Real Estate Market Analysis Tips

Knowing how to conduct a real estate market evaluation is indispensable when navigating the investment landscape. If you’re thinking of investing in a particular area and you want to ensure you’re using your money wisely, you need to understand the regional economic trends, the average home or apartment size, demographic facts, crime statistics, and other market data. On the other hand, if you’re looking to sell a property, understanding the current market climate may help you maximize your potential gain.

Learn from the Experience of Others

I can help you to better understand the complexity and trends, while improving your overall knowledge of real estate market analysis. This may just help you learn how to evaluate the market, and using the proper methods will help you to avoid the pitfalls that many new investors face. Real estate investing can be an art and a science, but with the right mentoring, you can make your investment dreams a reality.

After reading some of the posts below, where I provide more detailed advice and share the advice of others I have interviewed during my podcast, the Best Ever Show, you may decide you want to passively invest with me. To apply for a chance to get involved in one of my apartment syndication deals, please complete this form.

3 Perfect Storms Facing Wealth in America

3 Perfect Storms Facing Wealth in America

In just a few years, the wealthiest generation in history known as the Baby Boomer generation will be between the ages of 60 and 70. These Boomers are set to pass down their assets to their heirs and it will be the largest intergenerational wealth transfer in history. According to Cerulli Associates, by 2043, an estimated $68 trillion will pass to succeeding generations. Industry experts have dubbed this “The Great Wealth Transfer.” This is the first of three storms. The two remaining are economic and political.

Picture this. You’ve built your wealth for 40 years. You own a large primary home, investment real estate, cryptocurrency, stock, or a business and now are faced with selling and transferring this wealth to your heirs. With such a large amount of wealth set to transfer, high-net-worth individuals, families, and their advisers must be prepared for the changes and responsibilities associated with this wealth transfer.


Are We in the Eye of the Hurricane?

Consider the following proposed policy game-changing statistics regarding capital gains, stepped-up basis, and dividends taxes.

  • The American Families Plan would:
    • Tax long-term capital gains and dividends as ordinary income for taxpayers with taxable income above $1 million.
    • Tax capital gains at death for unrealized gains above $1 million ($2 million for joint filers).
    • Limit 1031 like-kind exchanges by eliminating deferral of gains above $500,000.
    • Tax carried interest as ordinary income.
  • The STEP (Sensible Taxation and Equity Promotion) Act would eliminate the step-up in cost basis. A step-up in basis means that upon death, an asset has its cost basis reset to the date of death.

Considering a storm may be coming to shift us from all-time economic highs in the stock market, real estate market, and cryptocurrency, does it make sense to sell your highly appreciated assets now?

 

When to Sell a Highly Appreciated Asset

According to a blog post by Financial Samurai, “Sometimes, selling is better to simplify life and earn a higher rate of return elsewhere … At the end of the day, your investment property’s main purpose is to generate cash flow in as painless a fashion as possible. Once the pain of owning becomes greater than the joy of earning, it’s time to sell. Continuously work towards that income stream that provides the highest return with the least amount of work … I believe the best holding period for real estate is forever. By not selling, real estate owners ride the unstoppable inflation wave. Further, by holding on, you never have to pay any onerous commissions and long-term capital gains tax. But forever is a long time.”

What if forever is too long for you, however, because you are facing large capital gains tax and the asset you are selling is deferrable using a 1031 exchange?

 

Using a Deferred Sales Trust to Weather a Storm

A Deferred Sales Trust™ (“DST”) offers an elegant way to move wealth into a safe harbor during the three storms facing wealth in America. It unlocks an exit plan for you if you are selling highly appreciated assets of any kind and eliminates the need for a 1031 exchange. Armed with this information and insight, you can position your wealth plan for yourself and your family’s future like never before.

What is a Deferred Sales Trust?

The Deferred Sales Trust has a long track record of success and has withstood scrutiny from both the IRS and FINRA since 1996. It is a tax strategy based on IRC §453, which allows the deferment of capital gains realization on assets sold using the installment method prescribed in IRC §453.

In simple words, if you sell an asset for $10 million using an installment sale contract, and finance the sale, you as the seller may not have received full constructive receipt of the cash. You have become the lender. You do not pay tax on what you have not received if you follow IRC §453 since it allows you to pay tax as you receive payments.

The buyer you lent money to will typically pay an agreed-upon amount of down payment to you upfront —for which you would pay tax — and then pay the rest of the purchase price to you plus interest in installments over a specific period of time. The deferral takes place as you wait to receive payment, which is typically three to five years.

What are the differences between the Deferred Sales Trust and 1031 exchange here? The answer is flexibility and timing. You can learn more about this in a recent interview from the Best Real Estate Investing Advice Ever Show.

Why Use the Deferred Sales Trust?

A Deferred Sales Trust unlocks the sale of any kind of asset and allows you to lower your risk by diversifying your investments and dollar-cost averaging back in the market at any time.

Examples of this include:

  • The sale of a primary residence
  • The sales of active investment real estate (this includes saving failed 1031 exchanges)
  • The sale of a business
  • The sale of cryptocurrency or stock (public or private)
  • The sale of artwork, collectibles, or rare automobiles
  • The sales of carried interest
  • The sale of GP or LP positions in your existing syndications
  • The sale of any kind of asset that is subject to U.S. capital gains tax

Three Questions to Determine if the DST Is a Good Fit for You

1. Do you have highly appreciated assets of any kind you would like to sell, defer the tax, invest the funds into real estate, and diversify the funds into a diverse set of investments, all tax-deferred? By a diverse set of investments, I’m referring to those who own asset types other than real estates such as cryptocurrency, businesses, artwork, collectibles, and public stock, all of which are not 1031 eligible. Yes, all kinds of asset types, not just real estate.

2. What would it mean to you to convert your highly appreciated asset — which may not be producing cash flow of any kind — to cash flow from passive or active real estate?

3. What is the return on equity in your asset?

I believe you are more likely to consider selling when you have a clear plan and solution to your capital gains tax, as well as a clear plan to increase your cash flow and lower/diversify your risk.

Here’s to helping you make the best decision for your family during the three perfect storms facing wealth in America!

 

 

About the Author:

Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers in the U.S. He is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast.

 

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7/13—How to Find Good Investments When Prices Are High and Markets Are Competitive

How to Find Good Investments When Prices Are High and Markets Are Competitive

How’s this for a success story? In just the last five years, Steve O’Brien and his team at Atlanta-based Arcan Capital have acquired more than 20 multifamily properties. Together, these assets are worth more than $300 million. How has Steve, Arcan Capital’s co-founder and chief investment officer, prospered in such a hugely competitive marketplace?

Well, Steve’s boiled his strategies down to four main pieces of advice. These tips should help you get ahead in the exciting but extremely crowded real estate industry.

 

1. Maintain Your Reputation

To start with, Steve stresses how building a stellar reputation takes a long time, but the results are priceless.

In the real estate community, many brokers and sellers know each other well. And many people discuss the firms they’ve worked with openly and candidly.

Therefore, it’s vital that, when you promise to do something, you actually do it. For example, don’t ever make a bid if you’re not sure you can afford it. If you follow through every time, people in the industry will know it soon enough.

Imagine that you bid on a deal, but two other real estate companies place higher bids. If those two companies are new and relatively unknown — or even worse, if their reputations are weaker than yours — it’s very possible that you’ll win that deal despite your lower bid.

 

2. Data, Data, Data

The only way to build a strong reputation is to really know what you’re doing. And the only way to know what you’re doing is to have thorough and accurate data.

Before you bid on a property, learn as much as you can about it. Study the local renting market as well. What are local renting habits like? What are area renters willing to pay for various options?

On top of that, you should be familiar with practically every contractor in the region. How much do they charge? How does their work compare? Which of them provides realistic quotes?

You should also get permission to tour the property with a trusted contractor. That way, you can find out what renovations are needed and how much they’ll cost.

Similarly, get to know as many maintenance professionals in the vicinity as possible. You’ll want to consult with a few of them to see how much it’ll cost each year to maintain the property.

Consequently, you can make data-driven decisions about which properties will pay off and how much to bid for them. You can be sure that many of your competitors won’t make such insightful choices.

You can also impress sellers and potential investors with the facts you discover during your research stage. For instance, it might be obvious that a certain property needs new windows. However, a contractor could tell you exactly what kind of window and what type of glass would be best.

