1. TREASURY YIELD INVERSION

• The yields on the 5-year and 30-year US treasuries inverted on March 28th for the first time since 2006, raising fears of an upcoming recession.
• The yield on the 5-year note reached 2.56%, while the yield on the 30-year at one point fell as low as 2.55% (5-year yields rose higher throughout the session but did not coincide with an inversion with the 30-year).
• When investors demand more in return for shorter-term debt relative to longer-term debt, it can often signal a decrease in confidence about the near-term financial outlook, making the yield-curve inversion a popular recession signal. The last time that such a yield curve inversion occurred was in 2006, a couple of years before the Global Financial Crisis.
• Despite the inversion, the relationship that is often most looked upon by traders— the spread between the 2-year and 10-year treasury rates— remained positive while the S&P 500 posted gains on the day. However, as the Federal Reserve prepares to conduct several rate hikes in 2022, the risk of additional inversions will increase.

2. PRODUCER PRICE INDEX

• The producer price index rose by a seasonally adjusted 0.8% in February, following increases of 1.2% and 0.4% in January and December, respectively, according to the Bureau of Labor Statistics. Final demand prices have risen by 10.0% on an unadjusted basis over the past 12 months.
• Goods prices were the sole contributor to the increase in the final demand index, rising 2.4% in February, while services remained unchanged. Two-thirds of the increase in goods were related to energy, which increased by 8.2% month-over-month. Within energy, gasoline contributed the most pressure, climbing by 14.8%.
• While the index for final demand services was on average unchanged, the biggest upward contributor to the index was the price for truck transportation for freight, which rose by 2.0%.
• Producer prices minus food, energy, and trade services rose 0.2% in the month.

3. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• Research by Chandan Economics indicates that the on-time collection rate for independently operated residential properties improved by 157 basis points between February and March, rising to 82.3%. February’s month-end on-time payment rate was revised up by 108 basis points.
• March’s preliminary on-time collection rate marks the highest monthly observation on record as part of the Chandan Economics-RentRedi post-2020 tracking. The collection rate is 390 bps higher than March 2021’s estimate.
• Through March 15th, 0.7% of units have paid rent late, and 17.0% of units have yet to make their full payment.
• Taking into account an anticipated fall in the share unpaid over the next several months as tenants catch up on late rents, if current trends hold, March 2022 is on track to reach the highest full payment rate (91.8%), including both on-time and late payments, since March 2020 (93.6%).
• Small Multifamily rentals (5-49 units) maintain the highest on-time payment rates of all sub-property types in March, coming in at 82.7%. Single-family rentals charted an on-time payment rate of 82.3% in March, while 2-4 family units claimed 80.0% of owed payments.
• Gateway markets continue their rebound after suffering the bulk of pandemic-related headwinds, climbing by 26 basis points over the month to an on-time payment rate of 81.4%. The on-time rate in gateway markets stands 47 basis points higher than in March 2021.

4. OFFICE LEASING CONDITIONS

• Returns from the office-focused REIT Boston Properties may offer a glimpse of rebounding fortunes for the office sector.
• In Q4 2021, Boston Properties signed 1.8 million square feet in new leases, its highest since Q3 2019, with a weighted average term of 8.6 years. Its 2021 volume totaled 5.1 million square feet, 55% higher than its 2020 year-end tally.
• According to the company’s commentary following the release of the data, leasing activity was widespread across its markets, while the firm’s largest footprint remains in major metros, some of which were heavily impacted by the pandemic, including Boston, Los Angeles, New York, San Francisco, Seattle, and Washington DC.
• According to the report, subleasing activity has had a large impact on the ability to lease new space in the last several quarters. As several office tenants looked to sublease their spaces due to a decrease in their own demand, lots of available space came to market. This made it harder for office landlords to lease already-open space as more furnished alternatives were available.
• However, as much of this space becomes absorbed, sublet availability has started to subside, opening the door for new leasing activity.

5. NEW RESIDENTIAL CONSTRUCTION

• New building permits for privately-owned housing units fell 1.9% between January and February to a seasonally adjusted annual rate of 1.86 million units, according to the latest data from the US Census Bureau. However, despite the downtick, permits remained 7.7% above February 2021 levels.
• Single-family authorizations fell by 0.5% month-over-month to an annualized 1.20 million units, while multifamily authorizations fell by 4.5% month-over-month to 597k units. Single-family and multifamily permit volumes are above their February 2021 levels by 5.4% and 12.0%, respectively.
• Housing starts rose 6.8% month-over-month in February to a seasonally adjusted annual rate of 1.77 million units. Starts remain 22.3% above February 2021 levels. Single-family housing starts are up 5.7% on the month and 13.7% since February 2021. Multifamily housing starts are up by 0.8% on the month but a massive 37.3% year-over-year.
• Housing completions in February rose 5.9% above January’s total to a seasonally adjusted rate of 1.40 million units. Single-family completions rose 12.1% from January and 1.7% year-over-year, while multifamily completions are down by -11.3% from January and -16.9% year-over-year.

6. HOUSING MARKET INDEX

• The NAHB/Wells Fargo Housing Market Index fell from 81 to 79 in March, largely reflecting a decline in single-family housing sales and an expected decrease in sales activity over the next months.
• The index subcomponent that measures the traffic of prospective buyers was the only aspect of the index that saw a positive movement in March, reversing a decline in activity from January to February.
• Regionally, sentiment in the Midwest was the only region that saw a positive increase, while sentiment in the Western US was unchanged. Sentiment in both the South and the Northeast fell, both reaching their lowest levels in the past year.

7. HUD BUDGET

• The 2022 Omnibus appropriations bill included an updated budget for the Department of Housing and Urban Development (HUD) that adds significant new funding for existing programs, including the HOME Investment Partnership program and the Housing Choice Voucher program, among others.
• The final bill allocates $65.7 billion to HUD, $5.32 billion above FY 2021’s total. The largest totals include $11 billion to build new affordable housing units and repair old ones, an additional $8.45 billion for public housing and $3.2 billion to address maintenance and repairs for the nearly one million existing public housing units.
• $1.5 billion was allocated for the HOME Investment Partnerships Program, the department’s primary tool for spurring private investment in affordable housing. An additional $280 million in funding was made available for Section 8 Housing Choice Vouchers, which is estimated to create an additional 25,000 new vouchers.

8. METRO-LEVEL CENSUS UPDATES

• New estimates recently released by the US Census Bureau indicate that the US population grew by an estimated 392,665 people between July 2020 and 2021, the slowest year of growth on record, while migration continued to shift out of larger metros and into smaller ones.
• According to an analysis of the data, New York, Los Angeles, Chicago, and San Francisco lost a total of roughly 700,000 people from mid-2020 to mid-2021, while Phoenix, Houston, Dallas, Austin, and Atlanta gained roughly 300,000 residents. Smaller cities and rural areas helped account for the remaining growth, while an overall natural population decrease due to pandemic deaths, drops in birthrates, and decreased immigration contributed to the declining growth rate.
• Dallas saw the highest year-over-year increase in its population of any metro, adding over 97,000 residents. Phoenix had the second-largest increase adding just over 78,000 residents, while Houston came in third with an increase of 69,000 residents.
• The New York metro continued to chart the largest population declines, falling by nearly 328,000 between July 2020 and July 2021. Los Angeles saw the second steepest drop in population, losing nearly 176,000 residents, while San Francisco saw the third-largest decrease, losing just over 116,000 residents.

