Measures for Rent Control Are Increasing Across the Country

Legislation is being considered or passed in at least five states.

Many states around the US, including Florida, California, Minnesota, New York, and Nevada, continue to discuss and implement rent control.

According to a study released this week by the National Multifamily Housing Council, a number of proposals have either been passed, rejected, or put on the ballot in November (NMHC).

According to Ric Campo, the company’s chief executive, apartment operators like Camden recently said in The Wall Street Journal that “it will not build in a rent-control market.”

According to Sean Rawson, co-founder of the California-based Waterford Property Company,“From a public policy perspective, rent control is an extremely short-sighted way to provide housing affordability.” As a developer and investor in affordable housing, Waterford is a strong supporter of income-restricted housing; yet, imposing rent control unfairly burdens private investors, deters new investment in communities, and costs the long-term rental advantages.

“In my opinion, the long-term negative effects far outweigh any short-term political benefits for elected leaders.”

Building permits in Florida often take two years to obtain

These administrations keep citing a lack of homes and rising demand. The recent declaration of a housing state of emergency in Lake Worth, Florida, was considered as the first step toward attempting to enact rent control.
Governments continue to use regulation to stall the building of new homes. According to a recent survey by NMHC and the National Association of Home Builders, the average cost of developing a multifamily property is 40% accounted for by regulations at all levels of government.

According to the Florida Apartment Association, some Florida developers have to wait up to two years to get their building permits.

A review of the status in each state

A resolution to put rent control on the ballot was approved by Orange County’s County Commissioners in Florida. If adopted by voters, the resolution would set a one-year limit of 9.8 percent on rent increases in Orange County.

The city councils of Tampa and Saint Petersburg both voted down initiatives to place rent regulation on their November ballots.

The influential Culinary Workers Union Local 226 in Nevada committed to keep working for passage, and according to NMHC, “we expect a fight at the state level in 2023.”

Kingston, New York, became the first upstate city to establish rent control in the state of New York. 90 miles north of New York City is Kingston.

According to local reporting, the legislation applies to structures with six or more units constructed before 1974, which corresponds to around 1,200 units.

In California, Richmond’s city council decided to put a rent control issue on the November ballot. Richmond is located immediately north of Oakland.

According to NMHC, “if passed, rent increases would be capped at 3 percent of a tenant’s existing rent or at 60 percent of the Consumer Price Index, whichever is lower.”

In November, a rent control referendum will also be held in Pasadena.

St. Paul, Minnesota, is thinking about making adjustments to the rent control ordinance it passed last year. A member of the municipal council is proposing to provide new development a 20-year exemption. According to the NMHC, certain federally funded housing would also be exempt from the regulation.

We are ready to assist investors with Santa Ana multifamily properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

Overview

Commercial real estate has continued to test its speed limit on the path to normalcy through mid-2022. Though coming off 2021 highs, price momentum in the sector has sustained throughout the first half of 2022, generally following deal volume activity over the same period. The Industrial sector continues to lead the post-COVID hierarchy, pushed by a prolonged shift in warehouse demand as goods inventories pile up amid complex supply chain and consumer demand dynamics. The Multifamily/Apartment sector is close behind, benefiting from robust demand that has only intensified in recent
months as homebuying becomes increasingly unaffordable for many would-be buyers. Meanwhile, the Office sector continues to lag behind its peers as space demand settles at a new post-pandemic low, driven by remote work adoption. The Retail sector, despite a slow start to begin the recovery, achieved record annual price growth in Q1 2022, which coincided with a seven-year high in deal volume. In this commercial real estate mid-year update, the SVN | Research team explores MSCI Real Capital Analytics (MSCI RCA) data on transaction volume, pricing, and cap rates, comparing current trends to ones observed before and during the onset of the pandemic.1

1 Unless otherwise stated, all data throughout this research referencing property-type cap rates, prices, or transaction volume are based on MSCI Real Capital Analytics hedonic series.

Commercial Real Estate Property Prices

Through July, measured by MSCI RCA’s Commercial Property Price Index (CPPI), commercial real estate prices have risen by 16.8% from one year ago. The latest figures are just a tad under the record 19.9% pace that was registered earlier this year and reflect an industry that continues to be a bright spot amid a storm of economic headwinds. Properties that are located both inside and outside of gateway metros have moderately slowed in recent months but have shown the ability to absorb the early effects of monetary tightening, climbing by 8.9 % and 19.3% year-over-year, respectively, through July.

Growth in gateway markets has consistently trailed non-gateway metros throughout the pandemic recovery, as corporate America inched its way into a new normal within larger cities. Somewhat surprisingly, the divergence only intensified as the United States moved beyond COVID-era policies and activity restrictions.

The growth spread between non-gateway metros and the top six major metros was relatively unchanged between December 2020 and July 2021 but began to balloon as the Delta variant took hold in the Fall. As Delta subsided to start

2022, inflation in the US intensified, with non-major metros experiencing a higher degree of cost increases relative to larger cities. So-to did the growth spread between gateway and non-gateway metros, which swelled to 10.43% through July 2022 — more than double its growth spread from one year ago.

The variation between gateway and non-gateway inflation rates likely explains a significant part of why we are seeing a similar pattern among commercial real estate price growth.