Later on, when you describe those ideal windows to the seller and to people who might make investments, they’ll probably be impressed. They’ll see that you really know your stuff. And, once again, you’ll gain a distinct competitive advantage.

 

3. Be Honest With Investors

Of course, your investors are key to putting your deals together. And they definitely have lots of options when it comes to residential and commercial real estate. That’s why you should always take care to strengthen your investor relations.

If these people believe that you respect them and care about their opinions, they’re much more likely to partner with you again and again. After all, that kind of relationship isn’t necessarily common in the real estate business.

Therefore, be straightforward about your expectations for each deal. Never oversell. If you explain that, due to current market realities, a certain deal might yield lower returns than previous deals, most of your investors will appreciate your honesty.

Likewise, don’t take any investments for granted. Maybe there’s someone who’s been investing with you for a long time, and that person is always enthusiastic about your work. Even so, don’t assume this investor will automatically go along with your next deal. Instead, sell them on it as though you were collaborating for the first time.

In addition, you can use different methods to keep the lines of communication open. Business reports, informational newsletters, and phone calls are all great ways to keep your investors connected and updated, even when you don’t have a deal to pitch.

 

4. Go Your Own Way

Whenever you can, look for properties with less competition for ownership. You might find, for instance, that dozens of firms are trying to buy one multifamily home, yet there’s a multifamily residence nearby with a less competitive amount bidders. If so, consider that less popular alternative.

The second property may need more renovation or maintenance work. Maybe its estimated return on investment isn’t as high as some investors would like. However, you might be able to get it at a low price. And, if you have relationships with contractors and maintenance pros who’ll give you good deals, you could see healthy profits from that purchase.

This approach is known as the blue ocean strategy: seeking discounts and low-demand options in order to claim new slices of the increasingly competitive market.

 

As you can see, Steve O’Brien’s real estate triumphs have nothing to do with luck. Instead, Steve has grown his company through copious research, informed decisions, honest investor relationships, a reputation for reliability, and the occasional quest for less sought-after properties. These strategies can ultimately benefit anyone seeking to develop a competitive edge in their chosen industry.

 

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7 Real Estate Experts on What to Do if There Is a Housing Market Crash in 2022

7 Real Estate Experts on What to Do if There Is a Housing Market Crash in 2022

For realtors and investors, planning ahead is one of those things that separates winners from losers. While odds are that we won’t witness a housing market crash in 2022, what would you do if it did happen?

This article is a sort of fear-setting or worst-case-scenario approach to real estate market predictions. What 2020 clearly showed us is that it’s usually hard to predict the ebbs and flows of real estate. No one could have thought there would be an influx of millennial first-time homebuyers pouncing on homes while the coronavirus vaccine was still in view. Real estate activity in 2020 had a significant effect on the U.S. economy’s rebound. So, I asked some real estate experts the question: If the housing market crashes in 2022, how would you keep your business afloat? Here are the responses I received.

 

Jeb Smith, Broker Associate and GRI with Coldwell Banker Realty in Huntington Beach

“I want to be clear that I don’t believe there will be a ‘housing market crash’ in 2022, but if the market were to change, I would do exactly what I’ve done my entire career, and that’s focus on relationships. As a realtor who receives the majority of his business from past clients, friends, and family, I would continue to nurture those relationships and be a source of information to help guide them through the tough times ahead.

“At the same time, I have experience in selling foreclosures in the last housing debacle and would work on redeveloping those relationships to take advantage of any new opportunities that could arise. I don’t believe you need to change your business model entirely if you’ve been focused on the right things the whole time, so I would just continue to focus on those people that know me, like me, and trust me, and things will be just fine.”

 

Ken McElroy, Real Estate Analyst and Investor

According to Ken, there are four main opportunities for investors right now in the housing market:

 

1. Cost to Build vs. Cost to Buy

“Let me give you an example: Right now we are in the process of buying a property in Katy, Texas. We’re buying two apartment complexes of 648 units in Katy and paying $73 million for both projects. That’s under $130,000 per unit, which equates to $120–$130 per foot. So, I’m buying a property at well below the cost to build. If I was to build another property right next door to that property, it would be well over $200 per foot. In Phoenix, that same exact property we bought in Katy, Texas will cost a little over $200,000 a unit. And of course, we went down to Katy because the rents are not that much different because the property is right across the street from the Texas Medical Center.”

In other words, give more weight to locations where buying real estate is comparatively cheaper than building — employ considerable due diligence.

 

2. Supply vs. Demand

“Take a look at the supply — where are people going? What’s the occupancy? If occupancy is really high in an area or about ready to be high because the area is growing, then that means that your rental demand is going to be there, and rents will grow like we just saw for the last 10 years in Austin, Texas.”

 

3. Follow the People

“People vote with their pocketbooks and their feet — the rider trucks, the U-Hauls, etc. Florida, Texas, and Arizona are good markets right now. But it’s very hard to buy properties in many places because people are moving there right now. And you’re going to see rental rates go up in these places because people are buying properties for investment and renting them for the long term.”

 

4. Cash Flow vs. Capital Gain

“Don’t buy properties for capital gains. This is not the time, for example, to buy a house for $300K and flip it for $400K. You want to make it cash flow. You want to use the strong rental rates so that whatever you buy will put cash in your pocket over the long term and you’re building a primarily tax-free passive income.”

 

Kristina Morales, Realtor, KristinaMorales.com

“Regardless of the condition of the housing market, I am confident that my business will stay afloat. The market is currently hot. However, it is hot for sellers, not buyers. So, when it shifts to a buyer’s market, it will be a hot market for buyers.

“For me, there are a few key things that I plan on doing to position my business for sustainable success. The first key to my business is to continue to invest in the right places — systems, automation, marketing, and people.

“Another key is anticipating market shifts and being nimble enough to skill up and prepare for the new market conditions. For example, if we find ourselves in a market where short sales become prevalent, then I will be sure to prepare myself for this environment.

“The last key is to continually innovate. The client experience is the number-one driving force in my success, and constantly trying to innovate to improve and deliver value to my clients is essential.”

 

Bill Gassett, Realtor and Owner of Maximum Real Estate Exposure

“When markets correct themselves, it is important for agents to be ready to adjust. It is very difficult to go from having to do little work to sell a house to all of a sudden having very few people to work with. In the last significant real estate downturn from 2007 to 2012, there were significant hardships. Numerous homeowners lost substantial equity in their homes. The economy was awful, and people were losing their jobs.

“This led to many financial hardships including foreclosure. As an agent, I began to notice fairly quickly there was a demand for someone who could help homeowners short sell their property rather than letting it go to foreclosure. To keep my business running full steam ahead, I became a short-sale expert.

“While other agents were floundering, my business skyrocketed. Doing short sales in addition to my traditional business, I was doing 80–100 transaction sides by myself. Needless to say, these were some of the best-earning years of my career.

“All great real estate agents need to be able to adjust to their environment. Whether that means learning something new, investing more money back into their business, or doing something different. Change is inevitable. A real estate correction will happen again. It always does. Agents who can recognize this early on will be able to put themselves in a better position not to skip a beat.”

 

Marina Vaamonde, Real Estate Investor, HouseCashin.com

“Experienced housing investors realize that the economy works in cycles and that they have to prepare for slow times. In tough times, cash is definitely king. Investors who recently got into the market have probably not had time to set aside reserves. Even some experienced investors ignore the need for adequate reserves. They had better start now.

“High prices make this a good time to sell properties that you previously bought at lower prices and have held onto. Investors with a sizable portfolio should consider selling some assets to increase their bankroll. Short-term investors with properties that are market-ready are in a good position. If the rapid acceleration of housing prices results in a crash, there will be opportunities for those who have cash to spend.

“Decreased demand will probably not last long. There was already a housing shortage prior to the pandemic. According to Freddie Mac, the U.S. had a housing shortage in 2018 of 2.5 million units. With the right preparation now, a housing investor will still be in business if the housing market declines.”

 

Aleksandr Pritsker, Realtor and Founder of Team Blackstar at eXp Realty

“Realistically speaking, if there’s a market crash, that means investors will start coming in and buying up everything as per previous market crashes. I always make sure to keep my business on a steady diet of all types of buyers and sellers, because you never know what type of market it will be. So, I try to make sure that I’m fully prepared for any market scenario and have the right contacts to be able to thrive and succeed in any market that may come up. You never know what tomorrow will bring, but you always have to surround yourself with the right business people to keep you going no matter what the situation is.”