9. BIDEN TAX PROPOSAL

• On March 28th, the White House proposed a new “Billionaires Minimum Income Tax” as part of its 2023 budget proposal that would specifically target households worth more than $100 million with a new 20% rate on income and unrealized gains from liquid assets. A majority of the projected revenues from the new tax would come from households worth more than $1 billion, according to the analysis of the proposal.
• Also contained in the budget proposal is a rehash of the Administration’s 2022 budget ask to raise the top individual income tax from 37% to 39.6%, reversing the 2017 tax cuts. The rate would apply to unmarried individuals with an income of 400,000 or more and married couples making 450,000 or more, according to a statement by the US Treasury.
• A separate proposal to increase the corporate tax rate from 21% to 28% was also included, which would be a partial rollback of the 2017 reform that cut the corporate rate from 35% to 21%.
• The proposal notably does not include a levy on hard assets, also called a “wealth tax,” a proposal often floated by Democrats in previous years. Still, the proposals aimed at collecting revenues from unrealized capital gains could face legal challenges as it falls outside of the typical income-based levying that is standard in the US tax code.

10. INDUSTRIAL: WAREHOUSE & DISTRIBUTION

• The industrial distribution and warehouse sector has grown robustly since the start of the pandemic owing to a bump in internet sales and firms’ determination to deliver products to consumers more quickly, according to an analysis by Moody’s Analytics.
• The sector’s growth comes with a reduction in lease terms and rising asking rents. The average lease term hovered around 36 months between 2017 and 2019— however, it has declined consistently since the onset of the pandemic and was just 29 months in Q42021.
• The average lease terms declined the most in the Midwest (-14%), while they declined the least in the South Atlantic (-7%) during 2021. Regional trends in lease terms could be driven by migration dynamics, with landlords in the Midwest granting more concessions for shorter leases since there could be a fear that the market will cool. On the other hand, declining lease terms in places with strong migration inflows could be because of rapidly rising rents and landlords’ ability to adjust rents more dynamically with shorter lease terms.

 

SUMMARY OF SOURCES

• (1) https://www.cnbc.com/2022/03/28/us-bonds-treasury-yields-invert-flashing-recessionary-warning-sign.html
• (2) https://www.bls.gov/news.release/ppi.nr0.htm
• (3) https://www.chandan.com/independentlandlordrentalreport
• (4) https://www.fool.com/investing/2022/03/25/the-office-sector-is-getting-back-to-normal/
• (5) https://www.census.gov/construction/nrc/pdf/newresconst.pdf
• (6) https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index
• (7) https://www.ncsl.org/ncsl-in-dc/publications-and-resources/2022-omnibus-appropriations-bill-a-summary-of-provisions-by-federal-agency.aspx; https://www.congress.gov/bill/117th-congress/house-bill/4550/all-info?r=22&s=1
• (8) https://www.census.gov/data/tables/time-series/demo/popest/2020s-total-metro-and-micro-statistical-areas.html; https://www.nytimes.com/2022/03/24/us/census-2021-population-growth.html
• (9) https://www.whitehouse.gov/wp-content/uploads/2022/03/budget_fy2023.pdf; https://www.cnbc.com/2022/03/26/president-joe-biden-to-propose-new-20percent-minimum-billionaire-tax-.html
• (10) https://cre.moodysanalytics.com/insights/research/warehouse-and-distribution-lease-terms/

NATIONAL OVERVIEW

INDUSTRIAL

“All good things must come to an end,” said nobody in the Industrial sector in 2021. As the US economy continues to modernize and consumer behavior evolves, the Industrial sector has stood as a winner at every step along the way. Heading into 2021, the National Association for Industrial and Office Parks (NAIOP) forecasted that net absorption on the Industrial sector would total 329.5 million square feet for the calendar year — a figure that would have represented a 28% increase over the previous record high. When all was said and done, the Industrial sector posted net absorption totals of 432.5 million square feet, blowing past the previous record by more than 68%.¹ With an eye on the horizon, NAIOP anticipates that fervent demand will continue to outpace new supply leading, with net absorption forecast at a robust 401.4 million square feet.
Even as COVID restrictions became less widespread in 2021 and consumers returned to shopping aisles, in absolute terms, last year was the most active for e-commerce consumption on record. In 2020, e-commerce retail sales jumped by 32%, landing at $759.6 billion.² In 2021, e-commerce retail sales grew by 14.6%, coming in at $870.7. Moreover, 2021’s e-commerce sales growth rate of 14.6% is well in line with the pre-pandemic pattern.³ In the five years leading up to 2020, e-retailing grew by an average of 14.2% per year, while never growing slower than 13.4% or faster than 15.4%.⁴

Hefty demand growth coming from the steady surge of e-retailing has sent prices in the sector soaring. Noted by SVN® Industrial Product Chair Curt Arthur, SIOR, “the price index for industrial properties rose a record 28.1% from a year ago, the fastest annual rate among the major property sectors, according to Real Capital Analytics.” Further, transaction activity reached a fever pace towards the end of last year, as December alone “was the most active month in US history with one-month sales exceeding annual totals from 2008-2011.”

Pushing our e-shopping carts to the side, it isn’t just e-retailing distribution facilities that are responsible for Industrial’s record year — manufacturing also had a significant role to play. The Board of Governor’s Industrial Production Index for Manufacturing, which measures the inflation-adjusted output of manufacturing activities, saw a steep drop-off during the pandemic lockdowns, with production declining by nearly 16% month-over-month in April 2020. Now, as of January 2022, manufacturing production has made up all its lost ground, and output currently stands at its highest level since Fall 2018.⁵

 

Financial Performance

TRANSACTION VOLUME

The Industrial sector maintained its solid momentum in 2021, posting the most transaction volume of any commercial property type other than Multifamily. For the calendar year, according to Real Capital Analytics, $173.6 billion of Industrial assets changed hands in 2021. Compared to 2020 levels, last year’s transaction volume totals rose by about 63% — the second-lowest mark across the core-four commercial property types.⁶ However, the only reason why Industrial’s 2021 transaction growth rate stands below Retail and Multifamily is because of its strong 2020, despite macroeconomic headwinds. In 2020, sans Industrial, all CRE property types saw declining transaction volumes between 24% and 38%.⁷ Meanwhile, Industrial only took a slight step back, declining by just over 9% in 2020.⁸ Compared to 2019’s previous peak, 2021’s transaction volume totals are up by an impressive 48%.⁹

CAP RATES AND PRICING

If Sir Isaac Newtown had been invested in the Industrial sector, perhaps the phrase would have been “what goes up must go down, and for Industrial cap rates, what’s already down can just keep on going.” Measured year-over-year, Industrial cap rates have fallen every quarter since Q3 2010.¹⁰ Through Q4 2021, Industrial cap rates are down to a lowly 5.4% — a decline of 32 bps from one year ago.¹¹ Across the different industrial sector sub-types, Warehouse assets saw the most significant cap rate compression in 2021, declining by a weighty 42 bps, bringing cap rates down to 5.3%.¹² Single Tenant Industrial space also saw steady cap rates declines, with yielding falling 31 bps year-over-year to average 5.5% in Q4 2021.¹³ Despite the rebound in manufacturing activity measured in 2021, cap rates for Flex Industrial space ticked up marginally last year, rising by 8 bps to land at 6.1% through Q4 2021.¹⁴

With cap rates declining to new all-time lows in 2021, significant pricing pressure was felt throughout the industrial sector. Measured year-over-year on a price per square foot basis, valuations ended 2021 30.8% higher than they were one year ago — the highest mark of all commercial real estate property types.

