The Mortgage Bankers Association (MBA) reported that applications to purchase and refinance both rose in the last week of July. Applications to purchase a home rose 1.2% from the previous week, while applications to refinance a home loan rose 2%.

Mortgage applications falling, creating more demand for rental properties.  With rates lately rising, the real estate market is slowing, most notably for residential properties. As expected, growth is slowing as loans get more expensive, but the housing market remains robust. This shift leaves many people renting and has the potential to create more demand for rental properties. Real estate investors who are looking for a place to park their money may want to consider commercial real estate. The market for commercial real estate is not as directly impacted by higher interest rates as the single-family market and, as a result, may provide a more stable investment. Of course, this all depends on the specific property and location, so it’s important to do your research before making any decisions.   Inflation hit 9.1% in June, the highest in over 40 years. The recent news of inflation reaching 9.1%, the highest it has been in over 40 years, is cause for both interest and concern among commercial real estate investors. Generally speaking, when inflation rises, the cost of goods and services also goes up, including everything from groceries to construction costs. This means that the cost to build new multifamily development and other commercial properties is higher, as are the costs of services necessary to maintain and operate apartment complexes and other investment properties. However, inflation also means that landlords can charge more for rent. In some cases, inflation can squeeze tenants. In fact, some properties are becoming increasingly unaffordable for many tenants, leading to lower profits for landlords.  For that reason, inflation can have a significant impact on the value of commercial real estate, and it’s important for investors to keep an eye on inflation rates and how they could potentially impact their portfolios. Those who are looking to invest in commercial real estate should do their homework to find properties and projects that can benefit from inflation, rather than being hurt by it.   The Fed is predicted to raise rates by up to 1% in its next meeting. In an effort to combat rising inflation, the Fed is predicted to raise rates by as much as 1% in its next meeting. Canada’s central bank, Bank of Canada, recently raised rates by 1%, and the Fed Board of Governors is expected to follow suit. This will cause the cost of borrowing to increase and, in turn, help to slow down inflation. With the most recent rate hike of 75 basis points in June 2022, it’s unclear when rate increases will stop. In the early 1980s, the federal funds rate reached 20% to combat double-digit inflation. This improved returns available to low-risk investments and raised the cost of financing for investors. As a result, many projects were put on hold, leading to an eventual decrease in inflation.  The current situation is very different from the early 80’s in that the federal funds rate is currently at 1.75, so there is more room for rates to increase before they start to significantly impact investment activity. Nevertheless, it is something that investors need to be aware of as it could have an effect on their portfolios.   Housing supply has continued to shrink. Growth in the housing market has slowed, but prices have not fallen. This is due in large part to a limited supply of single-family homes. Construction ground to a halt during the coronavirus pandemic and again when the supply of construction materials dried up.  The supply of homes hasn’t yet caught up to the demand for new housing, and it’s taking longer for buyers to find a home that meets their needs. In fact, it’s estimated that the US faces a shortage of roughly 5.5 million homes. Luckily, homebuyers are still willing to pay more than the list price when they do find a home that meets their needs. This is especially true in desirable neighborhoods and school districts. The trend of rising prices and shrinking supply is expected to continue in the coming months as the economy reels from the impacts of inflation. Investors who are thinking about buying a property should do so soon to avoid paying too much. Those who already own investment properties should keep a close eye on market conditions and be prepared to make changes to their portfolios as needed.  