 

Jordon Scrinko, Realtor, precondo.ca

“The great thing about real estate, in general, is that transactions occur regardless of price action. People have to buy and sell homes for a number of reasons — jobs, relocation, upsizing, downsizing, etc. My experience suggests that in a down market, sellers flock to the realtors who really know their market and produce results, rather than in a frothy market where any realtor will do the trick. Product knowledge is key in a down market.”

 

What is a housing market bubble?

When there’s limited supply and rising demand due to speculation or a deregulated real estate financing market, we have a housing bubble. It appears that currently, we’re in a housing bubble as home buyers overpay on homes in hot markets and investors compete with cash on overpriced homes. A housing bubble typically lasts for four to five years.

According to Wikipedia, “Bubbles in housing markets are more critical than stock market bubbles. Historically, equity price busts occur on average every 13 years, last for 2.5 years, and result in about 4 percent loss in GDP. Housing price busts are less frequent, but last nearly twice as long and lead to output losses that are twice as large (IMF World Economic Outlook, 2003).”

Eventually, price growth rises to a point where there isn’t a demand to sustain it, and it stagnates or falls — i.e., a sharp drop in prices or a housing bubble burst.

 

Will the housing market crash in 2022?

A recent Reuters poll of 40 housing analysts suggested that house values in the U.S. will rise more slowly in 2022. The surveyed analysts estimated that values would rise by 10.6% this year, followed by a gain of 5.6% in 2022. According to the Reuters report: “Beyond this year, U.S. house prices were forecast to moderate and average 5.6% growth next year and 4.0% in 2023.”

Experts believe we’ll see the high home price growth rates reduce to near-normal levels in 2022 and 2023. Another reason why there is probably not going to be a housing market crash in 2022 is that there have been tighter lending standards. A major reason for the 2007/2008 crash was that there was a high rate of mortgage fraud. The mortgage denial rate halved between 1997 and 2003. The cost of lending increased, and the federal reserve loosely supervised banks and lenders, leading to price corrections in many markets. The culmination of these things led to a housing bubble burst.

This led to hundreds of thousands of homes going into foreclosure, multiple subprime lenders declaring bankruptcy, and the real estate market requiring federal bailouts. Based on a survey of 5000 realtors by real estate MarTech platform Real Estate Bees, 56.6% of realtors don’t believe we’ll witness the same kind of foreclosure and short sale swamp that was witnessed in 2008. On the mortgage front, we don’t see the same kind of indiscriminate lending being practiced in the face of new legislation and federal oversight. Yet, there is still uncertainty, since “whatever goes up must come down.” But based on the facts, the housing market crash isn’t about to crash in 2022.

 

Final Thoughts

The key to navigating a housing market crash is having a good strategy in place. During the 2008 housing market crash, realtors and real estate investors who embraced innovative marketing strategies grew their businesses even while the overall market declined. While a housing market crash isn’t expected in 2022, it’s still a good idea to plan for every eventuality.

 

 

About the Author:

Agnes A Gaddis is a writer for Inman News, Influencive, and the TSAHC (Texas State Affordable Housing Corporation). She has over 7 years of experience writing for the real estate industry. Connect with her on Twitter: @Alanagaddis

 

 

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Third Straight Month of Record-Breaking Multifamily Rent Growth

According to Apartment List’s most recent national rent data, May marked the third straight month of record-breaking rent growth.

Rent grew by 2.3% in May, the largest increase since Apartment List has recorded data. The previous high was 2.0% in April. Prior to that, the high was 1.4%.

 

1. Rents now exceed pre-pandemic projections.

Prior to the pandemic, Apartment List made projections for rent growth in 2020 and 2021. Due to three straight months of record-breaking rent growth, current rents are now above the level they projected they would have been if the pandemic-related price declines of 2020 had never happened.

 

2. Rents continue to recover in hard-hit COVID markets.

The cities with the largest rent declines during the pandemic have yet to fully recover to pre-pandemic levels. However, most have experienced positive rent growth over the previous four months. This trend continued in May, with rents increasing by 3.8% in San Francisco (down 17% since March 2020), 4.4% in Boston (down 6% since March 2020), 3.7% in Seattle (down 11% since March 2020), 4.1% in New York (down 12% since March 2020), and 1.6% in Washington, D.C. (down 9% since March 2020).

 

3. Rent growth continues to accelerate in mid-sized affordable markets.

The same 10 markets have topped the list for greatest rent growth since the start of the pandemic. For example, in Boise, ID, rents grew by 6.6% in March for an overall increase of 31% since March 2020. The other top markets are Spokane, WA (22% rent growth), Fresno, CA (17% rent growth), Mesa, AZ (16%), and Virginia Beach, VA (16%). However, all of these markets performed well prior to the pandemic. For example, in Mesa, AZ, rents grew by 25.5% from January 2017 to 2020 — the fastest rent growth in the nation over that period of time. Eight of the 10 cities with large rent increases during the pandemic were in the top 20 for rent growth between 2017 and 2020.

 

4. Pandemic rent changes resulted in more affordability.

The markets with the greatest rent decrease during the pandemic were the most expensive markets pre-pandemic. Conversely, the markets with the greatest rent increases during the pandemic were the most affordable markets pre-pandemic. As a result, there has been a convergence of rents in the most expensive and most affordable markets.

 

Check out Apartment List’s full May 2021 rent report here.

 

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Is Commercial Real Estate a Good Hedge Against Inflation?

It is commonly talked about that real estate offers a good hedge against inflation. Typically, the value of real estate will align with, if not slightly edge out, inflation rates. But what are the actual drivers, specifically in commercial real estate, that make this true? And are these drivers equivalent among the specific types of real estate: multifamily, retail, industrial, and hospitality?

To better understand the true nature of any inflation hedge, we need to look to where the returns of real estate are generated:

  • Income/cash flow
  • Sale value/cap rate

The sale value will have a direct correlation to the net operating income, but outside forces — meaning market cap rates — will have a direct impact as well.

 

Income/Cash Flow

Inflation will typically have an upward pressure on rents. More rent means more income. More income means higher sale value. Therefore, commercial real estate is a good hedge against inflation. But if you unpack that between asset types, can an operator truly realize higher rents? Most office, retail, and industrial leases are five years or longer, and oftentimes have predefined renewal rates for even longer terms. When you get into anchor tenants, it is not uncommon to have 20-year leases. These types of leases do provide surety of income, particularly from credit tenants, but in a high inflationary environment, the owner cannot adjust rents mid-lease term, so, therefore, they cannot realize the upward pressure on rents. Leases on vacant units can reflect current market conditions, but this could have a minimal impact on NOI, depending on the size of the unit.

Now, when compared to multifamily and hotel assets, these have much shorter leases. The typical residential lease is 12 months, and a hotel “lease” is often one day to a week. Due to the shorter length of the lease, the apartment or hotel owner has more frequent opportunities to adjust their rental rates, allowing these assets to better realize higher rents due to inflation.

Regardless of asset type and the ability to capture current income, commercial real estate carries the inherent value of future cash flow. So, a property in an area with historical trends of strong rent growth will still sell for more than comparable assets in areas with lower rent growth expectations.

 

Sale Value/Cap Rate

The sale value of commercial real estate is calculated as net operating income (NOI) divided by a capitalization rate, or cap rate. The cap rate, which is represented as a percent, can create very large swings in value. For example, if an asset generates $5 million of NOI and the market cap rate is 10%, that creates a $50 million value. If the market cap rate drops to 8%, the value is $62.5 million. Many core assets, particularly in the favorable asset classes of multifamily and industrial, trade in the 3%–5% range. The same $5 million NOI property trading at a 4% cap rate is valued at $125 million. Drop the cap rate to 3.8% — so, only a 0.2% change in cap rate — and you have a property worth $131.6 million, or $6.6 million more than at a 4% cap rate.

So how does inflation affect cap rates, and ultimately sale values? Historically, cap rates will move with interest rates. As interest rates go up to stave off inflation, the cost of capital for borrowers goes up, and therefore the returns needed from their investments need to increase as well. And an increased cap rate lowers the overall value.