 

Markets Making Headlines

1-HOUR DELIVERY LOCATION, LOCATION, LOCATIONS

Across most commercial real estate verticals, Gateway markets have lagged the rest of the pack during the pandemic. Still, major metros have not lost their shine when it comes to Industrial CRE performance. Even as residents have left costly coastal metros like New York and Los Angeles on the margins, these markets remain behemoths of population agglomeration. As of the 2020 Census, there were more than 20 million people living in the New York MSA and more than 13 million living in the Los Angeles MSA. No other metro area is above 10-million residents.

With respect to Industrial space demand in major markets, in short, the conversion from physical retail to e-retail has far outweighed any marginal population losses. In Northern New Jersey, an area that sits with the Greater New York Metropolitan Area, Industrial rents per square foot surged by 14.1% last year, according to CoStar — the second-best reading in the country. From a valuation perspective, the North New Jersey area saw the third-highest levels of asset appreciation last year, growing 19.8%.¹⁵

Moving over to the West Coast, the Inland Empire — an expansive semi-urban area directly adjacent to Los Angeles— saw the second-highest levels of Industrial asset appreciation last year, with prices growing by 20.8% year-over-year.¹⁶ Moreover, the Inland Empire finished 2021 with the seventh-highest occupancy rate (96.4%) of all tracked markets.¹⁷ Ventura and Los Angeles follow as the eighth and ninth-highest Industrial occupancy rates in the country, reflecting overall strength throughout the Greater Los Angeles area. According to David Rich of SVN | Rich Investment Real Estate Partners, “Industrial remains the healthiest commercial real estate sector in Los Angeles – outperforming even multifamily in terms of price and rent appreciation.” Mr. Rich goes on to note that in Los Angeles, “demand is expected to continue into [mid-2022], due in large part to accelerated online consumer consumption from the COVID economy.”

In NAIOP’s Q1 2022 Forecast Report, the researchers note that concerns over future space needs in the future are spurring competition for available space today. In dense markets such as the metropolitan areas surrounding New York and Los Angeles, where space is limited, the effect is bottlenecking of prices. These observations are shared by Mr. Rich, who remarks that “area growth restrictions and increased developments costs [in Los Angeles] will contribute to strong property values and rental rates beyond 2022.”

THE WESTERN EDGE OF EASTERN TIME

Head west a few hundred miles from the eastern seaboard, and you’ll run into an inter-region set of markets that all straddle similar longitudes. Markets such as Atlanta, Knoxville, and Columbus may not share much in common other than their time zones, but they all stood out as top performers in the Industrial sector last year.

Columbus, OH, was one of the most consistent booming Industrial markets in 2021, posting the tenth highest increase in market rents (+11.8%) and the tenth highest increase in Industrial occupancy rates (+2.7 percentage points).¹⁸ Doug Wilson of SVN | Wilson Commercial Group, LLC notes that “the definition of “’ Industrial real estate”’ is evolving rapidly in Columbus. There are few industrial operations any more here, but there are many distribution centers. And those are complemented by the prevalence of massive fulfillment centers. And add to that, large data centers to round out the new wave of industrial “sized” properties populating this market. The construction pipeline of speculative industrial buildings is surging to about 13–15 million SF, while vacancy is a mere 2%-3%.”

Atlanta posted significant Industrial sector rent increases in 2021, coming in at the fifth-highest annual increase in the country.¹⁹ Closing out last year, according to CoStar, Industrial space in Atlanta was renting for an average of $7.26 per square foot— an increase of 12.7% year-over-year.²⁰ No market had a higher occupancy rate than Knoxville, TN, in Q4 2021, coming in at a stellar 99.0%.21

 

Macro Economy

ECONOMIC GROWTH

The US economy has experienced a robust recovery from the initial shock of COVID-19. A pandemic-driven shift in consumption away from services and into goods, boosted by a sweeping stimulus effort, reconditioned our economy well before an off-ramp from the public health crisis was in sight. By Q3 2020, inflation-adjusted GDP shrugged off its worst quarterly performance on record to record its best, a 33.4% annualized growth rate.¹ In 2021, the total nominal value of all consumption and production reached $23.0 trillion, a 9.1% increase above 2020’s total and 6.9% above 2019’s total. After adjusting for inflation, the US economy is 3.2% larger than its pre-pandemic peak.²

The foundation of the economy’s rebound has been a swift labor market recovery. At its April 2020 peak, the official unemployment total reached a staggering 23 million people.³ By the start of 2021, the unemployment total had improved to just 10.1 million people out of work.⁴ Over the past year, this level has come down to 6.5 million people, less than one million above the pre-pandemic level of 5.7 million.⁵

 

INFLATION & MONETARY POLICY

One year ago, the market consensus was that the Federal Open Market Committee (FOMC) would not begin a monetary policy tightening cycle until 2023. However, as demand surges in the face of gummed-up supply chains, rampant inflation has emerged at center stage, forcing shifting guidance from policymakers.

After decades of tepid price increases, in January 2022, the Consumer Price Index (CPI) reached 7.5%, a level not seen in 40 years.⁶ Core-PCE, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, reached 5.2% in January, prompting the FOMC to be increasingly committed to an interest-rate hike at its March 2022 meeting.⁷ In just 24 months, policymakers at the Federal Reserve have repositioned themselves from a tighter monetary policy stance into an accommodative one and back to a tightening one. According to the CME Fed Watch Tool, as of February 23rd, future markets are forecasting seven rate hikes by the end of the year — a sizable shift from even just one month earlier, when future markets were forecasting just four rate hikes in 2022. Volatile swings in the medium-term outlook are symptomatic of the rapid shifts in economic activity that categorized the past two years.

In December, Fed officials looked on cautiously at the near-term outlook as Omicron emerged as a roadblock to economic normalcy. After the Delta variant led to declining activity and sluggish job growth in mid-to-late summer 2021, some officials worried that Omicron, a more transmissible variant of COVID compared to previous waves, would hinder the recovery. While a significant wave of US cases followed, the Omicron wave proved to be less deadly and less straining on the US public health system than previous ones. As a result, an increasing number of US states and municipalities are relaxing masking and vaccine restrictions. On February 25th, the CDC introduced a new slate of guidelines that experts say shifts the US into the “endemic phase” of the pandemic. The new guidelines would put more than half of US counties and over 70% of the population in “low” or “medium” risk designations, bolstering the FOMC’s willingness to remove accommodative monetary policies.