Build-to-rent single-family homes gaining popularity. Millions of Americans, especially younger generations, are unable or unwilling to purchase their own homes. Reasons may include a lack of downpayment or poor credit, while other potential buyers are waiting for the market to soften and interest rates to go down. Even though these people may not be ready to purchase, they still want the benefits of owning a single-family home: a yard for pets and kids, more privacy, and a sense of community. And that’s where savvy real estate investors are stepping in. Large real estate investment firms like DR Horton, Lenner, and Invitation Homes are getting into the single-family build-to-rent business. This activity includes building single-family homes on empty lots in existing neighborhoods or, in some cases, building entire communities of rental houses with workout facilities, pools, and playgrounds. The investment in new-build, single-family rentals seems to be picking up steam. In 2020, $3 billion was invested in this sector. Those investments rose 10-fold in 2021 to 30 billion dollars, and are anticipated to reach $50 billion in 2022. Even though build-to-rent homes currently represent only 5% of the building market, that’s nearly double its average. With vacancies of single-family rentals low, and rents rising by 13% over last year, the new-build single-family rental market looks like a pretty solid long-term investment strategy.   Despite the work-from-home trend, office space is still in high demand. Finally, there is good news for real estate investors with office space in their portfolios. Numerous indicators point in a more optimistic direction regarding workers returning to the office. New office tours, a leading indicator for new leases, rose 20% from February to March of this year. While these numbers are still lower than pre-pandemic levels, they’re up nearly 10% over March 2021. In addition, CBRE Group, a leader in commercial real estate services, conducted a survey of office-based companies that was even more encouraging.  Of the 185 companies surveyed by CBRE, 36% said that a return to the office was already underway. Another 41% said they anticipate employees returning to the office by the end of 2022. These businesses expect 19% of returning workers to be in the office full-time, with another 61% working a mix of hours from home and in the office. While returning to the office looks imminent for most, many companies are revamping the office experience. Nearly 45% of companies surveyed report that, as opposed to numerous satellite offices spread around the city or state, they are moving to larger, more centralized office space. In addition, they prefer for this space to be located in or near their city’s central business district. This demand for new office space drives rents in the right direction for investors. According to Moody’s, asking and effective rents rose by an average of 2.5% during the first quarter of 2022. This was the largest increase in rents since the beginning of the pandemic.   Private investors are snatching up high-value retail space. Real estate investment trusts (REITs) and institutional investors have long been the major players in the commercial retail sector. This was especially true regarding high-value retail space acquisitions of $50 million or more. In 2021, private investors decided they’d like a larger piece of that pie. Last year, private investors took over 45.5% of the retail market share, investing more than $6.5 billion in high-value retail space. Recent reports show that private lenders will continue to outspend institutional investors to acquire high-value retail investments. According to Real Capital Analytics, 47 high-value retail transactions, defined as worth at least 50 million dollars, were completed in the first quarter of 2022. Private investors closed 32 of those deals, often out-bidding larger corporate investors.  Of particular interest to private investors are grocery-stored-anchored shopping centers, which account for 31% of all retail purchases made by private investors. In an interview with the WSJ, Jim Michalak of Plaza advisors says, “Private investors have migrated to acquiring shopping centers because of better yields, compared with other real estate.”    Hoping to curb inflation, Feds raise rates again. To slow inflation, the Federal Reserve has raised its benchmark interest rates by ¾ of a percentage point. This is the largest one-time rate hike since 1994. The goal of this rate hike is to bring inflation down to 2%, without increasing unemployment above 4%. This increase in rates is sure to affect an already softening real estate market. After the announcement, the 30-year, fixed mortgage rate climbed to 6%. Nearly double the interest rates at the beginning of the year. Real estate buyers and sellers aren’t going to be the only ones hit by this increase. Small businesses that rely on bridge loans or a revolving line of credit to keep afloat will have some difficult decisions to make. Namely, is expanding operations right now worth the increased monthly interest payments? There is a small silver lining concerning this rate hike: savings. Interest rate hikes mean a higher annual percentage yield (APY) on money sitting in savings accounts, certificates of deposit (CDs), and money market accounts. The Federal Reserve is set to discuss interest rates again this July. According to Powell, they expect to raise the rates again, possibly up another 75 basis points.   Good news for industrial real estate investors – vacancies are down and rents are up. The industrial real estate sector has remained relatively strong over the past couple of years and shows no signs of slowing. In the first quarter of 2022, industrial vacancy rates fell to 3.4%. This was the sixth quarter in a row industrial vacancy rates fell. Vacancies remain low, despite the fact that developers built over 90 million square feet of industrial floor space in the first quarter of 2022. There are another 531 million square feet of industrial space currently under construction. None of this new inventory is expected to have much of an impact on vacancy rates.  Based on the high demand for new industrial space, rents keep climbing. In the