The balance here is that oftentimes, interest rate increases are a reaction to inflation, not a leading indicator. Therefore, there is the ability for rents to rise, and for NOI to rise at a fast rate, to counterbalance the rise in cap rates.

 

The Wildcard Factor

While income and cap rates are fairly easy to measure, demand is not. Historically, investor sentiment moves towards hard assets in markets showing high inflation. This increase in demand helps keep values high for those hard assets: real estate, gold, oil, and even collectibles.

So, while capital market effects can often imply a decreased value, the natural demand that comes from inflation helps increase the demand and often balances out rises to cap rate.

 

Overall, real estate — specifically commercial real estate — has proven to be a strong investment option. In good economies and bad, real estate continues to show its resilience through its ability to create current cash flow and retain long-term values.

 

About the Author:

Evan is the Investor Relations Manager for Ashcroft Capital. As such, he spends his days working with investors to better understand their investment goals and backgrounds. With over 13 years in real estate, he has seen all sides of real estate from acquisitions to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan here.

 

 

 

 

 

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8 Post-COVID Pandemic Commercial Real Estate Trends

In Marcus and Millichap’s recent Coronavirus Special Report, they analyzed the performance of the major commercial real estate asset classes during the pandemic in order to predict future, post-pandemic investment trends.

I recommend checking out the full report here, because there are many graphs with up-to-date cap rates, asking rent, and vacancy trends for industrial, multifamily, office, and retail commercial real estate.

Here are my top eight takeaways from the report:

 

1. Improved economic outlook

The US GDP is set to grow between 5% (low-end forecast) and ~9% (high-end forecast) in 2021. Even if the low-end forecast comes to fruition, it will be the greatest single-year GDP increase since at least 2001. This is supported in part by savings deposits and money market funds increasing by an estimated $4.3 trillion since February 2020. This built-up demand will result in increased retail spending, helping the economy grow.

 

2. Cap rates expected to continue to compress

With the exception of senior housing and office where cap rates are expected to remain the same, cap rates are expected to continue to decrease across all other commercial real estate asset classes. The asset classes with the greatest anticipated decreases in cap rates are self-storage and hospitality.

 

3. Commercial real estate yields still greater than other alternative low-risk investment vehicles

The spread between the average commercial real estate cap rate and the 10-year Treasury rate is 460 bps (compared to 590 bps in 2011 and 390 bps in 2016).

 

4. Strong demand for industrial space

Temporary store closures resulted in more people engaging in e-commerce business. As a result, there were a near-record number of deliveries over a 12-month period ending in March, while national industrial vacancy only rose 10 bps and the average asking rent grew by 4.6%.

 

5. Target secondary and tertiary markets for multifamily

Across primary markets in the last four quarters, vacancy increased by 80 bps and average effective rent declined by 3.4%. However, in secondary and tertiary markets, vacancy decreased by 10 bps and average effective rent grew 2.2% over the same span.

 

6. Single-tenant retail space preferred over multi-tenant retail space

Demand remains strong for single-tenant office space that at least maintained performance during the pandemic, like discount stores, drugstores, and quick-service drive-thru restaurants. However, some multi-tenant spaces, like grocery-anchored shopping centers in growing submarkets, are in demand.

 

7. Continued uncertainty in office space, but suburban preferred over urban office space

Due to the uncertainty of people returning to in-person working, cap rates for office have remained largely unchanged. However, medical offices are in demand, which is reflected by minor compression of cap rates. Additionally, suburban office space performed better than urban office space. During a 12-month period ending in March 2021, vacancy rates for suburban offices rose approximately two-thirds as much as compared to urban offices, while asking rents fell by 6.1% for urban office space compared to 0.2% for suburban office space.

 

8. Private buyers responsible for the majority of purchases during the pandemic

Private buyers accounted for 55% of the total dollars invested during the 12-month period ending in March of 2021, which is 300 bps higher than the pre-pandemic volume. This is typical during economic recessions, but the trend is expected to continue for the near future, especially for purchases in the $1 million to $10 million price range.

 

Download Marcus and Millichap’s full report here.

 

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Commercial real estate

Handbook for Real Estate Market Analysis

Originally published on Groundbreaker here.

Having a real estate market analysis strategy is an important part of real estate investing. Knowing which metrics to look at and how to use online tools and in-person visits can help you decide if a deal is right for you. This guide covers the best practices for conducting a real estate market analysis based on my experience syndicating over $1 billion in apartments in multiple markets in the U.S.

But it’s important to note that while identifying a strong real estate market is important, it isn’t a guarantee of success. Something you hear a lot about in real estate investing is, “Location, location, location. The location is the most important factor that determines the success of a deal. You make money buying in the right area and lose money buying in the wrong one.”

While I get the sentiment, this is only partially true.

Yes, you can lose money buying properties in the wrong real estate market. But you can lose money buying in the right real estate market, too. Your investment team is far more relevant to the success of the deal than the real estate market. An apartment syndicator can buy a deal in the hottest real estate market in the country but lose their passive investors’ money by overpaying, failing to implement the business plan, making incorrect underwriting assumptions, or for any other number of reasons. At the same time, another apartment syndicator can buy a deal in a real estate market that is horrible on paper and double their passive investors’ capital if that is what they specialize in, and they can find deals and buy at steep discounts.

With that said, all other things being equal, you will likely make more money investing in a good real estate market than in a bad one. As a result, apartment syndicators should spend a lot of time on real estate market analysis — both prior to and after investing.

The best strategy for real estate market analysis is a combination of online and in-person analysis. Here is a quick rundown of the ideal approach:

 

Online real estate market analysis

Review the established or up-and-coming real estate markets across the U.S. and narrow them down to a handful of markets. Then, perform a more in-depth analysis of these markets. This includes doing a lot of online research, reviewing commercial real estate reports, analyzing raw demographic and economic data, and catching up on local news (both general and business news).

 

In-person real estate market analysis

Visit the market in person for a boots-on-the-ground analysis. Drive around the real estate market looking for the best neighborhoods, visiting properties, and meeting with local commercial real estate professionals.

Based on your online and in-person real estate market analysis, select one or two real estate markets to target.

Apartment syndicators should follow this approach both when selecting a real estate market for the first time and when they are ready to expand. But what metrics should they be looking at during their online and in-person real estate analysis?

 

What is the right real estate market to target?

The real estate market you target shouldn’t be a metropolitan statistical area (MSA) nor a city. Instead, you should be targeting a submarket within an MSA or city. A neighborhood within a submarket is even better. Data on the entire city or MSA can be misleading due to the amount of territory included in the information, so the more specific the area the better.

For example, the population of New York City is over 8 million, and its footprint is nearly 500 square miles. It is broken into five boroughs, each with hundreds of neighborhoods. A few neighborhoods will align with the overall market statistics of the entire city, but most will be either better or worse. The only way to know for certain is to analyze the neighborhood.

Therefore, the best practice for a real estate market analysis is to focus your online research on finding the best MSAs and cities in the U.S., as well as the best submarkets within the large MSA or city. Then, focus your in-person, boots-on-the-ground efforts on finding the best neighborhoods in those top submarkets.

 

Finding the nation’s top real estate markets

A best practice I use with my private apartment syndicator clients is to select seven real estate markets to analyze. I always recommend that at least three are real estate markets they are already familiar with, two are within driving distance, and two are considered “top market.”

The first two categories are self-explanatory, but how do you find the “top markets?” A best practice is to leverage the market analysis of the top commercial real estate investment institutions in the country.

These institutions invest a lot of time and money into creating monthly, quarterly, biannual, and annual real estate historical and forecast reports. Some of my favorites are:

  • Marcus and Millichap’s quarterly market-specific reports
  • Marcus and Millichap’s annual multifamily investment forecast
  • CBRE’s quarterly cap rate survey
  • Deloitte’s commercial real estate outlook
  • IRR’s commercial real estate trends report
  • PwC’s emerging trends in real estate report
  • IPA’s annual multifamily forecast
  • IRR’s annual multifamily report

Review these reports to see which real estate markets the big players are focusing on to select the final two target real estate markets.