THE GREY AREAS

Still, a measurable dose of uncertainty overhangs stock markets and the whole macroeconomy. The VIX, a volatility index captured by the Chicago Board Options Exchange, has remained stubbornly elevated since the onset of the pandemic. Despite moderately retracting during the fall of 2021, the annual average for the VIX in 2021 was 19.7, 27.7% above its 2019 average.⁸

The SVN Vanguard team can help with your industrial real estate needs. We can help you find the ideal industrial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

 

NATIONAL OVERVIEW SOURCES

1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau

5. Board of Governors of the Federal Reserve

6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021

12. Real Capital Analytics; Through Q4 2021
13. Real Capital Analytics; Through Q4 2021
14. Real Capital Analytics; Through Q4 2021

15. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
16. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
17. CoStar; Through Q4 2021. Note: Measured across the top-100 markets

18. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
19. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
20. CoStar; Through Q4 2021. Note: Measured across the top-100 markets
21. CoStar; Through Q4 2021. Note: Measured across the top-100 markets

MACRO ECONOMY SECTION SOURCES

1. NAIOP
2. US Census Bureau
3. US Census Bureau
4. US Census Bureau

6. Real Capital Analytics; Through 2021
7. Real Capital Analytics; Through 2021
8. Real Capital Analytics; Through 2021
9. Real Capital Analytics; Through 2021
10. Real Capital Analytics; Through Q4 2021
11. Real Capital Analytics; Through Q4 2021

1. RUSSIA-UKRAINE: RCA ANALYSIS OF IMPACT ON COMMERCIAL
REAL ESTATE

• According to Real Capital Analytics’ Senior Director of EMEA Analytics, Tom Leahy, the spiraling conflict in Ukraine will most likely only have indirect effects on global commercial real estate conditions.
•  Mr. Leahy notes that Russian institutional capital has very little presence in global commercial property markets, with outbound investment flows into foreign commercial property averaging just $330 million over the past five years. Additionally, the analysis notes that global capital exposure to Ukrainian commercial property is minimal.
• The primary channel by which the conflict is likely to disrupt global commercial real estate markets is through increased energy prices. On the morning of February 24th, fresh of the news of Russia commencing its invasion and missiles landing in the Ukrainian capital of Kyiv, Brent Crude prices topped $100 a barrel for the first time since 2014.

2. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• Research by Chandan Economics indicates that the on-time collection rate for independently operated residential properties was 79.6% in February, a slight downtick from January’s mark of 80.8%. January’s collection rate was revised higher by 8 basis points from its previous estimate.
• February’s slight decrease in on-time payments is consistent with month-to-month variations experienced in prior Februarys. On a year-over-year basis, on-time collections rose by 369 bps.
• The collections of Gateway markets (including New York, Los Angeles, San Francisco, Washington DC, Houston, Dallas, Chicago, and Boston), which were disproportionally impacted by pandemic headwinds, declined during the month but continue to show improvement from the depths of the pandemic. As of the February 2022 first estimate, 79.5% of apartment units in Gateway markets paid their rents on time compared to 79.7% in non-Gateway markets. Compared to one year ago, on-time payment rates in Gateway markets have increased by 474 bps.
• Sun Belt markets have also started seeing improvement from their underperformance compared to non-Sun Belt regions in the second half of 2021. On-time collections in the Sun Belt stand 60 bps higher than non-Sun Belt regions, according to February’s initial estimate.

3. REMOTE WORK IN 2022

• According to a new survey from Pew Research Center, even as more Americans are back in desks than they were one year ago, remote work remains widespread, and increasingly, it’s by choice.
•  As of January 2022 Survey, of those who report being able to accomplish their job responsibilities from home, 59% are working from home all-or-most of the time, 18% are working from home part-time, and 22% are rarely ever working from home.
• When the same survey was conducted in October 2020, the results were 71% all the time, 12% sometimes, and 17% never. Of the net -12 percentage point increase in working from home all of the time, a slight majority shifted into hybrid work setups.
•  After two years of the pandemic, a majority of remote-capable workers remaining in work from home setups speaks to its permanence in the workplace of tomorrow.
• Of those that have made the switch to working from home, 64% report an easier time balancing work responsibilities and personal life. However, a nearly equivalent share (60%) report feeling less connected to their co-workers.

4. HOME PRICE INDEX

• In the February 22nd release of its Home Price Index, the Federal Housing Finance Agency (FHFA) announced that home prices rose by 3.3% between Q3 and Q4 2021. Prices have risen by 17.5% from Q4 2020.
• The FHFA noted that the increase from Q3 to Q4 2021 was not as rapid as price increases seen in the earlier quarters of the year but continues a decade-long positive annual appreciation experienced since the end of the Great Financial Crisis.
• Home prices rose in all 50 states and the District of Columbia over the past four quarters. Arizona (27.4%), Utah (27.1%) and Idaho (27.0%) led all states in home-price increases with Florida (25.6%) and Tennessee (24.1%) close behind. The lowest price appreciations over the past four quarters were the District of Columbia (6.6%), Louisiana (10.2%), North Dakota (10.3%), Maryland (10.8%), and Alaska (11.3%).
• Cape Coral-Fort Myers, FL (24.6%) led all price increases on a metro level, while the weakest price increases were in Frederick-Gaithersburth-Rockville, MD (8.5%).

5. NEW HOME SALES

• Sales of new single-family homes rose to a seasonally adjusted annual rate of 801k in January, according to the latest data by the Census Bureau and Department of Housing and Urban Development.
• January’s rate is 4.5% below the revised rate for December 2021, which charted a rate of 893k during the month. Home sales are up by 19.3% year-over-year.
• The median sales price for new homes sold in January was $423k, while the mean sales price was $497k.
• A seasonally adjusted estimated 406k homes were for sale at the end of January, a supply of 6.1 months at current sales rates.

6. EXISTING-HOME SALES

•  Sales of existing single-family homes rose by 6.7% month-over-month in January to a seasonally adjusted annualized rate of 6.5 million, according to the latest data by the National Association of Realtors (NAR). Sales increased in all US regions.
•  Housing inventory fell 2.3% month-over-month to 860k units in January and 16.5% year-over-year.
•  The median sales price of existing homes rose to 350.3k in January, up 15.4% year-over-year, and is the 119th consecutive month of positive year-over-year price increases.
• First-time buyers were responsible for 27% of January sales, according to the NAR report, a decline from 30% in December and 33% one year ago.
• Notably, there has been a sharp decrease in homes priced under $500k, according to NAR economist Lawrence Yun. The shift is expected to result in a mix of homebuyers that are increasingly high-income and will continue to exasperate the challenge of affordability in the housing market.

7. PRIMARY MORTGAGE MARKET SURVEY

• Weekly mortgage rates fell for just the second time in the past two months, according to the latest available data from Freddie Mac’s Primary Mortgage Market Survey.
• The 30-year fixed-rate mortgage ticked down to 3.89% during the week ending on February 24th, 3 basis points below the rate measured one week before.
•  Rates, including the 30-year fixed, 15-year fixed, and 5-year adjustable rates, have all steadily increased since the middle of 2021. The 30-year fixed-rate fell only once since December 23rd, which was a slight 1 basis point decline during the week of January 27th.
• This is not likely a signal of a notable shift in the direction of mortgage rates, which have increased amid robust loan demand and an expectation of tighter monetary policy on the horizon. The Federal Reserve is expected to raise the benchmark Federal Funds rate by at least 25 basis points in March, and many industry rates have already started to adjust pricing in anticipation. Absent a shift in Fed policy guidance, mortgage rates are likely to see continued upward pressure.