Apartment

The Apartment market continues to be a stalwart not only for commercial real estate but for the US economy at large. According to MSCI RCA, Apartment transactions rose by $18 Billion from Q1 to Q2 2022, a 26% increase quarter-over quarter and up 42% from one year ago.

While transaction volume in the sector has receded from the record highs achieved in 2021, it continues to benefit from robust housing demand amid increasingly limited supply. If Apartment sector volume were to continue its pace set during the first half of this year, it would amount to more than $309 billion in sales, second only to 2021’s record level.

Through Q2 2022, unit prices are up 25.6% year-over-year — an all-time high for the sector. Amid rising prices and increased buyer activity, cap rates have continued to fall to new lows, dropping 10 bps to 4.3% in Q2. Between 2011 and 2019, a rough approximation for the last real estate cycle, cap rates fell an average of 17 basis points annually. According to the latest data, cap rates are down by a weighty half-percentage point from one year ago.

Office

Transaction volume in the Office sector continues to trail pre-pandemic levels as remote work gains what signals to be a permanent foothold in the US labor market. Through the second quarter of the year, MSCI Real Capital Analytics has tracked $57.7 billion worth of Office sales, an improvement from the same period in 2021, but roughly $10 billion below
the first-half 2019 pace.

Projecting out the half-year data over the rest of 2022, the annualized total of $115.4 billion would amount to just 80% of both 2021 and 2019 volumes. However, it is worth noting that transaction volumes across most property types tend to peak in the fourth quarter — in the five years before COVID, CRE transaction volume was 22% higher on average during the second half of the year compared to the first. The seasonality was exacerbated in Q4 2021 as inventors readied for the impending Fed tightening cycle — Office sector transactions achieved near record-volume in Q4 2021 ($56.6 billion).
The trend suggests that 2022’s first-half improvement over last year may be a more reliable signal than the annualized projection. Still, as 2021 ended, Office investors still largely anticipated a normalization of attendance levels as pandemic era activity patterns waned. So far in 2022, all evidence has pointed to the contrary, and Office transaction volumes are likely to stall in the fourth quarter of 2022 compared to previous years as a result.

Entering the pandemic, office space on average was transacting at $238 per square foot. Pricing fell to a low of $235 per square foot between Q2 and Q4 2020 and has since rebounded to new highs — reaching $278 per square foot in Q2 2022. As of Q2 2022, office space is transacting at an average of $289 per square foot, up 13.3% year-over-year and 2.2% quarter-over-quarter. Cap rates on Office properties continue to reach historical lows, falling to 6.0% in Q2 2022. Over the past year, cap rate compression in suburban offices has driven much of the reduction in the broader sector.

Retail

The Retail sector has shaken off early pandemic headwinds, registering its highest first-half of the year transaction volume since 2015. Further, through the second quarter of 2022, Retail led all sectors with a 46% year-over-year increase in deal volume. Notably, compared to other CRE types and their sub-sectors, Retail has experienced the largest variation in sales growth between its two sub-sectors over the past 12 months. Transaction volume at shopping centers rose 186% year-over-year through Q2 2022, while shop sales rose just 52%.

Though annual growth has fallen below the triple-digit increases seen throughout 2021, much of last year’s high marks were due to base effects stemming from an anemic market in 2020. If Retail volume was to continue at its current pace for the remainder of the year, it would set a record $89.2 billion in transaction volume. Considering that this projection does not factor in the typical volume uptick during the fourth quarter, Retail is poised have a banner year in 2022, all else held constant.

Retail cap rates ticked down 10 bps quarter-over-quarter to a new all-time low of 6.0% in Q2 2022. While cap rates in the sector held relatively steady throughout much of the pandemic, they have fallen by 40 basis points over the past year as property values have risen more rapidly than rents. Retail price per square foot reached $313 in the second quarter, the highest mark on record.

Moreover, the price per square foot for transacted Retail assets has risen on a year-over-year basis for five consecutive quarters. Prior to the recent string of price growth, annual pricing had declined for four consecutive quarters. Through Q2 2022, Retail price per square is up 24.9% year-over-year, the fastest annual pace on record.

Industrial

The Industrial sector has seemingly had the wind at its back ever since the end of the Great Recession, and this was only intensified by the positive shift in goods consumption that we saw take place during the pandemic. Through the halfway mark in 2022, sector growth remains as strong as ever. According to MSCI Real Capital Analytics, $74.9 billion of Industrial asset sales have changed hands through the first two quarters of 2022, amounting to 134% of 2021’s first half volume. Annualizing the first two quarters of sales suggests that the sector is on pace to hit $149.2 billion worth of
transaction volume by the end of the year.

Like the pattern evident across all CRE sub-sectors, Industrial transaction volumes could accelerate during the second half of the year. For instance, in Q4 2021 Industrial transaction volume totaled a massive $77.3 billion, roughly $20 billion more than the first two quarters of 2021 combined. While last year’s market was partially fueled by monetary policy tea leaves, if Industrial experiences an uptick in Q4 2022 that is anywhere close to what we saw last year, the sector will set an annual total that is well ahead of what it has to date.

Like all other sectors, cap rates for the Industrial sector continue to chart new lows, falling 10 bps quarter-over-quarter and 40 bps year-over-year. On the other hand, asset pricing continues to reach record highs both in terms of observed levels and annual growth rates. As of Q2 2022, Industrial assets are trading at an average of $175 per square foot, rising $8 from the previous quarter and $32 from one year ago. Through the second quarter, asset price growth in the sector has achieved a new record high of 32.0% year-over-year first achieved in Q1.

