventory Growth in Suburban Sun Belt Submarkets Above 10% Link

• Bustling Construction Activity: Apartment construction activity has driven inventory in 15 of the country’s 50 largest markets above 10% in Q1 2023. The Sun Belt region reflects this trend the most, due to increased migration and population growth since the pandemic began.

• Texas as Construction Powerhouse: Texas, particularly the Dallas/Fort Worth area, showed significant supply volume, earning the title of “nation’s construction powerhouse” in the report. More than 74,000 units are in the pipeline there, representing an all-time high.

• Areas with Highest Inventory Growth: The south suburb of Burleson/Johnson County in Fort Wayne topped the list with an all-time high increase of 20.1%. It was followed by two other Fort Worth submarkets: North Fort Worth/Keller at 13.4% and South Arlington/Mansfield at 12.4%. The Dallas submarket of Frisco also made the list with growth of 14.9%.

A Strategy

For Real Estate Portfolio Optimization : The Annual Mark-to-Market Exercise: Link

• Annual Mark-to-Market Exercise: This strategy is crucial for identifying cost-saving opportunities across a real estate portfolio. It provides potential leverage points for negotiations and offers the chance for meaningful engagement between business units and corporate real estate organizations

• Best Practices and Key Metrics: The exercise is most beneficial when conducted 18 to 36 months in advance of lease expiration. It should focus on the 20% of the portfolio that accounts for 80% of the annual cost. Obtaining the strike price, or the agreed-upon price the space would lease for in the current market, is a valuable data point.

• Analyzing Results: The results of the mark-to-market exercise can be categorized into three buckets: Above, At, and Below market. While savings opportunities lie in the "Above" market category, "Below" market locations pose the greatest risk of a rent increase upon renewal. Strategies for above-market locations include aggressive renewal strategies, "blend & extend" agreements, and potential relocation.