8. FED MEETING MINUTES

• Minutes from the Federal Reserve’s January meeting show that the FOMC rate-setting committee is poised to raise interest rates and make efforts to shrink its balance sheet after several years of accommodative monetary policy.
• While the committee did not raise rates in January, they appear committed to a rate-hike during their upcoming March meeting. Most market forecasters are predicting a 25-basis point hike, though an increasing share of participants are predicting as many as seven rate hikes will be needed this year as producer and consumer prices continue to rage across the US.
• Notably, the Fed’s asset purchase program is scheduled to end in March, setting the table for a reduction of the central bank’s balance sheet. Currently, the Fed is engaged in purchases of $20 billion per month in US Treasuries and $30 billion per month in mortgage-backed securities. The most likely method of decreasing the balance sheet will be to allow bonds to mature without any reinvestment, but some members have signaled a willingness to outright sell mortgages if necessary.

9. RETAIL SALES

• According to the Census Bureau, US retail sales totaled $ 649.8 in January 2022. The total represents a month-over-month increase of 3.8% and a bounce back from December’s 2.5% decline.
• A big takeaway is from January’s bounce back is that while sales could be reflecting higher inflation, they are also reflective of a resilient consumer. It also sends the signal that consumption was likely more impacted by another COVID wave over December 2021 than previously thought.
• The impact of this winter’s COVID wave is also reflected in two consecutive month-over-month decreases in sales at food services and drinking places. Bar and restaurant sales fell 0.6% and 0.9% in December and January, respectively, but remained up tremendously from a year ago.
• Gains were driven by non-store retailers, including internet sales and motor vehicle dealers. However, when excluding motor vehicles, retail sales still climbed 3.3%.

10. HOMEBUYER RELOCATION

• According to new reporting from Redfin, a record share of homebuyers (32.4%) are looking to change metro areas, measured through January 2022.
• The new all-time high eclipses the previous record of 31.5% set early last year. Moreover, the current relocation share sits well above the pre-pandemic average, when just 26.0% of homebuyers were looking for a change of scenery.
• Redfin Chief Economist, Daryl Fairweather, believes that the share of relocations should continue rising through 2022. He notes, “with mortgage rates going up and rents skyrocketing, moving somewhere more affordable is one of the only ways for many Americans to stay within their housing budget.”
• Moreover, the above trends follow a widescale development of workers becoming increasingly less tied to a physical office, allowing housing decisions to be dislocated from corporate headquarters.

Have questions about Orange County commercial real estate? Looking for Orange County commercial properties for sale and lease? Contact SVN Vanguard today.

 

SUMMARY OF SOURCES

• (1) https://www.rcanalytics.com/russia-ukraine-impact-cre
• (2) https://www.chandan.com/independentlandlordrentalreport
• (3) https://www.pewresearch.org/social-trends/2022/02/16/covid-19-pandemic-continues-toreshape-work-in-america/
• (4) https://www.fhfa.gov/Media/PublicAffairs/Pages/US-House-Prices-Rise-17pt5-Percent-overthe-Last-Year-Up-3pt3-Percent-from-the-Third-Quarter.aspx
• (5) https://www.census.gov/construction/nrs/pdf/newressales.pdf
• (6) https://www.nar.realtor/newsroom/existing-home-sales-surge-6-7-in-january
• (7) http://www.freddiemac.com/pmms/
• (8) https://www.federalreserve.gov/monetarypolicy/fomcminutes20220126.htm
• https://www.cnbc.com/2022/02/16/federal-reserve-releases-minutes-from-its-january-meeting.
html
• (9) https://www.census.gov/retail/marts/www/marts_current.pdf
• (10) https://www.redfin.com/news/january-2022-housing-migration-trends/

By Michael Gerrity | February 16, 2022

 

According to global property consultant CBRE, the total U.S. commercial real estate investment volume of $296 billion in Q4 2021 brought the full-year total to $746 billion, both record levels.

CBRE reports that multifamily led all sectors for investment volume in Q4 ($136 billion) and for the year ($315 billion).

Although Los Angeles and New York had the highest levels of investment in 2021, Sun Belt markets had the strongest year-over-year growth rates, including Las Vegas (232%), Houston (191%), and South Florida (179%).

Private buyers accounted for the most Q4 investment volume ($143 billion), while REITs/public companies had the highest year-over-year growth rate of 153% to $35 billion.

CBRE further reports that cross-border investment in the U.S. increased by 115% year-over-year to $29 billion in Q4. Foreign capital accounted for $56 billion or 7.5% of the total investment volume in 2021.

Canada was the largest source of foreign capital in 2021 with $21 billion, followed by Singapore with $15 billion.

 

Originally posted on WorldPropertyJournal

 

We are ready to assist investors. For questions about Commercial Real Estate Investment and Selling Land For Commercial Development, contact your Orange County commercial real estate advisors at SVN Vanguard. 

 

by: HUDSONPOINT Team | October 31, 2021

Delaware Statutory Trusts (DST) provides real estate investors with one of the most efficient ways of obtaining tax-efficient, fractional ownership interest in commercial real estate. A DST is similar to a limited partnership in that a group of investors (otherwise known as partners or beneficiaries) acting as minority owners contribute capital and resources to the trust, where the master partner (or sponsor) then manages the assets and holdings that the trust owns.

A DST can hold title to multiple properties in several locations at once, similar to a REIT (Real Estate Investment Trust). In return for their capital and resources, the minority owners receive limited liability, a pro-rata share of income and cash distributions, and access to commercial real estate investments for which they may otherwise lack the capital.

The use of the DST for commercial real estate investors grew in popularity in 2004, after the IRS ruled that ownership interests in a DST qualify for the tax benefits granted by a 1031 exchange, or “like-kind” exchange, a tool that allows real estate sellers to defer capital gains tax by rolling proceeds from one real estate investment directly into another within a set timeframe.

The Pros of Delaware Statutory Trusts

DSTs incentivize the growth of real estate wealth not only through the passive, hands-off nature of their investments but through their tax benefits, low costs of ownership, and diversification potential.

DST investors can invest in just about every type of commercial real estate property, including multi-family housing, industrial real estate, retail buildings, office spaces, and even specialty property types such as medical offices and self-storage units.

An individual investor who owns a single-family home leases it out, and manages it entirely by themselves may see similar or greater returns from the commercial real estate investments offered by DSTs minus the woes of property management and other components of hands-on investing.

 

1. Tax Benefits through the 1031 Exchange

The 1031 exchange has historically been a popular way for individual real estate investors to defer and recapture capital gains tax by reinvesting the proceeds from one sale into another.

The 1031 exchange was originally introduced as part of The Revenue Act of 1921 under Section 202(c); after multiple revisions, in 1954, an amendment to the Federal Tax Code changed the section applicable to tax-deferred, like-kind exchanges to Section 1031 of the Internal Revenue Code.