The next step is to narrow your list down to one or two markets. The best practice is to perform a detailed online real estate market analysis, finding relevant data on the demand of multifamily in those submarkets. I’ve found that the metrics that best indicate demand are:

  • Population demographics
  • New and existing businesses
  • Top industries
  • Absorption rates
  • Unemployment
  • Occupancy and rent trends

 

Population demographics

Population age

Different demographics demand different types of apartment communities. For example, Generation Z (born in 1996 and later) desires smart amenities, affordability, and communal spaces. The Millennial generation (born 1977 to 1995) prefers resort-style living experiences and high-tech amenities and services. Generation X (born 1965 to 1976) prefers urban areas, high-tech home furnishings, concierge services, and family-friendly features. Baby Boomers (born 1946 to 1964) prefer larger living spaces, state-of-the-art fitness centers, and common areas. Understanding the dominant generation in the target market will let you know what the most in-demand properties are.

For demographic trends, and all other market data, I recommend analyzing at least the last five years. That way you can determine how the metrics are trending. Most of this data is located on the census.gov website unless otherwise indicated.

 

Population growth

The more people moving to an area, the greater the demand for housing. A good resource to use is U-Haul’s annual migration study. They rank each state in the U.S. based on the number of one-way U-Haul trips. Census.gov also has detailed data on annual population trends.

 

New and existing businesses

Fortune 500 companies

If a multibillion-dollar company is moving their headquarters to a market, they are doing so because they’ve determined through research that it is the ideal location. The market is pre-qualified in a sense. Looking forward, this will also result in an influx of new jobs and new potential renters as well as other businesses moving into the area.

Go to Google News and search “[target market name] + Fortune 500” to see if any large corporations are moving or have recently moved to the area.

 

Other businesses

Smaller businesses moving into the market is also a positive sign. While not as positive as a Fortune 500 company moving into the area, this will still result in new jobs and new potential renters.

Go to Google News and search “[target market name] + new businesses” and “[target market name] + new jobs” to see if any smaller corporations or businesses are moving or have recently moved to the area. New business news is also usually included on local chamber of commerce and economic development websites.

 

Top industries

If a large portion of the population works for one company, or even just a few companies, the market is riskier. If the company or companies decide to leave, this will have a major negative impact on the market. Similarly, the market is also riskier if many people work in one industry. If that job industry were to decline or disappear, it would have a major negative effect on the market.

Ideally, the real estate market does not have one or only a few dominant companies, and no more than 25% of the population is employed in a single industry.

Google “[target market name] + top employers” for a list of the major corporations in the area. The industry breakdown can be found on the census.gov website.

 

Absorption rates

The population is the demand. The apartment communities are the supply. Both are important in determining the strength of the market. The ideal situation is if construction cannot keep up with the growing population. The worst-case scenario is a lot of new apartment construction and a declining population.

The metric that best measures the supply situation in a market is the absorption rate. The absorption rate is a ratio of the number of units rented to the number of available units over a given period of time. The higher the absorption, the less supply can keep up with demand.

Integra Realty Resources (IRR) publishes yearly multifamily reports that label U.S. markets as being in an expansion, hyper supply, recession, or recovery phase. The markets in the hyper-supply and recession phases have poor supply and demand metrics. One of the metrics included in their analysis is the absorption rate.

Fannie Mae also publishes absorption rates in their biannual multifamily market outlook reports.

 

Unemployment

The more people who are working, the greater the supply of high-quality renters who are capable of paying their rent on time. Markets with higher unemployment rates are fine as long as it is decreasing. The worst-case scenario is a target market with a high, increasing unemployment rate over the previous five years. Ideally, the target market has a low, decreasing unemployment rate over at least the previous five years.

You can find unemployment data on your target markets on census.gov.

 

Occupancy and rent trends

Occupancy rates and rental rates are also a measurement of supply and demand. The greater the demand, the greater the occupancy rate and rental rates. The best real estate markets have increasing apartment occupancy rates and increasing apartment rental rates over at least the previous five years.

Occupancy and rental rate data can also be found on census.gov.

 

Narrowing down your real estate market analysis

Once you’ve gathered your data, rank your seven real estate markets based on the metrics outlined above. The most important metrics are related to supply and demand (absorption rates, occupancy, and rent trends) and job diversity (top industry). Therefore, I recommend ranking each market based on those metrics and then, assuming the other metrics aren’t disqualifying (e.g., a massive unemployment rate or a plummeting population), using the other metrics as tiebreakers.

 

Performing an in-person analysis

Once you’ve narrowed down the list to the one or two markets with the best supply/demand and job diversity, move forward with the in-person, boots-on-the-ground real estate market analysis to find the best streets within the best submarkets/neighborhoods.

To accomplish this, start by meeting with local professionals to find the best submarkets/neighborhoods. Then, visit properties to find the best streets.

 

Meet local professionals

There may be tens or hundreds of submarkets/neighborhoods in any one market. The most effective way to narrow them down is to ask local real estate professionals for their opinions. The best professionals to speak with are property management companies and commercial real estate brokers. They are actively managing and selling apartments every day, which means they are experts on the market.

Contact at least three local property management companies and three commercial real estate brokers. A simple phone call will suffice to start. Explain your investment criteria (i.e., what types of apartments you invest in) and ask them for the top submarkets/neighborhoods in the market to focus on.

Once you have a list of a handful of submarkets/neighborhoods from the local experts, focus on becoming an expert on each submarket/neighborhood.

 

Visit properties

I have my apartment consulting clients begin the process of becoming an expert in a submarket/neighborhood by finding and logging information on actual (yes, real) properties in the market. I recommend a total of 200 properties for each market. Thus, the exercise is called the 200-Property Analysis. The purpose of this exercise is to have street-by-street-level expertise on your target submarket/neighborhood. Plus, you may target these properties with off-market lead generation strategies in the future, so it is not only an academic exercise.

To begin the 200-Property Analysis, create a spreadsheet to track the following 17 data points:

  1. Market Name
  2. Property Name
  3. Property Address
  4. Submarket/Neighborhood
  5. Total Units
  6. Rentable Square Footage
  7. One-Bedroom Rent
  8. Two-Bedroom Rent
  9. Three-Bedroom Rent
  10. Year Built
  11. Who Pays Utilities?
  12. Value-add?
  13. Source
  14. Owner Name
  15. Owner Address
  16. Appraised Value
  17. Year Purchased

Using Apartments.com, you can generate a list of well over 200 properties in a market, as well as find data to complete most of the spreadsheet. I recommend finding properties that are scattered across the submarket/neighborhood rather than a concentration of properties in one area. Remember, the goal is to learn about the market and find the best neighborhoods.

I am a value-add apartment syndicator and teach others how to be the same, so we want to know if the property is a potential value-add opportunity. One strategy I like to use is to look at pictures to see if the interiors look outdated or if there is only one photo listed. If the interiors have been recently upgraded, the owners of the apartment will likely list a bunch of pictures to highlight the renovations.

Another strategy is to determine whether the owner pays the utilities. This indicates an opportunity to bill back utilities to residents via a ratio utility billing system (RUBS) program to increase revenue.

In addition to Apartments.com, you will need to locate the apartment on the local county auditor/appraiser site to find the owner’s contact information, appraised value, and year purchased.

This may seem like an arduous process, but no two streets are the same in a real estate market, and this can save you and your investors from years of headaches because of acquiring an asset on the wrong street or in the wrong neighborhood.

Once your spreadsheet is completed, print it out and set aside at least one weekend to visit as many properties on your list as possible. At the property, you will want to perform the following tasks:

  • Take a general picture of the property. You will be viewing many properties, so this main image will be your visual reminder.
  • Take another picture of something noteworthy. Examples would be large green spaces, fresh landscaping, a newly paved parking lot, and/or an interesting monument or signage. Be creative here. When you eventually begin reaching out to owners to see whether they’re interested in selling, you can bring up this noteworthy item during the conversation.
  • Look for any signs of distress and take pictures of anything noteworthy. Examples would be an uncovered pool in the winter, a pool closed for the summer, poor landscaping, peeling paint, old roofs, and old HVAC systems. Signs of distress relative to other assets in the same area signal a potential value-add opportunity and/or a motivated seller.
  • Number of cars in the parking lot. This is important, especially during the day, since it will indicate the employment situation at the property.

This will give you an understanding of the types and quality of apartments in each neighborhood.

 

Drive around the real estate market

While you drive between property visits, pay attention to your surroundings to get a “feel” for the overall neighborhood and each street.