Macro Economy

The US economy is sending mixed signals, to say the least. Inflation continues to sit near generational highs, with the Consumer Price Index (CPI) climbing by 8.5% over the previous 12 months through July. A flattening of headline CPI between June and July has escalated hopes that the Federal Reserve’s monetary tightening may be having an impact on price pressures. Still, Fed Chair Jerome Powell along with several other FOMC voting members have indicated in recent statements a willingness to push ahead with hikes until the economy has achieved a sustained reduction in price growth.

The feared double-edged sword of rising rates has indeed begun to poke out in both directions. Real GDP declined by an annualized 0.6% in Q2 2022, according to the latest estimate released by the Bureau of Economic Analysis (BEA) in August, the second consecutive quarterly reduction. A fall in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment over the quarter fueled the decline. Notwithstanding, consumer spending remains robust while US exports increased in the second quarter. That sustained economic activity is evident in the continued strength of the labor market, which added 528,000 jobs in July as the unemployment rate ticked down to 3.5%.

Whereas in 2020 and 2021, commercial real estate success was propelled by unprecedented economic stimulus followed by a momentous reopening of the economy, it is now being fueled both by late-cycle demand and the cascading of costs related to supply shortages. The above can be inferred because, while each major sector besides Office saw an annual transaction volume climb through Q2 2022, all four sectors saw a decline in the numbers of properties transacted. Builders have sounded the alarm for months on the challenges brought by labor and materials shortages that are hampering their ability to complete new projects. These added costs amid the backdrop of sustained demand are adding significant value to assets.

Each sector of CRE will have its own key factors to look out for as we progress through the second half of 2022. Apartment assets should continue to benefit from consumers trickling out of the home buying market and into the rental market. New home sales fell sharply in July, down -12.6% month-over-month and -29.6% year-over-year. Much of the would-be housing demand will overflow into apartments, but tenant affordability concerns will likely intensify. The fate of Industrial assets will largely depend on Retail inventory volume in the coming months. Retail inventories excluding autos increased by 1.5% in July, according to the Census Bureau, as pent-up orders from earlier in the year get stocked away. However, many Retail market watchers expect record discounting this holiday season as firms look to reduce inventory — an important signal to keep an eye on.

Office appears to be settling into a new post-COVID equilibrium, but one where quality, accessibility, and amenities are arising as key differentiators for space demand relative to centrality. Retail has enjoyed a sizeable rebound so far this year, and where consumer spending evolves from now will be a key barometer for the look ahead. While many consumers remain skittish about inflation and are enduring tough spending decisions in each paycheck, consumer sentiment has begun to rebound from its historic low reached in June. Even with a few traffic jams along the way, commercial real estate and the US economy as a whole are still moving forward with pace.

1. SECOND GDP ESTIMATE

Real gross domestic product (GDP) decreased at an annual rate of 0.6 percent in the second quarter of 2022, according to the BEA’s second estimate released on August 25th. The revision shows that the US economy contracted less than expected, though directionality suggests that we are in a technical recession. Real GDP fell 1.6% in the first quarter.
The latest update revises up both consumer spending and private inventory investment , the latter which led to overall declines in the second quarter. Consumer spending remained the strongest contributor to growth. On the flip side, there was a downward revision in residential fixed investment, which was also one of the leading categories of decline in the second quarter.
The most significant contributors to the economic contraction were pullbacks in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment. Meanwhile, exports and consumption increased, leading all positive contributions to the index.

2. REAL ESTATE SENTIMENT INDEX

According to the Real Estate Round Table’s Q3, 2022 Sentiment Index, commercial real estate executives are pessimistic about the sector’s current state, though optimism remains on the horizon.
The overall index, which included both current and future conditions, fell from 51 in Q2 2022 to 44 in Q3 2022 (note: above 50 = positive conditions). The overall index is down by 34 points compared to one year ago.
The overall index decline was entirely due to reductions in the “current conditions” sub-index, which registered a Q3 observation of just 38— its lowest reading since 2020. Among the reasons cited for the decline, inflation, supply chain disruptions, and the impact of rising interest rates all topped the list.
Optimism for future conditions rebounded in Q3 2022, registering a reading of 51. It was the first time since early 2021 that the future conditions sub-index rose quarter-over-quarter.

3. MSCI RCA COMMERCIAL PROPERTY PRICE INDEX

Commercial real estate prices climbed by 16.8% year-over-year through July, according to the latest data from MSCI RCA’s All-Property index. The index rose by 0.9% month-over-month.
July’s pace of growth remained strong but was the second consecutive month where growth decelerated. Annual growth in commercial real estate properties reached a record 19.5% year-over-year in May.
Industrial continued to outpace all other property types in quarterly and annual growth rates, climbing by 1.2% and 24.4%, respectively. July marked the tenth consecutive month of above-20% year-over-year growth for the sector; however, it is down from the nearly 27% annual growth registered earlier this year.
Apartments registered the second highest annual growth in July but slipped from the previous month, falling to 20.9.
Annual growth in Retail climbed 17.7%, down 1.0% from June but still significantly above its historical average.
Suburban office slowed to 7.8% year-over-year, while CBD office also slowed to 7.7%.