Now, since their 2004 ruling, the IRS allows DST investors to claim the same tax benefits granted to individual investors using 1031 for a sale and, as a result, preserve all of the sale’s equity. These benefits apply as long as the proceeds from the sale of a relinquished property are reinvested into a “like-kind” replacement property of equal or greater value within 180 days of the relinquished property’s closing date.

 

2. Low Ownership Costs & Investment Minimums

Unlike other ownership structures like the tenant-in-common (TIC) agreement, investors in DSTs are not required to maintain any type of individual legal structure on their own. The State of Delaware does not charge any type of ongoing fee for the creation and management of a DST either, and investment minimums can run as low as $100,000 for 1031 exchange investors and $25,000 for cash investors.

It’s also more difficult for investors in a tenant-in-common agreement to obtain financing from lenders since each co-owner in the agreement is also a co-borrower. The sheer amount of paperwork involved in acquiring these loans often turns lenders away from TICs.

This is not the case, however, with DSTs. They’re financed with non-recourse debt and their investors, given their purely passive relationship with the trust, are not responsible for any liability on loans. All debt liability falls on the shoulders of the DST’s

sponsor.

 

3. Portfolio Diversification & Monthly Cash Distribution

Delaware Statutory Trusts give access to commercial real estate investments for which most individual investors would otherwise lack the capital. Combining that with the fact that the investors themselves don’t actually have to do any of the property scouting and securing work makes portfolio diversification even easier for DST investors.

The rental income that DST properties generate is distributed directly to the investors’ bank accounts on a monthly basis, and investors can expect anywhere between a 5% and 9% cash-on-cash monthly rate of return.

 

The Cons of Delaware Statutory Trusts

Despite their benefits, DSTs face illiquidity due to real estate being their primary underlying asset with long-term hold periods of 5 to 10 years. DSTs are also vulnerable to macroeconomic trends, such as rising interest rates and periods of recession, that tend to put downward pressure on earnings.

The IRS puts a great deal of strain on DSTs in the form of regulatory constraints; for example, to benefit from a 1031 exchange, you need to plan several months in advance to ensure compliance with IRS guidelines, and a single mishap can halt the entire process.

Despite their benefits, DSTs face illiquidity due to real estate being their primary underlying asset with long-term hold periods of 5 to 10 years. DSTs are also vulnerable to macroeconomic trends, such as rising interest rates and periods of recession, that tend to put downward pressure on earnings.

The IRS puts a great deal of strain on DSTs in the form of regulatory constraints; for example, to benefit from a 1031 exchange, you need to plan several months in advance to ensure compliance with IRS guidelines, and a single mishap can halt the entire process.

 

1. Sensitivity to Macroeconomic Trends

Similar to commercial real estate investments in and of themselves, Delaware Statutory Trusts are sensitive to the debt cycles of the economy and how much it costs to borrow money. Investors should stay informed on monetary policy and monitor moves made by the Federal Reserve to keep a healthy track of their investments, no matter how passive.

Remember that no debt liability falls on the shoulders of the trust’s beneficiaries, so at the very least, minority owners don’t have to worry about making loan payments in spite of poor investment property performance.

 

2. Heavily Debated & Amended Tax Laws & Regulations

The tax laws and regulations that govern DSTs top the list of debate topics adored by Congress. Combine this with the fact that DST transactions often involve many moving parts and you have a sales process that halts at the first sign of weakness, delaying cash flow and successful completion of the exchange.

If your DST has investments in other states outside of Delaware, you’ll have to file a state income tax return with each state wherein your trust has investments, increasing expenses on your part as your CPA takes time to prepare and file each one.

 

3. Atypical Fees & Commissions

While the costs of ownership for a DST are lower than other ownership structures, some of the upfront transaction fees you’ll encounter as an investor in a DST are atypical. These include:

• Sales commissions. It’s customary for third-party sales groups, like registered investment advisors, to conduct most of the DST’s investment sales. As such, these groups collect their own shares of the profits.
• Broker-dealer fees. Managing broker-dealers expect compensation in return for their marketing and market research efforts on behalf of the DST, among other services like securities compliance.
• Operating expenses. These include the costs of actually running the business, including securities registration, printing costs, and other operating expenses.
• Finder’s fees. This type of fee is paid by the investors to the sponsor for locating and acquiring the DST’s assets. On top of that, the sponsor may require additional fees from investors for obtaining financing.

 

These aren’t the only types of fees you may encounter as an investor in a DST, but they’re some of the most common.

As with any investment, there are risks involved in a DST. Risks such as mismanagement of the portfolio, poor use of leverage/capital, and a collapse of the portfolio. Understanding these risks and performing your own due diligence prior to investing in a DST can minimize these risks.

 

Originally posted on HudsonPoint

 

We are ready to assist investors. For questions about Commercial Real Estate Management and Retail Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard. 

 

by Eric Stewart | February 8, 2022

For years, I’ve been saying that one of the best reasons to invest in commercial real estate is its incredible tax benefits. For investors and landlords alike who want their money-making work while they enjoy life with all those extra income checks coming from owning property on behalf of others; there really isn’t anything better than finding new ways how we can maximize our earnings by taking advantage of every aspect possible regarding what type(s) of space will give us sweetest return!

Commercial real estate investors get more than just a good deal from their investments. They can also take advantage of tax breaks that no other type of investing offers!

Let’s take a look at these benefits now!

Interest write-offs

Commercial real estate can be one of the only assets on earth that pays you as it ages and degrades! You may have heard about how commercial properties often generate more income than most people spend on rent, but did you know there’s a good chance this will continue to happen even when interest payments are taken into account? Don’t let your mortgage payment go towards someone else’s profit—write those off instead.

You’ll also come out ahead if they pay legal fees or marketing expenses since these represent costs borne solely by landlords without any benefit from their investment beyond keeping up appearances (and maybe inadvertently creating some).

Depreciation advantage

Commercial buildings begin depreciating the minute you acquire them. The asset may not be “physically” decreasing in value but make no mistake: every day, it gets older and thus less valuable

As properties wear out over time (and thanks to depreciation), owners can deduct certain amounts from their taxes each year before applying any income against what was originally earned; this is called “depreciation expense.”

On an expenses list, depreciation is the process of claiming less for each expense as time goes on. This means that you can walk away with more after taxes since it’s not actually coming out of your pocket! So if you own your building, there is no better time than now to make sure that all possible tax benefits have been taken advantage of before preparing any financial statements!

QBI deduction

If you’re in the real estate business and have been running your company for profit this past year then there might be some good news! The new Tax Cuts And Jobs Act allows businesses to take up an additional 20% tax break by claiming Qualified Business Income (QBI).

This means that as long as they meet certain requirements such as being sole proprietor or owned solely through one member LLC – these entrepreneurs can now deduct their profits from salaries paid out. So commercial real estate investors may now benefit from the benefits of pass-through taxation-which includes being able to take advantage of this very incentive!

Write off against capital gains

The depreciation and interest expense deductions help lower the income tax burden, but they can’t be written off against capital gains. However, there’s an option for real estate investors: 1031 exchanges! This means that when you sell your commercial property – instead of reinvesting in another one through a simple sale agreement with no strings attached-you get cashback (or put it towards something else).