A great strategy is to print out a map of each neighborhood. Bring a green, yellow, and red highlighter. Highlight the map green to denote a “great” street, yellow for “okay,” and red for “avoid.”

Other things to look for when driving between properties are:

  • Starbucks/McDonald’s: these businesses are nearby for a reason
  • Parks and trails
  • Schools: especially in “family-friendly” markets
  • Entertainment hubs
  • Restaurants
  • Major highways and roadways: this means the location has ease of access to jobs
  • Traffic: could be a good thing because of walk-ins
  • Road quality: a lot of potholes and trash or newly paved
  • Quality of cars: indicates the resident type in the area

Another best practice is to drive the neighborhood at night to see how “safe” the area feels.

Based on the in-person analysis, you should have a better understanding of which neighborhoods are the best.

 

Bonus tip

Another recommendation is to set up Google Alerts for the target markets you are interested in. Just because a market is qualified today, that doesn’t mean it will remain qualified this time next year. Therefore, use Google Alerts to receive automated email updates on any changes, good or bad, in specific markets.

Good keywords to set up for each prospective target market are:

  • Apartment
  • Multifamily
  • Real estate
  • Jobs
  • Unemployment
  • Absorption
  • Vacancy
  • New business
  • Fortune 500

 

Real estate market analysis summarized

In summary, the real estate market itself is not as important as your ability to implement your business plan. However, selecting the right real estate market does increase the likelihood of preserving and growing your passive investors’ capital.

Therefore, to select the best real estate market, follow my tried-and-true real estate market analysis:

  1. Select seven real estate submarkets.
  2. Perform online analysis to rank these real estate submarkets.
  3. Narrow your list down to one or two real estate submarkets.
  4. Perform in-person, boots-on-the-ground research to locate the best neighborhoods.

 

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7 Reasons You’ll Love Investing in the Midwest

I’m a Midwestern kid. Born and raised in Cleveland. Went to college in Dayton. Lived and worked in both Chicago and Detroit. And I currently live in Cincinnati.

With that noted, I’m a firm believer of live where you want, invest where it makes sense. So it may come as a bit of a surprise that I prefer to invest in the Midwest as well. But here’s the thing – you should too. Yes, I know the Sunbelt is the darling of multifamily investing, and rightfully so. But don’t sleep on the Midwest. There are excellent markets with sound fundamentals and compelling narratives that rival some of the hottest markets in the country.

But don’t just take my word for it, here’s what George Tikijan of Cushman and Wakefield had to say about it:

“Investors who previously focused on coastal markets, especially New York and New Jersey, shifted focus to more stable locales, and that’s benefited markets such as Indianapolis; Cincinnati; Louisville, Ky.; Kansas City, Mo.; Columbus, Ohio, and Nashville, Tenn.”

And here’s more from Tyler Hague of Colliers International when describing the allure of the Midwest:

“Great yields, less competition, and steady rent and income growth. Investors can realize 75-150 basis point premiums in the greater Midwest for a similar product on the coasts…The demographic and market fundamentals are sound in almost every large secondary market in the Midwest.”

While some may be quick to dismiss the region as “flyover country,” savvy investors are eager to explore the returns available in the region. And the Midwest offers investors more than just cash flow, kind folks, and cornfields. The region delivers a unique blend of culture, affordability, and stability. Here are seven reasons you’ll love investing in the Midwest.

 

Seven Reasons You’ll Love Investing in the Midwest

1. Attractive Markets

When some people think of the Midwest, they may think of farmland, but there are major metros with thriving nightlife, culture, and universities to attract the ideal renter demographic. 11 Midwest MSAs have populations of more than 1 million people. Some of the world’s largest companies call the region home, like McDonald’s, Walgreens, Caterpillar, Procter & Gamble, General Motors, Eli Lilly, and many more.

The Cleveland Museum of Art is widely recognized as one of the best in the world. Minneapolis ranks 2nd in the nation for live art per capita after New York City. Detroit is reinventing itself as a burgeoning tech hub. Summertime Chicago is the best place on the planet! And as far as the farmland, it’s worth noting that California has more farms than Ohio.

 

2. Superior Yields

If cash flow is king then the Midwest serves as a bountiful palace. Cincinnati, Cleveland, and Detroit are perennial stables on the list of top multifamily markets for yield. This means that you will see a higher return when investing in a similar quality of properties compared to other markets. Even through COVID, the region performed well as investors prioritized cash flow over appreciation potential. According to CBRE, the following Midwest markets were among the best in the country for 2020: Indianapolis, Detroit, Columbus, Cleveland, Cincinnati, Kansas City, Louisville, and St. Louis.

 

3. Less Competition

Investing is about finding opportunities and creating value. There are excellent markets across the country that are seeing population growth, job growth, and have a diverse economy. The only drawback is every other multifamily investor is seeing the same data, causing enormous competition and driving up acquisition prices. This is great for sellers, but not so good for buyers.

Some markets are seeing return expectations reduced to the 4% range for B-class properties. Instead of accepting this lower return, explore better returns in other cities with less competition. The Midwest offers some great alternatives with Columbus and Indianapolis being the most popular. Other options for higher returns with less competition are Louisville, Cincinnati, and Kansas City.

 

4. Affordable

Many value-add strategies rely on increasing rents, but there is a point where residents can no longer afford the hikes. Recently, there has been a fair amount of residents fleeing expensive cities such as New York and San Francisco in search of more affordability. This is where the Midwest shines, boasting 7 of the top 10 most affordable states. These markets are positioned well for potential inflation with room to absorb increased rents. For comparison, check out the chart below with the average rents for select Midwest markets and key destinations in the Southeast according to RentCafe.

 

City Avg Rent Avg Sq Ft Rent Per Sq Ft
Indianapolis $947 880 $1.08
Cincinnati $1,022 869 $1.18
Louisville $1,009 936 $1.08
Chicago $1,862 748 $2.49
Dallas $1,263 848 $1.49
Atlanta $1,527 975 $1.57
Orlando $1,432 963 $1.49
Charlotte $1,301 941 $1.38

 

 

5. Less Volatility

There is a perception that properties in the Midwest do not appreciate in value. This simply isn’t true, although other regions certainly experience greater appreciation. While the area may not shoot up to the moon, it also won’t plummet to the Earth’s core. The Midwest is stable. Part of the reason is people in the Midwest genuinely like the area and choose to live here. This provides a strong baseline for demand with less volatility than coastal markets, even if they don’t grow quite as fast.

 

6. More Space

Space has quickly moved from a luxury to a necessity for many renters across the country. In fact, 73% of renters say larger living spaces are highly important to them, according to a 2021 Multifamily Housing Study. However, affordability and connectivity are also important so they’re seeking places that offer the trifecta. Midwest markets serve as a great blend of space, affordability, and connectivity to meet these demands.

 

7. Community

There are good, hard-working people in the Midwest. Many grew up on a set of values that prioritizes family, faith, and community. I’ve traveled throughout the country and lived all over the Midwest and the people I’ve met here have been caring, creative, and charismatic. They like people who care about the community and welcome the chance to convert strangers into friends. You don’t have to live here to invest like a local and take advantage of all the area has to offer.

The Midwest may not be the sexiest region but there are a lot of great reasons to love investing here. Consider diversifying your multifamily portfolio with a few Midwest markets and experience firsthand what the rest of us love about the region.

John Casmon has helped families invest passively in over $90 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Target Market Insights: Multifamily + Marketing. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com

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Record-Breaking Multifamily Rent Growth in April 2021

According to Apartment List, rents grew by 1.9% nationally in April 2021, which is the greatest month-over-month growth since 2017 (which is when Apartment List began collecting data). Another commercial real estate analytics company, RealPage, said, “effective asking rents for US apartments climbed 1.3% in April, rising at the fastest pace seen during a single month for the past decade or so and likely at the fastest pace ever.”

No matter how you put it, April 2021 was a record-breaking month for multifamily rent growth!

For perspective, rents dropped by 1.2% nationally from March to June 2020 due to the coronavirus pandemic. This decline wasn’t overcome until March 2021, where rents increased by 1.4%, a record at the time. Adding in the 1.9% rent growth in April, the year-over-year rent growth of 2.3% is the second-highest since Apartment List began collecting data in 2017.

In other words, “the recent growth in [Apartment List’s] national rent index has now reversed the disruption experienced in the early stages of the [COVID-19] pandemic.”