4. INDUSTRIAL DEMAND FORECAST

According to the latest industrial space demand report from NAIOP, retailers and logistics firms have begun to slow the rate at which they acquire new industrial space.
Net absorption of industrial space fell sharply to 151.2 million square feet in the first two quarters of 2022, down from 2021’s record pace but still relatively higher than prior years. NAIOP forecasters expect the market to cool further and revert to pre-pandemic levels by 2023.
The combining factors of falling pressure on supply chains, increased inventory carrying costs, an economic contraction, and slowing e-commerce expansion contribute to the fall in demand. According to the NY Fed’s Supply Chain Pressure Index, supply chain congestion eased during the year’s first half, resulting in retailers buying up less space than in recent quarters.

5. NEW HOME SALES

New single-family home sales fell sharply in July, down -12.6% month-over-month and -29.6% year-overyear.
The median sales price on a new home was $439,400, up from $402,400 in June.
Just 511,000 homes were sold in July, down from 585,00 in June and 726,000 one year ago. July’s volume is the lowest monthly sales total since January 2016.
The continued decline of new residential sales indicates rising mortgage rates and other cost pressures are affecting would-be homebuyers despite robust overall housing demand. The average rate on a 30- year mortgage never dropped below 5% during the month and is at least 2% higher than any rate made available in January of this year.
Builders are also reporting continued construction woes, adding additional pressure to prices. While some expect a correction in pricing, most economists predict that it will be far from the drastic pullbacks seen during the housing crash of 2008 as today’s economy continues to be supported by both strong job growth and housing demand, which was not a feature of the previous downturn.

6. SENIOR LOAN OFFICER OPINION SURVEY COMMERCIAL

The Federal Reserve’s July Senior Loan Officer Opinion Survey, conducted over the second quarter of 2022, signals that lenders continue to tighten underwriting standards across all cross-sections of real estate.
For commercial properties, a net 41.5 percent of lenders report tightening lending standards— the highest share since the October 2020 survey. The decidedly risk-averse reading in the most recent survey comes after an equal split of underwriters tightening and loosening in the prior survey (April 2022).
For Multifamily, a net 30.3% of respondents reported tightening underwriting standards in the July 2022 survey—a shift of 39.5 percentage points from April.
Construction lending saw the largest share of underwriters pulling back on the reins, as 48.4% reported tightening standards.

7. CMBS ISSUANCE

CMBS issuance have slowed in 2022 as higher interest rates reduced available leverage, pushing loan coupons and debt yields higher, leading to an overall slowdown in the market.
While there have only been two significant CMBS deals so far in the third quarter, some important trends appear to be taking shape. The percentage of multifamily loans dropped from 12% to 6% quarter-over-quarter, while hospitality loans climbed from 1% to 9%. While the decline in multifamily issuance may be explained by more loans being securitized as CRE CLOs than CMBS, the uptick for hospitality is less evident given the sector’s struggles, implying stronger underwriting metrics.
LTVs for hospitality loans fell by about 5% while LTVs on hospitality loans declined close to 10%. Uncertainty regarding the sectors’ outlook drives the more conservative underwriting standards, potentially constraining future lending.

8. RETAIL INVENTORIES EXCLUDING AUTO

Rental inventories excluding autos increased by 1.5% in July, according to the Census Bureau. While inventory growth has come down from highs hit towards the end of 2021 and the beginning of 2022, they still sit significantly higher than historical averages as pent-up orders from earlier in the year get stocked away. The development is in line with the observed fall in Industrial real estate property volume so far this year but with growth in overall dollar transaction volume.
Durable goods, excluding defense orders, increased by 1.2% month-over-month in July, the third consecutive month order growth either increased or stayed the same relative to the previous month.
Meanwhile, wholesale inventories continue to decline month-over-month. With July data set for release on August 26th, this could also be a key indicator impacting the outlook for the Industrial sector.

9. OFFICE OCCUPANCY

Offices appear to be getting a slight boost from the back-to-school season, as occupancy climbed by 30 basis points to 43.5% of pre-pandemic levels in the most recent week of reporting. While the level remains historically low , occupancy has hovered around 43% since April— the uptick was evident across most major cities, except New York, Philadelphia, and Washington, DC.
Dallas experienced the most significant increase, climbing by 1.6% week-over-week to 52% of pre-pandemic levels. Likely fueling the climb, relative to the lack thereof in northeastern metros, was a return to school for many students across the south in the past week.

10. RENT GROWTH VARIATIONS

A recent blog by Trepp looks at the differences between rent growth rents across metros in June, which showed to be significant. In June, rents climbed by an average of 5.8%, according to Trepp’s calculations, but the deviation between the #1 metro for rent growth and the #5 metro for rent growth was 5.3%.
The Phoenix-Mesa-Scottsdale, AZ metro registered the highest increase in net operating incomes, climbing by 9.2% year over year. Detroit-Warren-Dearborn, MI, which came in 5th, risen by 3.9% year-over-year.
Sun Belt Metros continue to outpace non-Sun Belt metros in various metrics, with four of the top five metros for revenue and NOI being from the region.