Federal Reserve expected to raise rates again. The Federal Reserve has raised the Federal Funds Rate by 0.5%. This is the highest interest rate hike in 20 years. This already follows a .25% increase in March. Raising interest rates is a response by the Fed to get a handle on soaring inflation. Inflation is now at a 40-year high in the U.S. The Consumer Price Index (CPI), a tool used to measure price changes over time for goods and services, was 8.5% higher than it was this time last year. The inflation is largely a result of uncertainty with the Ukrainian war and a supply-chain disruption in China due to their coronavirus lockdowns. There are expectations that the interest rate will be lifted even further, with some experts expecting the Fed to target 2% by May 2023 and 2.9% in early 2023. The Fed’s response is affecting the indexes on which variable interest rate mortgages are based. Borrowers with variable-rate loans are seeing their monthly payments increase and may seek to refinance into fixed-rate mortgages before rates climb further.  In addition, higher interest rates could lead to thinner cash flow margins for investors. This can push them to get more creative and look at options like interest-only loans to decrease the total loan payment and maintain a higher level of cash flow. Owner-occupants get a 30-day head start over investors at FHA foreclosed property auctions. The Federal Housing Administration (FHA) has announced that it is giving priority to owner-occupant buyers, approved nonprofits, and government entities in foreclosed property auctions. These entities have 30 days to bid on properties before the auction is open to investors. This expansion on the Claims Without Conveyance of Title (CWCOT) program will go into effect immediately. The goal is to increase the supply of single-family housing available on the market. The supply of affordable housing has been restricted recently, making it difficult for families to compete in the current real estate market. Until the implementation of this policy, investors were purchasing foreclosed properties and reselling them at a higher value. The FHA hopes that the CWCOT will lead to at least 50% of these properties being purchased by owner-occupant buyers, approved nonprofits, and government entities. This is just one step the current Administration has taken to ease the effects of rising housing costs on families. In April, the Administration and FHA announced the option to extend any unpaid mortgage on an FHA loan to a 40-year loan term. These actions aim to ease the burden on families looking to purchase a home or stay out of foreclosure. In addition, the new extension to CWCOT takes away any slight advantage investors have in the real estate market over owner-occupant buyers. Good news for multifamily investors – vacancies are down and rents are up. Rental vacancies spiked to 7% at the beginning of the coronavirus pandemic as people felt uncertain about the future and moved in with family. As the economy recovers and adjusts, vacancies have since seen a consistent decline. Currently, the vacancy index stands at 4.6%, up slightly from the low of 3.8% in August. While vacancies are down, meaning fewer housing and apartments left unrented, rent prices continue to rise. Year-over-year rent growth is at 16.3%, with most of the increase taking place in the spring and summer of last year.  Through the first four months of 2022, rent prices have increased by 2.5% with the busy season for the rental market still looming ahead. While 2021 saw some of the biggest spikes in rent prices, 2022 still stands to be a promising year for investors seeking to take advantage of these current trends. This trend does not appear to be regional, with 93 of the 100 largest U.S. cities seeing a month-over-month rent increase. Although Sun Belt Cities, like Miami and New Orleans, have seen a more consistent upward trend in rent prices, almost all cities are experiencing a rent increase throughout the year. Increased college enrollments make off-campus housing a solid investment. The onset of the coronavirus pandemic created a shockwave through the higher education sector. Students began studying from home, while many chose to take a year or two off until they could return to campus. As things begin to regain some semblance of normalcy, college enrollment numbers are rebounding. This increase in college enrollment brings to light the current student housing crisis. Top-tier universities are struggling to find housing for all their students. U.C. Berkeley is one university that has been facing this crisis for some time. Currently, they only have enough space to house one-fifth of the student population. U.C. Berkely is not alone in this battle. There are some reports of universities having to house students in nearby hotels for the semester. The student housing crisis has created a unique opportunity for investors to diversify their portfolios by offering student housing. Student housing generally does not track the economy, making it a reliable investment when student enrollment is on the up. A joint venture between Chicago’s Core Space and Harrison Street paid $21.5 million in January for a third of an acre across from U.S. Berkely. They then built a 232-bed, 87-unit student housing project. These ventures are proving to be fruitful when targeting top universities facing the severe student housing crisis. Lower-income neighborhoods may see more investment dollars coming their way. The Biden-Harris Administration plans to modernize the 1977 Community Reinvestment Act, which currently only adheres to lending options from physical branches. The existing rule in Community Reinvestment Act requires banks to lend to lower-income groups in their areas. This has created a loophole for online lending institutions as they have no branches that abide by this policy.  As online banking and lending become more common, the 1977 Community Reinvestment Act may be revisited to allow for fair lending to small businesses and people in low-income neighborhoods. In a prepared statement by the Federal Reserve, Vice Chairwoman Lael Brainard stated “Today’s proposal seeks to expand access