Here are some other takeaways I got from the report:

  • Rents in hard-hit markets continue to rebound: For example, rents in San Francisco were down 26.6% from March 2020 to January 2021. Since January, rents have increased by 8.5%, including a 3% increase in April 2021. Other hard-hit markets like Boston (4.3% rent growth in April), Chicago (4% rent growth in April), Seattle (3.6% rent growth in April), New York (2.7% rent growth in April), and Washington DC (1.4% rent growth in April) are experiencing a similar trend.
  • Boise still holds the spot for most rent growth during the pandemic: Rent has grown by 23% between April 2020 and April 2021 in Boise, ID, including a 5.2% rent growth in April 2021. Other top markets include Fresno, CA (13% YoY rent growth), Spokane, WA (13% YoY rent growth), Gilbert, AZ (12% YoY rent growth), and Toledo, OH (12% rent growth).
  • There has been a convergence of rents in pre-pandemic expensive and affordable cities: Essentially, there has been a correlation between pre-pandemic rent levels and rent changes during the COVID pandemic. The higher the pre-pandemic rent, the more it fell. The lower the pre-pandemic rent, the more it rose. Consequently, the expensive markets are more affordable while the more affordable markets have become more expensive.

To review Apartment List’s full April 2021 rent report, click here.

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14 Markets That Have Fully Recovered from the COVID-19 Recession

According to Yardi Matrix’s April 2021 bulletin, “roughly one out of every 14 multifamily properties in the US has seen occupancy rates drop by 5% or more over the last 12 months.” 7.3% of multifamily properties experienced a 5% or more decrease in occupancy, and 1.8% experienced a 10% or more drop in the last 12 months.

Understandably, occupancy in large urban areas was impacted the most. Leading the pack was New York City where 32.6% of properties experienced a 5% or more decrease in occupancy and 9.8% experienced a 10% or more decrease in occupancy.

Nationally, multifamily occupancy is down 0.2% year-over-year. Since many of the large urban metros aren’t expected to return to pre-pandemic occupancy levels for five or more years, Yardi Matrix predicts that the national occupancy rate will not recover until Q2 of 2024.

Now for the good news.

National rents have already recovered. National rents are now 0.6% greater than pre-pandemic rents. Also, 14 metros have occupancy levels and rents above pre-pandemic levels – either because they’ve fully recovered or weren’t impacted enough by the pandemic. Here are those markets:

1. Raleigh, NC

  • Occupancy change YOY: 0.1%
  • Rent change YOY: 0.5%

2. Portland, OR

  • Occupancy change YOY: 0.3%
  • Rent change YOY: 1.7%

3. Phoenix, AZ

  • Occupancy change YOY:0.4 %
  • Rent change YOY: 6.9%

4. Denver, CO

  • Occupancy change YOY: 0.0%
  • Rent change YOY: 0.4%

5. Indianapolis, IN

  • Occupancy change YOY: 0.6%
  • Rent change YOY: 3.9%

6. Philadelphia, PA

  • Occupancy change YOY: 0.2%
  • Rent change YOY: 3.4%

7. Baltimore, MD

  • Occupancy change YOY: 0.9%
  • Rent change YOY: 3.8%

8. Orange County, CA

  • Occupancy change YOY: 0.3%
  • Rent change YOY: 1.0%

9. Sacramento, CA

  • Occupancy change YOY: 1.1%
  • Rent change YOY: 7.3%

10. Las Vegas, NV

  • Occupancy change YOY: 1.4%
  • Rent change YOY: 6.1%

11. Atlanta, GA

  • Occupancy change YOY: 1.1%
  • Rent change YOY: 4.7%

12. Tampa, FL

  • Occupancy change YOY: 0.9%
  • Rent change YOY: 5.0%

13. Charlotte, NC

  • Occupancy change YOY: 0.5%
  • Rent change YOY: 2.7%

14. Inland Empire, CA

  • Occupancy change YOY: 2.2%
  • Rent change YOY: 8.3%

 

Other markets to note:

  • Dallas: Rents have fully recovered and occupancy is projected to recover in Q2 of this year. In a sense, Dallas also has fully recovered.
  • Houston: Rents and occupancy are expected to fully recover by the end of 2021.
  • Twin Cities, Nashville, Kansas City: Rents have fully recovered but occupancy isn’t expected to recover for at least a few years (5+ years for the Twin Cities, Q4 2023 for Nashville, and Q4 2024 for Kansas City).
  • New York, San Jose, San Francisco, Los Angeles, Chicago, Orlando: Occupancy isn’t expected to fully recover for more than five years.

Click here to review the full bulletin from Yardi Matrix to see if the market you invest in has fully recovered from the COVID-19 recession.

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10 Markets with Greatest Rent Changes during COVID Year in Review

10 Markets with Greatest Rent Changes During COVID: Year in Review

One year ago, this month, we began to see major changes in the world due to the COVID pandemic. On the 12th of March, the NBA elected to suspend the remainder of the season. In hindsight, this act was the first domino that led to further lockdowns across the country.

The first city to shutdown was San Francisco on March 17th. The first state to shutdown was California on March 19th. By the end of March, 32 out of 50 states had locked down.

These lockdowns, as well as the economic stimulus and eviction moratoriums, have affected multifamily markets to varying degrees. Some markets experienced a large increase in rents while others experienced double-digit drops in rent.

In this blog post, I will outline the five markets with the greatest increase and the five markets with the greatest decrease in rents one year into the coronavirus pandemic lockdowns.

Markets with Greatest Increase in Rents

1. Boise, ID

  • Rent change since March 2020: +16.0%
  • Rent change month-over-month: +3.4%

2. Fresno, CA

  • Rent change since March 2020: +11.9%
  • Rent change month-over-month: +0.6%

3. Greensboro, NC

  • Rent change since March 2020: +9.5%
  • Rent change month-over-month: +0.9%

4. Gilbert, AZ

  • Rent change since March 2020: +9.0%
  • Rent change month-over-month: +0.6%

5. Riverside, CA

  • Rent change since March 2020: +8.9%
  • Rent change month-over-month: +1.3%

Markets with Greatest Decrease in Rents

1. San Francisco, CA

  • Rent change since March 2020: -23.2%
  • Rent change month-over-month: +3.4%

2. New York, NY

  • Rent change since March 2020: -18.7%
  • Rent change month-over-month: +0.9%

3. Seattle, WA

  • Rent change since March 2020: -18.5%
  • Rent change month-over-month: +2.2%

4. Oakland, CA

  • Rent change since March 2020: -15.2%
  • Rent change month-over-month: -0.5%

5. Boston, MA

  • Rent change since March 2020: -14.5%
  • Rent change month-over-month: +2.9%

You can view the YoY and MoM rent changes for all major US markets here.

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10 Markets with the Greatest Vacancy Changes During Covid

10 Markets with Greatest Vacancy Changes During COVID

Historically, vacancy rates increase during recessions. According to the US Census, vacancy on renter-occupied properties increased by 0.9%, 0.7%, and 2.4% during the 1990, 2001, and 2007 economic recessions respectively.

The current COVID recession is following a similar trend. According to Marcus and Millichap’s 2021 multifamily forecast report, multifamily vacancy increased by 0.2% – from 4.2% to 4.4%. Even though we are technically still in a recession as of this writing, an overall increase in vacancy is a good assumption, especially since an eviction moratorium has been in place since the onset of the pandemic.

Physical vacancy is an important metric for multifamily investors because it indicates the demand for apartment rentals. The closer to zero percent the vacancy rate is, the more demand for multifamily, and vice versa.

While absolute vacancy rates are relevant, understanding the vacancy trend is even better. Absolute vacancy rates provide a current snapshot of how demand in one market compares to another. However, vacancy trends show if demand is increasing or decreasing, which helps with future investment decisions.

In this blog post, I will outline the markets where vacancy rates decreased and increased the most during the current COVID recession.