The catch? You have to work alongside this qualified intermediary who will hold onto all profits from each transaction while helping facilitate deals among different parties interested at various levels.

But the beauty about investing through a 1031 exchange is that you get to use your capital gain as an investment opportunity. Since taxes on those profits won’t be incurred, there will always be more money for future purchases!

 

Originally posted on LinkedIn

 

We are ready to assist investors. For questions about Commercial Real Estate Investment and Commercial investment properties, contact your Orange County commercial real estate advisors at SVN Vanguard. 

 

BY GREG CORNFIELD FEBRUARY 15, 2022
The multifamily sector led the fourth quarter with $136 billion, and for the year with $315 billion.

Business isn’t just back, it’s booming like never before.

A record-high $746 billion was invested in commercial real estate in the United States in 2021, including an incredible $296 billion in the fourth quarter, which is also a record over three months, according to a new report from CBRE.

Those measures show an 86 percent increase over the previous year, when the pandemic hit, and a 90 percent increase over the fourth quarter of 2020, respectively. For comparison, CBRE estimated that total U.S. investment for all of 2019, before the pandemic, was $573 billion, and the fourth quarter that year accounted for $173 billion.

The multifamily sector led the way in the fourth quarter with $136 billion, and for the year with $315 billion, according to the report. With persistent supply chain issues and an ever-growing e-commerce sector, industrial real estate took in the second-most investment in the fourth quarter with $64 billion, up 55 percent year over year. Office investment also surged in 2021 compared to the year prior, up 73 percent to $50 billion, as a significant portion of workers returned to the office in some fashion last year.

CBRE also noted that private buyers accounted for the largest share of investment volume in the final quarter last year with $143 billion, for nearly one-fifth of the total. And real estate investment trusts and public companies traded $35 billion.

Among individual markets, Greater Los Angeles led 2021 for investment volume with $58 billion, which was 83 percent higher than in 2020, and it was 18 percent higher than in 2019. L.A. was followed by New York with $49 billion in 2021, and Dallas with $41 billion, according to CBRE.

Meanwhile, among regions, the Sun Belt markets showed the strongest year-over-year growth rates. Las Vegas investment jumped 232 percent since casinos were shut down in 2020. Houston jumped 191 percent, which was the largest increase among the top 20 markets, and South Florida increased by 179 percent. South Florida also saw a 228 percent increase in office investment with $5.2 billion and a 240 percent jump in multifamily with $13.1 billion.

The Washington, D.C., region saw the 10th-highest investment, for a 52 percent increase over 2020.

Overseas investors brought in 115 percent more in the fourth quarter of 2021 than the same period in 2020. Foreign capital accounted for $56 billion, or 7.5 percent of total investment volume in 2021. Canada was the largest source of foreign capital in 2021 with $21 billion, followed by Singapore with $15 billion. The mix is starkly different from when China led the list by a wide margin some years ago.

 

By Michael Gerrity | January 28, 2022

U.S. warehouse leasing activity in 2021 breaks all-time record

According to a new report by CBRE, the U.S. industrial & logistics market hit new highs for leasing activity in 2021, recording more than 1 billion sq. ft. of transactions.

That 1 billion sq. ft. is the largest annual gross amount recorded since CBRE started tracking the figures in 1989. Last year’s surging activity drove vacancy down to 3.2%, the lowest on record. With space incredibly tight, asking rental rates shot to $9.10, up 11% year-over-year and a new high.

“We anticipated that last year would set a record, but this level of activity is extraordinary,” said John Morris, executive managing director and Industrial & Logistics Leader for CBRE. “As retailers require more safety stock and e-commerce continues to expand, more space is needed. All signs point to the same demand continuing in 2022.”

On a net basis, the market registered positive absorption of 432 million square feet, an 81 percent increase from 2020 totals. Last year’s net absorption outpaced the previous record in 2016 by 50 million sq. ft. Net absorption measures total leasing activity – that 1 billion sq. ft. – against the amount of space newly vacated in that period.

The construction pipeline is robust, with a record 513.9 million sq. ft. of projects under construction at year end, 200 million sq. ft. higher than this time last year. However, construction completions were down 10.3 percent year-over-year as supply chain issues have hampered the construction timeline for many projects due to a scarcity of materials.

“We will need to see significant construction completions this year to accommodate all of this activity,” said Morris. “Developers will likely take on more construction and materials costs to keep pace with demand, but space will remain very tight and rents will likely continue to rise at considerable rates.”

 

Originally posted on WorldPropertyJournal

 

We are ready to assist investors. For questions about Industrial Real Estate for Lease and Industrial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard. 

 

By Rainer

It’s essential to understand various forms of ownership and how they affect your financial situation before investing. Most people seem familiar with the most common form of taking real estate title, which is fee simple ownership. However, it’s worth noting that there are other forms of ownership such as leasehold ownership and ground lease ownership.

The three types of land ownership are very different from each other from a value perspective. Therefore, it is necessary to understand each of them in-depth, especially if you wish to become a real estate investor. Here are some basics to help you understand the pros and cons of the three.

Fee Simple Ownership

Mainly it’s the most common form of ownership whereby buyers gain full possession of the property after purchase. It gives you total dominance over the buildings on the property, ponds, roads, and other machinery available. Further, you own right to the minerals under the surface and air above.

Additionally, it gives you the freedom to do whatever you wish with your property. As a legal owner, you can dispose of it when needed and make improvements based on your preferences. You hold the property in perpetuity, and you can sell, lease, trade, or give it away as inheritance upon death.

Nobody can take the real estate form from a fee simple owner aside from a few exceptions. With this form of ownership, you won’t have to pay any rents, only some property taxes, and maintenance fees. Thus, most people prefer to purchase property in the fee simple ownership form.

In fee simple ownership, you own the land on the ground along with the building sitting on top of the land. Since you also own the building improvements, you can take advantage of real estate tax depreciation.

Advantages of Fee Simple Ownership

• You have total control over the premises. With no restrictions, you can choose to transfer part or the whole property through sale or will.
• It allows you to access financing easily. You can utilize the possessions as collateral to buy other items, which might seem difficult in different ownership types. Meaning that you can borrow on the property, and more lenders will be willing to offer you financing since your property is easily used as collateral.
• It offers optimal freedom since you can decorate or renovate your property as you pleased.
• You also have the liberty to decide when, where, and the cost of maintenance required for your premises.

Disadvantages of Fee Simple Ownership

• All payments associated with the property falls in the hand of the fee simple owner. You may need to pay taxes, mortgage, and maintenance fees.
• It requires a massive initial investment since you are paying for the building improvements/structure.

Leasehold Ownership

In a leasehold, you can enjoy the exclusive use and possession of a property for a specified period. For instance, as a fee simple property owner, you can give another individual the right to occupy your land for a specific time at a price. Please note that although leasehold property may seem less pricey than simple fee properties, you might face some stringent financing requirements with leasehold ownership.

Under leasehold ownership, as a leaseholder, you purchase the building and structures at the specified period, but you have no right over the land beneath (aka you don’t own the dirt/ground below your building). You might own the freedom for improvements on the property, but when the agreed-upon time runs out, the premises returns to the owner.