Using Airbnb properties to capitalize on the growing “remote worker” movement. The CEO of Airbnb, Brian Chesky, has announced that he plans on working remotely and living out of Airbnbs for the time being. This brings to attention a growing trend of remote workers letting go of their regular rental agreements and fully embracing the remote lifestyle through the short-term rental market giant. Airbnb took a major hit at the beginning of the Covid-19 pandemic as all travel virtually came to a halt. It was quick to recover, however. This year there has been a 56% hike in the number of nights and experiences booked through Airbnb, which brings reservations within 8% of the 2019 total. One in five bookings through Airbnb in Q4 2021 were for a month or longer. It should be noted that this trend might be here to stay. Over 20% of work teams and departments in the U.S. plan to remain on remote status over the next five years. As Brian Chesky said, “All you need is a laptop and someone’s internet in their home and you can do your job. In fact, you can even run a nearly $100 billion company.” Retail projections not as gloomy as anticipated. Union Bank of Switzerland (UBS) previously predicted 80,000 retail closures in the US over the next 5 years, but new data has dropped its prediction to 50,000 retail closures by 2026. This illustrates the optimistic outlook many are having for the future success of retail space, even amidst the rising popularity of E-Commerce. Despite the convenience and ease of online shopping, many still prefer in-store shopping. The loyalty to in-store shopping has allowed retail stores to pull through the pandemic much more gallantly than expected. In fact, in 2022 retailers have reported net openings across the nation rather than a net closing. Coresight Research data shows 1,385 store closures through the first three months of 2022, compared to 3,694 announced openings. General merchandise stores and auto parts businesses are expected to experience the largest growth in new retail space. On the other hand, clothing and accessory retailers, consumer electronics businesses, and home furnishing chains are expected to see the most closures. In addition, UBS said that the number of shopping centers in the U.S. reached its peak last year of 115,000 centers, up from 90,000 in 2000. While it’s expected to be a bumpy road ahead, the outlook for retail openings is much more optimistic than previously expected. Based on generational data, the rental market is anticipated to remain strong. There has certainly been a shifting mindset among various generations on how they view the housing market. Surveys reveal that younger generations, particularly Generation Z, place much smaller importance on the value of homeownership than older generations do. Baby Boomers hold the highest esteem for homeownership of any other generation. This is not a surprise given the post-WW2 prosperity that Baby Boomers thrived in. A recent survey posed various questions regarding homeownership to people across all generations. The data showed that younger generations were more inclined to feel discouraged and less rewarded by homeownership than older generations. One of the key reasons for this discouragement among younger generations is affordability. 74% of Millennials said they cannot afford a home, and 21% said that owning a home is a financial risk. While millennials aren’t as interested in purchasing homes for themselves, the younger generation will still need places to live. As rentals become a more popular option, the rental real estate market is anticipated to continue to thrive even while traditional homeownership may not. Purchasing rental properties is a good option for those looking for a good investment in the coming years. Layering tax credits, traditional lending, and grants to build low-income housing. The cost of housing has been rising, largely due to a lack of supply. For the past 20 years, every state in the US has severely underbuilt housing. The supply just doesn’t meet today’s demand. These rising prices have caused some hiccups for builders of affordable housing. Historically, the financing to build affordable housing relied heavily on the Low-Income Housing Tax Credit (LITHC). However, due to rising prices, the LITHC has much less of an impact today than it did in the past. From 2016 to 2019, the cost to build new affordable housing under the LITHC program has increased from $425,000 to $480,000. Due to the need to meet a feasible return on affordable housing projects, developers are now relying on a larger mix of funding gathered from the local, state, and federal levels, private equity, and philanthropy. It is estimated that the average number of loans has doubled in the past two decades for affordable housing projects. LITHC projects built between 2000 and 2018 layered an average of 3.5 permanent sources of funding, with one in four projects layering at least four sources of funding. These rising costs and layering of credits have caused an additional problem. The cost of planning and coordination has gone up as the complexities grow with the rising costs. This only adds to the initial costs of affordable housing projects. Commercial RE firms starting to focus more on mixed-use properties. Mixed-use properties are those that serve a multi-purpose function. For example, having an apartment complex with a small shopping plaza on the ground floor. These mixed-use properties are rising in popularity very quickly as people search for comfort and convenience all in one. As more workers shift toward a “work from anywhere” lifestyle, you find more of them wanting to socialize and intertwine different aspects of their lives in a shared setting. Mixed-use properties have two main advantages. The first is tenant attraction and retention. Creating a convenient and comfortable space for consumers to live, work, and play leads to overall satisfaction and a high retention rate. The second advantage goes along with the expression, “don’t put your eggs in one basket”. Diversifying the portfolio minimizes risk when compared to the reliance on a single-use property.