SUMMARY OF SOURCES

(1) https://www.bea.gov/news/2022/gross-domestic-product-second-estimate-and-corporate-profits-preliminary-second-quarter
(2) https://www.rer.org/docs/default-source/economic-sentiment/2022/q3-rer-sentiment-report—final.pdf?Status=Master&sfvrsn=46ac4e42_3
(3) https://www5.rcanalytics.com/webmail/71612/1320089930/d196fa9edcdbcd8870f742246c5dcb4284d1bc9d62a4b45c2f8d05f65f5dc44
(4) https://naiop.org/en/Research-and-Publications/Space-Demand-Forecasts/Industrial-Space-Demand-Forecast
(5) https://www.census.gov/construction/nrc/pdf/newresconst.pdf
(6) https://www.federalreserve.gov/data/sloos/sloos-202207-chart-data.htm
(7) https://cre.moodysanalytics.com/insights/cre-news/cmbs-new-issuance-market-unfreezes/
(8) https://tradingeconomics.com/united-states/retail-inventories-ex-autos
(9) https://www.kastle.com/safety-wellness/getting-america-back-to-work/?utm_source=adwords&utm_campaign=Kastle_EVG_LG-PROS_GSNBrand&utm_medium=ppc&utm_term=kastle&hsa_ver=3&hsa_grp=121717591581&hsa_acc=9348517971&hsa_ad=533979302346&hsa_src=g&hsa_tgt=kwd540451063&hsa_kw=kastle&hsa_cam=13059609033&hsa_mt=p&hsa_net=adwords&gclid=CjwKCAjwu5yYBhAjEiwAKXk_eFh1Gz-pBiE2snvnzJ_j27_VORy9l_Low0q7gxHjAVylhfLHX1CnWhoCr8QQAvD_BwE
(10) https://www.trepp.com/trepptalk/cpi-fyi-report-a-deeper-dive-into-the-geographic-variation-of-growth-rates

The commercial real estate sector had a jolt when the Federal Reserve increased interest rates by 75 basis points in June and again 75 basis points in July. Fortunately, there are ways around and fixes for these possible obstacles. Investors in the five to 150 unit small balance lending (SBL) segment of the multifamily housing market have a number of choices to accomplish their goals of financing multifamily portfolios. View the timeline above in larger resolution by clicking here.

A recent webinar entitled “Financing Amid Rising Rates: Best Approaches for $1M-$15M Multifamily Loans” featured market professionals from Walker & Dunlop who discussed how to successfully navigate the current financing environment. Tim Cotter, director of capital markets, Allison Herrera, senior director of SBL, and Allison Williams, senior vice president and chief production officer, made up the expert panel.

In a range of finance contexts, these seasoned experts have discovered strategies to close agreements and have shared their insights and advice. The following advice will assist you in navigating the current financial landscape and gaining momentum if you are an owner of five to 150 unit properties in need of loans ranging from $1 million to $15 million.

Step 1: Take into Account All Available Capital Sources
Walker & Dunlop asked viewers about their current sources of capital during the webcast. With 70% of respondents saying they had recently worked with a bank or credit union, bank and credit union funding was the most common.This source of funding is appropriate for a variety of uses, including conventional and construction financing that cannot be covered by interest-bearing debt. However, taking out a loan from one of these highly regulated institutions may have certain drawbacks, including recourse for all or part of the loan, tougher underwriting standards, and possibly limited capital availability in the coming months.

Due to these factors, buyers in the multifamily market’s $1 million–$15 million segment should look outside of banks and credit unions for their financing options. The Department of Housing and Urban Development (HUD), life insurance companies, Freddie Mac and Fannie Mae, as well as commercial mortgage-backed securities, make up the whole spectrum of funding sources (CMBS).

Here is a quick summary:

Agency finance: The US government founded Fannie Mae and Freddie Mac with the goal of financing affordable homes in both good and bad economic times. Their programs are less susceptible to market volatility as a result.

If you are aware with the nuances and requirements of the program, agency financing can be executed more quickly because it is non-recourse, which gives it an advantage over many bank options.

Additional benefits for multifamily SBL borrowers include:

80% maximum loan-to-value (LTV)
a low ratio of debt service to total debt (DSCR)
Early interest rate locks and interest rate holds
a more accommodating pre-payment framework with cash-out options than other government funding packages
HUD financing: This option may be appropriate for SBL borrowers who have the time and resources for a more drawn-out execution procedure as well as for comprehensive reporting and documentation following closure. HUD programs are renowned for offering competitive borrowing rates and leverage that can be greater than that provided by Freddie Mac and Fannie Mae. Longer terms, up to 30 years, complete amortization, and a reduced debt service coverage ratio are all options for borrowers.

HUD offers programs available for development as well as financing market-rate homes as well as affordable and rent-restricted housing.

Don’t let your thoughts be constrained by the idea that life insurance firms only invest in low-leverage, institutional-quality deals involving fully leased properties in significant metropolitan centers. There are options for loans of different sizes, ranging from $1 million to $15 million, and some life companies are willing to finance older assets that require renovations. Additionally, life insurance firms provide many of the benefits of agency financing, including non-recourse terms and relatively quicker and more efficient execution.