In leasehold ownership, you own the building/structural improvements above the ground. You do not own the dirt/land below. Since you only own the building improvements above ground, you can take advantage of real estate tax depreciation.

An owner of leasehold property needs to pay the required rent in full to the owner of the land/dirt below. Further, you will only use the premises up to the years indicated in the lease agreement. Additionally, the lease rents may face adjustments, probably every 10 to 15 years. The new rent depends on the current land market value. If it increases over time, then you will inevitably pay more rent.

It’s worth noting that if you transfer the leasehold property to a new user, the individual can only use the premises for the remaining period outlined in the original lease. For instance, buyer A purchases a leasehold property with 50 years remaining on the base lease term. He then decides to sell the interest to buyer B 10 years later. Buyer B’s terms on the premises stand at 40 years remaining on the base term.

Advantages of Leasehold Ownership

• It requires a lower initial investment since you are only paying for the building/structural improvements. The leasehold property costs far less expensive than the fee simple and is thus more affordable since you are not paying for the land/dirt on the ground below.
• You may have the chance to extend or renew your leasehold after the specified base lease term ends with the ground owner.
• If the ground owner wishes to sell the remaining interest on the property, you will buy it based on the remaining lease time of the leasehold and the underlying land value.
• You may enjoy higher levels of tax depreciation (consult your CPA!)
• It’s a flexible option. Instead of owning a property that you may need to sell in the future, businesses can lease the premises to work on region-specific projects and then leave after accomplishing their objectives.

Disadvantages of Leasehold Ownership

• At the end of the lease period, you need to give back the building/structural improvements to the landowner unless you negotiate for an extension.
• You will find lots of difficulties obtaining financing with most lenders.
• With time, the property becomes less valuable. You may, therefore, find it harder to sell or obtain financing.
• Most leasehold interests require regular payments to the landowner while on a fee simple property, you buy it and pay off outright.
• The leasehold property seems a little bit hard to sell out since most buyers prefer fee simple ownership.
• You may face restrictions on the use, maintenance, and alterations in the leased property.
• In case of a surrender clause in the lease, the building, and other improvements may revert to the lessor.
• The leasehold doesn’t feel like real ownership. After all, you will have to let go of the property eventually. All you own is an agreement outlining your right and responsibilities on the premises.

Ground Lease Ownership

Ground Lease ownership is when you own the land (aka the dirt/ground below the building). The tenant (aka lessee) will be responsible for the building and structural improvements above your land.

Explain like I’m five years old (ELI5): Imagine a birthday cake with two layers. The bottom half is the “ground lease” layer. The top half is the “leasehold” layer. All together, the entire cake makes up “fee simple” ownership.

If you only own the bottom, you have a “ground lease.” If you own the top, you have a “leasehold.” If you own the whole thing, you have a “fee simple.”

Advantages of Ground Lease Ownership

• Lower cost to develop or purchase compared to fee simple ownership.
• Lower rent and taxes are beneficial for both landlord and tenant.
• The landowner will receive the building at the end of the lease term without paying for the construction or original build.

Disadvantages of Ground Lease Ownership

• Since you do not own the building structure or improvements, you cannot take advantage of real estate tax depreciation.
• Ground lease Cap Rates are typically lower than fee simple NNN or NN yields since they are perceived with even less risk.
• Since the tenant is paying for the structural and building improvements, the landowner has no control over the improvements.

Things to Consider Before Choosing Fee Simple, Leasehold, or Ground Lease Ownership

Now that you know the three main types of land ownership for commercial real estate investors, you need to keep several considerations in mind. Make sure to review the time left on the lease agreement and the required amount of rent payable to the lessor. Also, confirm the leased fee interest and the terms of reversion outlined.

Further, you may want to determine whether there is a provision to extend the lease term or resell it. Remember to check the lease rent renegotiation dates and other fixed periods to help make an informed choice.

Choosing Between Fee Simple, Leasehold, and Ground Lease Ownership

The decision to go for either of these land ownership types depends on personal preferences and the premises’ purpose. The main difference between the three is that you need to pay rent to the original owner in leasehold interest. In contrast, you own the premises for fee simple and ground lease properties, and you may enjoy some income if you choose to rent it out.

To make the right choices, please determine how much time you plan to use the property. The fee simple ownership works best for individuals who seek permanent ownership and full property control. Also, it’s an excellent alternative if you wish to enjoy full ownership rights with minimal restrictions. Besides, you may consider this form of ownership if you want to leave property to your heirs, or use it as collateral for financing in the future.

The leasehold ownership will suit you best if you wish to have the benefits of use at a fraction of the property market value. You will only pay for lease rent that is much less than the mortgage price of the entire property including land. Still, you can consider this type of ownership if you have no heirs, are only looking for short-term ownership, or in dire need of property depreciation benefits.

 

By Ted Knutson | February 04, 2022

Headwinds are likely to moderate expansion for 2022.

Commercial real estate had a banner year in the Americas but headwinds are likely to moderate expansion for 2022, says a new report from CBRE.

“Another year of investment growth is expected in 2022, albeit at a more moderate pace than in 2021,” said Richard Barkham, Global Chief Economist for CBRE. “Continued economic growth and low-interest rates will fuel investment activity. Headwinds, such as rising inflation, geopolitical tensions, and the potential for a COVID-19 resurgence, may cause some jitters in Q1 2022.”

CBRE estimates that annual global investment volume will increase by roughly 8% in 2022, Barkham added.

This reflects a similar assessment the National Association of Realtors made in January when it said that commercial real estate can be expected to perform well this year despite the prospect of higher interest rates.

Annual investment volume surged 86% to nearly $776 billion in the Americas with the fourth quarter record having a volume of $305 billion, up by 90%, CBRE said.

The fourth-quarter increase, CBRE said, was fueled by 116% growth in multifamily investment volume as Sun Belt markets continued to see robust growth, while gateway markets began to recover—particularly in high-quality office assets.

The multifamily sector’s share of total investment grew to 45% in Q4 2021, up from 41% in Q3 2021 and above its 2015-2019 of 28%, driven primarily by Sun Belt markets with gateway markets such as San Francisco, Los Angeles, and Chicago all had year-over-year growth of more than 110%.

In the fourth quarter, the industrial sector accounted for 22% of total investment volume on par with growth in the previous two quarters but down from its pandemic-era high of 27% the same quarter a year earlier.

Industrial investment increased 55% year-over-year to $64 billion in the last quarter of 2021 with full-year investment in the sector increasing by 53% year-over-year to $160 billion.

Retail investment increased by 119% year-over-year to $34 billion in Q4 2021, accounting for 11% of total investment volume in the period, its highest share since Q2 2020.

The full-year increase for retail was up 84% to a total of $74 billion.

The office sector saw its share of total investment falling to 17%. At the same time, the office market captured its highest quarterly volume of $120 billion since Q4 2018—an increase of 73% from Q4 2020 and 19% from Q4 2019.

Full-year 2021 office investment volume rose by 55% from 2020 to US$136 billion—just 5% shy of 2019’s total.

Hotel investment showed particular strength, rising 142% year-over-year in Q4 2021 to $12 billion, helping to take a full-year volume to $43 billion, a 238% increase from 2020.