Rapid inflation forces FED to raise interest rates Inflation has hit a 40-year high and shows no signs of slowing, with the war in Ukraine further disrupting global supply chains. The consumer price index grew nearly 8% this February, a level that hasn’t been seen since 1982. This record-setting inflation is putting pressure on the government to act. The Federal Reserve, whose mandate includes keeping prices stable, has dramatically shifted its tone in the last few months. Less than six months ago, most economists predicted just a couple of interest rate increases for 2022. Today they expect the FED to raise the federal funds in all seven of its meetings this year. The FED is in a difficult position. If it raises rates too quickly, it could lead to a recession, too slowly, and we could see runaway inflation. How does all of this affect mortgage rates? The expectation of the FED’s moves has already pushed up rates on 30-year fixed mortgages by half a percent. Commercial real estate interest rates are expected to follow a similar path. However, for the moment, the market is holding steady. Real estate investors who foresee rates rising dramatically over the next couple of years are rushing to lock in a lower rate while they still can.   Real Estate sales volume hits record levels Property sales volume rose by 87.8% in 2021, compared to the year before, and more than doubled the 20-year annual average of $369.24 billion. Apartment properties are leading the way, accounting for 41.5% of the year’s total sales volume, followed by the industrial sector with 20.5%. Hospitality, a major casualty of the Covid era, saw a stunning recovery with a 16.8% increase in prices from last year. Investors are rushing to the southeast, where 31% of the apartment sales were made, specifically in Florida, with more than $30 billion in trade. They are also looking further afield in search of good deals. Smaller markets made up 80% of the sales activity, up from 60% last year. According to Real Capital Analytics, the stability of the commercial real estate market and the expectation of future income growth can explain this performance. Liquidity on the equity side, combined with low-interest rates and support from Fannie Mae and Freddie Mac, on the debt side, also helped push the market up. The demand for commercial real estate pushed prices to new heights, compressing capitalization rates. Could the Fed’s plan to raise interest rates this year dampen this trend?   Renters by choice? California-based Banyan Residential is planning to build 230 single-family rental homes, 18 miles north of Austin. The build-to-rent industry has grown rapidly in recent years, with Wall Street firms such as JP Morgan Chase pouring billions of dollars into projects located primarily in the Southwest. Experts disagree on what’s behind this trend. Some argue that student debt and the high cost of housing are forcing millennials to delay their home buying dreams. Others believe that a new “renter by choice” wants the suburban lifestyle without the commitment of a mortgage. In either case, the promise of a home office and a bit of green has propelled many to seek an exit from their crowded apartment buildings to a newly built single-family home. Only time will tell if the trend continues in a post-pandemic world.   A housing problem even Big Tech can’t solve Google, Meta, and Apple are struggling to fulfill their promises to build a total of 40,000 new homes in the Bay Area. Facing negative publicity for their role in California’s housing crisis, the firms have each committed billions of dollars towards solving the issue. However, money alone can’t solve the problem. California’s restrictive zoning laws and burdensome bureaucracy are preventing powerful companies from reaching their goals. Although the Bay Area’s median income is $112,000, many tech workers find themselves spending a third of their paycheck on their mortgage, or else commuting 90 minutes each way to work. The sight of RVs in front of tech campuses drives home the urgent need for more housing. Even if the tech behemoths succeed in their development goals, it would barely make a dent in California’s housing crisis. The state needs at least 3.5 million new homes by 2025 to fully provide housing for its population. It will take a combination of private investment and policy changes to meet that demand.   Is the rental market finally cooling down? After a year of unparalleled rent growth, Apartment List’s national rent index shows signs of a cooling rental market. 2021 was a record-setting year with an 18% increase in rents, however, the last four months have shown sluggish growth of less than 1%. Although rent prices tend to slow down this time of year, we may be seeing signs that the rental market is stabilizing. Rents are losing ground across the board. In December, prices fell in 61 of the nation’s 100 largest cities like Boston, San Francisco, and Chicago. Smaller cities like Boise, Fresno, and Reno are also experiencing the trend. The national vacancy index, which has risen for four straight months, might indicate that the winds are changing and that pressure in the rental market is finally beginning to ease.