CMBS: Despite being frequently seen as “financing of last resort” and with spreads now expanding, CMBS can be an excellent choice for:

Deals that don’t mesh well with agencies or life firms
Sponsor with a negative credit history
A contract having a distinctive quality
The last thing to keep in mind is that not all financing needs to be long-term or permanent. Bridge loans with terms of 2 to 5 years are an excellent choice for:

Objects that need further stabilization
After-purchase property rehabilitation
Purchasing a house that hasn’t been stabilized because of a recent occurrence, such as damage to some of the units
Changing to a permanent loan transaction, a refinance, or a sale
These loans frequently feature fluctuating interest rates, but they may also include a ceiling on those rates for your safety. For additional loan funds for uses like rehab work, such loans might be underwritten to pro forma operating income, which is the predicted cash flow once the property is stabilized and occupied versus where it is now.

Step 2: Control What You Can

There are several factors that an SBL borrower can influence as long as interest rate volatility persists, despite the fact that you cannot control inflation, the Fed, or geopolitical events.

You should start with your current portfolio. Have you got a loan with a pre-payment penalty or one that you weren’t quite ready to restructure a few years ago? It could be wise to go over these scenarios once more and look into refinancing possibilities.

Look at your net operating income to acquire the best leverage and highest LTV:

Are your operating costs as minimal as possible?
Can you cut any fees that aren’t necessary?
Are you performing maintenance in the most efficient manner possible?
Finally, organize your paperwork. Having the required documentation on hand expedites the process because you want to lock in an interest rate as soon as feasible.

Think about cap rates at every stage. These are still still moving independently from the Treasury rate and at historic lows. However, the strong rent growth of today is probably going to change things. Continued rent growth will influence cap rates because it will contribute one of the biggest increases to operational revenue. As a result, you could conclude a loan at a cap rate that is far lower now than it would be at year’s end.

As a result,
Work with an expert on your future steps, whatever they may be. They’ll have an up-to-date understanding of who is financing in the $1 million to $15 million range, how much they are loan, and under what terms and conditions as the market changes. You can download the Walker & Dunlop financing guide to learn more about your possibilities.There is never a bad time to begin. An experienced partner can monitor the market, assess potential lenders, and even assist you in locking in a rate early that is based on your cash flow or anticipated stabilization even if your property is just in the planning stages.

You can be sure that your multifamily ambitions won’t need to be put on hold by having a complete understanding of your funding alternatives, taking preemptive measures, and receiving expert advice. Regardless of what happens with interest rates in the next months, a professional will be able to ensure that 2022 is a year of progress rather than pauses.

Markets overreacted optimistically to Chairman Powell’s earlier remarks.

Many people had begun to think that the Federal Reserve might start to scale down the interest rate rises as a result of some easing in the producer price index and inflation. That news would be welcomed by the CRE sector. However, it’s unlikely to arrive. Certainly not this year.

The minutes from the Fed’s July meeting were made public. Although it is a two-week in the past mirror, it is close enough to show how the Central Bank is viewing the economy and its goals. It appears that a small improvement in some areas of the economy is insufficient for a significant shift.

They stated that “recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

“In assessing the appropriate stance of monetary policy, the [Federal Open Market] Committee will continue to monitor the implications of incoming information for the economic outlook,” they continued. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

It’s a lengthy way of cautioning markets against getting their hopes up too fast.

Quincy Krosby, chief global strategist for LPL Finance, noted in an email that, “The Fed minutes stressed that the campaign to curtail inflation [will continue] until the Fed believes inflation has fallen enough to reach levels commensurate with price stability, This suggests that the market’s optimistic reaction to Chairman Powell’s July press conference was premature. That a parade of Fed speakers came out with a nearly orchestrated response following the July Fed meeting warning market participants that the Fed is by no means close to easing its campaign was dismissed by the market.”

Bill Adams, chief economist at Comerica Bank, added in a separate note, “It’s a no-brainer to expect rate hikes to continue in the near term. As the Fed’s July monetary policy statement said, the FOMC “anticipates that ongoing increases in the target range will be appropriate,” and that still holds, even with WTI back under $90 a barrel. Comerica forecasts a half percentage point increase in the fed funds rate at the Fed’s next meeting in September, but it’s a close call between that and another hike of three-quarters of a percent.”

We are ready to assist investors with Santa Ana Commercial Real Estate properties. For questions about Commercial Real Estate Investments, contact your Orange County commercial real estate advisors at SVN Vanguard.

As an investor, you don’t want to wish anyone bad luck but it might comfort you to know that you may benefit if the economy declines.

While nobody wants a recession, they are at times a natural result of the business cycle. Although the pandemic recession was an exception in that regard, there is a good probability that the United States could go through another one in the near- to mid-term.

In a recession, the strongest companies will probably profit first, albeit at the expense of weaker ones. According to Jahn Brodwin, co-leader of the real estate solutions business and senior managing director at FTI Consulting, “patience and working capital are typically the two ingredients that insure a successful real estate investment. When an investor lacks one or both of these during a recession, it can lead to forced sales at inopportune times at less-than-optimal prices or worse, lead to foreclosures. The corollary to that, of course, is that those with the funds available today will likely have some excellent buying opportunities.” The CEO of the Klotz Group of Companies, Jeff Klotz, contends that the typical ebb and flow is “healthy.”

According to Klotz, “A recession in today’s economy will slow inflation and generally level out the economy which is good for everyone… It will also ease up on the challenges created from the current ‘boom economy’ and make the availability of reasonably priced goods, materials, and labor much more accessible which is something that is extremely beneficial for commercial real estate.”

While wood prices have decreased and are now at 2018 levels rather than the absurd heights of last summer, there are still significant supply chain issues for many other building products and materials. Eddie Lorin, founder and CEO of Alliant Strategic Development, concurs that removing pricing pressure off materials, combined with greater stabilization of construction labor and increased rents, is “really not that bad for developers of market rate apartments.” A general slowdown could provide some breathing room for the whole supply chain.

Naturally, with all these factors in consideration, it is assumed that a recession is imminent. Not everybody is confident. Palladius Capital Management CEO, Nitin Chexal asks, “What recession?… Unemployment is sitting at 3.5% with several million job openings. We are seeing supply chain issues begin to moderate. Rental demand from multifamily to student housing to industrial remains robust. The overall health of the economy continues to be favorable for commercial real estate.”

Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.

The deviation is known as a “great divergence” by analysts.

According to a recent research from Moody’s Analytics, rent growth in the office and multifamily sectors is no longer trending together. This new development shatters a long time trend in which the two sectors frequently followed the same path.

Analysts describe the anomaly as a “great divergence,” noting that last year was the only time that rentals for offices and multifamily buildings really moved in the opposing ways.

“Companies haven’t fully reopened offices, but households come back to cities anyway,” they say. “Further, in a rebuff of the historic link – it wasn’t just suburban apartment markets feeling the positive demand shock, dense urban areas bounced back, with many having apartment rent levels that have now fully rebounded.”

Office market performance also trended below the US average in cities like New York, Tampa, Orange County, Charleston, and Greenville, with asking rents ticking up 0.8% from 2021 to 2022, while multifamily rents in the same markets “skyrocketed.” And in Minneapolis, St. Louis, and Columbus, all of which had office markets that were above average last year, the apartment market is performing far below the national average.

“If people choose where to live based on their office locations, this divergence should not be as evident,” the analysts say. “Lifestyle must play a very critical role in this divergence, though the single-family market, zoning regulation, industry types and other factors affect it as well.”

According to a recent RentCafe poll, San Francisco, Jersey City, Manhattan, Philadelphia, and Boston witnessed the most increases in Gen Z renters’ lease applications over the past year, with rises of up to 101%. Moreover, a quarter of recent renters in San Diego, Los Angeles, Manhattan, and Philadelphia are also Zoomers.

However, Moody’s also noted that asserting that remote labor has no adverse effects on urban apartment markets would be “premature.”

In an era of hybrid and totally remote office employment, they claim, “it is likely that as households age into child rearing, the typical pull of suburban/exurban life could become stronger.” But it’s also true that a particular lifestyle only exists in urban areas.

If households followed work as the dominant pattern in contemporary life, we may now be approaching an era where work follows households, the analysis suggests. Whether this transition is temporary or permanent, however, remains to be seen.

“At a minimum, the link between office and multifamily performance has dramatically weakened over the past year,” they write. “The US economy is based heavily in the production of knowledge, and the main resource in the process is skilled labor. If firms still believe there is value in the office, even in a hybrid capacity, they will look to locate within striking distance of those workers. The link may not be permanently broken after all, but instead, economic strength may be diversifying and shifting towards where people want to be. Time will tell how this dynamic between office and apartment property types plays out.”

It remains uncertain whether any extra assistance beyond the monies now available will be provided.

Given the end of widespread financial assistance to people who needed it—and frequently did not receive it—a backlog from the moratorium, the challenge of obtaining court statistics, and other factors, it is difficult to estimate the current eviction rates. The Eviction Lab at Princeton University estimates that landlords file 3.6 million eviction proceedings annually.

A summit on long-lasting eviction prevention reform was held by the White House and the Department of the Treasury. The summit focused on the use of remaining American Rescue Plan (ARP) funds from ERA and State and Local Fiscal Recovery Fund (SLFRF) assistance,” both of which, by definition, won’t last for very long.

According to figures cited by the Biden administration, things appear to be better than usual after the pandemic-induced slump. According to an analysis of data gathered by the Eviction Lab at Princeton University, “despite projections of an eviction “tsunami” following the end of the CDC eviction moratorium in August 2021, eviction filings nationally have remained 26% below historic averages in the 10 months since the end of the moratorium.”

Although the administration credits this to its numerous meetings, the promotion of the use of funds to provide legal assistance, and other recommendations conveyed to state and municipal governments, it is unclear exactly how or why things changed. They claim a major factor was the drive for eviction diversion programs in 180 jurisdictions spread over 36 states. However, the greatest strategy to prevent evictions in a market where rents are rapidly increasing and inflation is depleting consumers’ financial resources, particularly those of lower-income individuals, is likely making sure that people can pay their rent.

According to the National Multifamily Housing Council, the White House’s aim was “to discuss future actions in this space and highlight states and localities that they feel are ‘getting it right.’”

Beyond urging state and local governments to use leftover ERAP monies and State and Local Fiscal Recovery Funds (SLFRF) to help tenants and housing providers who are having difficulty, the organization claimed that it was “unclear what specific efforts the White House will undertake.”

While the Eviction Lab did report that since mid-March 2020, landlords have filed for 1,103,236 evictions in the six states and 31 cities it tracks, it is unknown what proportion of rental homes in the nation that includes. The pandemic eviction moratorium was also in effect during this time; it was only lifted in August after the Supreme Court determined that the CDC lacked the power to continue the activity.

As a result, it’s hard to say where things stand right now, how much difficulties tenants are having due to inflation while also experiencing a robust job market, and whether or not landlords are experiencing exceptionally high levels of difficulty.

“It is the larger sized deals where cap rates are moving.”

Net-leased healthcare assets owners across the US are seeing assets that might have sold for a cap rate in the mid-fives last year now trading with cap rates in the 6 percent range according to the Ben Reinberg of Alliance Consolidated Group of Companies.

Although Reinberg’s isn’t one size fits all in terms of current net lease transaction climate, it does help to show the approach some sellers are taking. Referring to a building he personally sold, “We wanted to sell and we didn’t want it to sit for however long it would take to get back to the mid 5s. Who knows, it could soon be at a 6.5 cap rate,” adds Reinberg. Due to client confidentiality, he refuses to disclose any other information regarding the transaction.

As buyers and sellers gauge rates and prices, analysts point out that deal flow is marginally slowing down. With many sellers clinging to market characteristics from a few months ago, a gap between offer and asking prices is starting to appear.

According to Reinberg, “…A lot of folks are holding onto assets especially if they have a good yield, and buyers have to protect themselves on pricing as the cost of capital rises.”

Inflation, rising interest rates, and fluctuating cap rates are important factors within the asset class, but like everything else with net lease, moderation and stability remain its distinguishing traits.

Although the current state of net lease is a little “off,” its risk-adjusted returns are still quite attractive, according to Will Pike, vice chairman and managing director of CBRE’s Corporate Capital Markets group and the Net Lease Property Group. “It is still active even if pricing is changing.”

Take for example, a property may have traded with a cap rate in the low to mid 3s at the beginning of the year. Now, that same property might sell for a cap rate in the low to mid-4s, especially for larger-sized deals.

Pike stated that there hasn’t been any movement in the $3 million to $8 million price bracket. “The upper 3s are still in force with them. It is the larger sized deals where cap rates are moving.”This is simply a matter of various capital buckets for private deals and institutional ones, he argues, and the larger sized deals are where cap rates are moving. According to Pike, “The higher-yielding deals at smaller price points are seeing less of an impact while higher price point transactions that are lower yielding are more affected.”

He comes to the conclusion that net lease is in a fantastic position overall. “It outperforms the greater CRE market during times of crisis. It had a higher share of the overall CRE market during COVID-19 and the Great Financial Crisis. It does well because of the dependable nature of its cash flow.”

Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.

Real estate investors throughout the country can breathe a sigh of relief as the Senate passed its historic $430 billion Inflation Reduction Act of 2022 without including the carried interest tax increase.

On a 51-50 party-line vote, the law was approved, with Vice President Kamala Harris casting the deciding vote.

Positive reactions followed the decision to drop the carried interest tax increase. Many noted that keeping the benefit would have created more barriers to housing development.

According to Jeff DeBoer, CEO of the Real Estate Roundtable, ” The carried interest provision would have been a disincentive to investment in real estate particularly in housing… It would have discouraged capital coming into the industry at a time when lenders and the capital markets are already tightening.”

After Senators Chuck Schumer and Joe Manchin announced that they would eliminate the carried interest clause late on Thursday night, Democratic Senator, Kyrsten Sinema subsequently decided to support the legislation.

Sinema also included a provision for an excise tax of 1%, which is expected to generate around $74 billion. She and three other western colleagues added $4 billion for drought resilience.

While the carried interest loophole is protected, real estate leaders are focusing their attention on other aspects in the bill that might impact the CRE market.

Also included in the bill is an increase to the corporate tax minimum, which is expected to generate 40% of the additional income needed to pay for the package as it moves on to the House. In order to enable property owners to deduct the costs of purchasing and developing rental property from their taxes, Sinema also fought for the addition of a depreciation tax deduction exemption.

Abraham Leitner, a tax attorney with Goulston & Storrs, adds that while the new exemption might be another significant gain for real estate investors, certain real estate entities might not be so fortunate.

“Tax on stock buybacks could potentially affect REITs. I think that some REITs have taken advantage of distributions in excess of basis that are dividends,” Leitner stated. “We have to see what the legislation actually says but many REITs do make distributions that are not dividends and it will be curious to see if the tax is going to hit those.”

Senators also allocated $5 billion to incentivize emission reduction over the following ten years. The clause would provide funds for more environmentally friendly, reasonably priced housing and building projects that would reduce carbon emissions.

According to DeBoer, “Those provisions could be stronger and could be more robust, but they are nonetheless positive incentives to be more energy-efficient in the types of equipment and technologies that people use in buildings.”

The Inflation Reduction Act, which intends to fund organizations working toward the nation’s target of reducing carbon emissions by 40% by 2030, is being hailed as the largest expenditure package yet to address global warming challenges.

Investors won’t be concerned about the carried interest tax increase in the near future, but some experts think the discussion is far from over. Every few years, killing carried interest resurfaces as a contentious issue, most notably when it was proposed in 2017 under the Tax Cuts and Jobs Act.

According to Matthew Berger, vice president of taxes for the National Multi Housing Council, “It’s clearly an issue that’s been discussed for well over a decade at this point… It has its proponents and it’s our job to educate policymakers and the policy world at large about the pernicious impact it would have if it were enacted on our industry’s ability to develop housing that this country so desperately needs.”