 

United States 

  • YoY Change: +0.2%
  • 2019 Physical Vacancy: 4.2%
  • 2020 Physical Vacancy: 4.4%

Markets with Greatest Decrease in Physical Vacancy During COVID

1. Riverside-San Bernardino

  • YoY Change: -1.7%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 1.8%

2. Las Vegas

  • YoY Change: -1.2%
  • 2019 Physical Vacancy: 4.7%
  • 2020 Physical Vacancy: 3.5%

3. Sacramento

  • YoY Change: -0.9%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 2.6%

4. Detroit

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 3.3%
  • 2020 Physical Vacancy: 2.6%

5. Baltimore

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 4.8%
  • 2020 Physical Vacancy: 4.1%

Markets with Greatest Increase in Physical Vacancy During COVID

43. Austin

  • YoY Change: +1.6%
  • 2019 Physical Vacancy: 4.6%
  • 2020 Physical Vacancy: 6.2%

44. New York City

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 2.0%
  • 2020 Physical Vacancy: 3.7%

45. Northern New Jersey

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 4.4%
  • 2020 Physical Vacancy: 6.1%

46. San Jose

large metropolis from above

  • YoY Change: +2.2%
  • 2019 Physical Vacancy: 3.9%
  • 2020 Physical Vacancy: 6.1%

47. San Francisco

  • YoY Change: +6.6%
  • 2019 Physical Vacancy: 5.1%
  • 2020 Physical Vacancy: 11.7%

The Market Rankings From One to 47

Rank City YoY Change 2019 2020 Rank City YoY Change 2019 2020
1 Riverside-San Bernardino -1.70% 3.50% 1.80% 26 Raleigh 0.20% 4.70% 4.90%
2 Las Vegas -1.20% 4.70% 3.50% 27 Cincinnati 0.30% 3.30% 3.60%
3 Sacramento -0.90% 3.50% 2.60% 28 St. Louis 0.30% 4.40% 4.70%
4 Detroit -0.70% 3.30% 2.60% 29 Kansas City 0.30% 4.60% 4.90%
5 Baltimore -0.70% 4.80% 4.10% 30 Oakland 0.60% 3.90% 4.50%
6 Atlanta -0.60% 5.10% 4.50% 31 Dallas/Fort Worth 0.60% 5.10% 5.70%
7 Indianapolis -0.60% 5.30% 4.70% 32 Houston 0.70% 6.30% 7.00%
8 Orange County -0.40% 3.60% 3.20% 33 Los Angeles 0.80% 3.70% 4.50%
9 New Haven-Fairfield County -0.40% 4.40% 4.00% 34 Orlando 0.90% 4.10% 5.00%
10 Tampa-St. Petersburg -0.40% 4.60% 4.20% 35 Minneapolis-St. Paul 1.00% 3.30% 4.30%
11 Charlotte -0.30% 4.70% 4.40% 36 Chicago 1.00% 4.90% 5.90%
12 San Diego -0.30% 3.60% 3.30% 37 Miami-Dade 1.00% 3.80% 4.80%
13 Philadelphia -0.20% 3.50% 3.30% 38 Seattle-Tacoma 1.00% 4.30% 5.30%
14 Phoenix -0.20% 4.00% 3.80% 39 Washington, D.C. 1.10% 4.00% 5.10%
15 Cleveland -0.20% 3.70% 3.50% 40 Nashville 1.10% 4.50% 5.60%
16 Fort Lauderdale -0.20% 4.40% 4.20% 41 Pittsburgh 1.30% 3.20% 4.50%
17 Columbus -0.10% 4.20% 4.10% 42 Boston 1.50% 3.40% 4.90%
18 Portland -0.10% 4.50% 4.40% 43 Austin 1.60% 4.60% 6.20%
19 West Palm Beach -0.10% 4.70% 4.60% 44 New York City 1.70% 2.00% 3.70%
20 Salt Lake City 0.00% 4.20% 4.20% 45 Northern New Jersey 1.70% 4.40% 6.10%
21 Denver 0.00% 5.10% 5.10% 46 San Jose 2.20% 3.90% 6.10%
23 Louisville 0.10% 4.80% 4.90% 47 San Francisco 6.60% 5.10% 11.70%
24 San Antonio 0.10% 6.20% 6.30%
25 Milwaukee 0.20% 3.50% 3.70% United States 0.20% 4.20% 4.40%
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10 US Cities Where Rents Will Rise the Most in 2021

The COVID-19 pandemic has accelerated the trend of people, especially the millennial generation, moving out of high-cost gateway markets. Pre-COVID, the millennial generation moved to be closer to family and/or start a family. After the onset of the pandemic, even more people began (and continue) fleeing high-cost gateway markets. For example, since many people are working remotely, they prefer the lower rent payments for a larger unit size rather than paying higher rents for a tiny apartment.

Many suburban, tertiary, and tech hub markets benefited from this migration trend in 2020. Markets with the most growth in 2020 include Sacramento (6.1%), Inland Empire (7.3%), Phoenix (4.6%), Tampa (3.9%), and Las Vegas (3.8), Boise (9.5%), and Scranton-Wilkes-Barre (7.8%), according to YardiMatrix.

2021 is a new year, yet many of the challenges from 2020 remain. Overall, YardiMatrix predicts rents will rise by 2.0% nationally in 2021 (compared to -0.8% in 2020). They predict rents will rise the most in Las Vegas (4.8%), followed by Salt Lake City (4.3%), Austin (3.9%), and Indianapolis (3.9%).

Investing in a market where rents exceed the national average is ideal. While you still want to make conservative rent growth assumptions based on a rental comparable analysis, market-driven rent growth allows multifamily investors to exceed their return projections.

Here are the 10 cities where rents are forecasted to increase the most in 2021:

 

 

1. Las Vegas

YardiMatrix 2021 Rent Forecast % Change: 4.8%

2020 Rent % Change: 3.8%

2. Salt Lake City

YardiMatrix 2021 Rent Forecast % Change: 4.3%

2020 Rent % Change: 3.8%

3. Austin

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: -3.6%

4. Indianapolis

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: 3.5%

5. Phoenix

YardiMatrix 2021 Rent Forecast % Change: 3.7%

2020 Rent % Change: 4.6%

6. Winston- Salem

YardiMatrix 2021 Rent Forecast % Change: 3.6%

2020 Rent % Change: 6.6%

7. New Orleans

YardiMatrix 2021 Rent Forecast % Change: 3.5%

2020 Rent % Change: 0.6%

8. Birmingham

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change: 2.8%

9. Sacramento

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change:6.1%

10. Cincinnati

YardiMatrix 2021 Rent Forecast % Change: 3.3%

2020 Rent % Change: 2.2%

 

Here is a data table summarizing 11 to 20:

Market YardiMatrix 2021 Rent Forecast % Change 2020 Rent % Change
Atlanta 3.3% 3.0%
Columbus 3.3% 2.3%
Louisville 3.3% 1.8%
Raleigh 3.2% 0.0%
Richmond 3.1% 6.5%
Memphis 3.1% 5.9%
Tucson 3.0% 5.9%
Nashville 3.0% -1.5%
Tampa 2.9% 3.9%
Houston 2.8% -1.9%

 

Forecasts are never perfect

Not many people, if anyone, could have predicted that the market with the greatest rent growth in 2020 would have been Boise, Idaho. Therefore, a strong rent growth prediction should not be the only reason why you decide to invest in a market. However, like all forecasts, rent growth predictions are good guides to locating potential investment markets on which you perform a deep dive analysis.

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Where Investors Did (And Didn’t) Buy Multifamily During the COVID-19 Pandemic

Transaction volume up over 50% in Pittsburgh, San Jose and Stamford, CT only other cities with increased volume

Each year, Integra Realty Resources (IRR) releases their “Commercial Real Estate Trends Report.” Based on long-term and short-term historical economic trends, IRR attempts to forecast how each commercial real estate sector will perform in the coming year.

According to the Federal Reserve Bank of St. Louis, which is responsible for dating recessions, the economy entered a recession in February 2020. And as of this writing, FRED has yet to call the end of the recession.

One dataset included in IRR’s annual trends report is the transaction volume during the prior year. Since the market was in a recession most of last year, the 2020 transaction data provides us insights into where commercial real estate investors were buying up multifamily during a down and uncertain economy. Maybe even more insightful are the markets where investors WERE NOT buying multifamily in 2020.

As a baseline, according to the report, the total multifamily transaction volume in 2020 was down 40% year-to-date, although it still had the highest total transaction volume of the other commercial real estate industries. Only three markets experienced an increase in multifamily transactions in 2020 – Pittsburgh, San Jose, and Stamford, CT. The greatest increase was in Pittsburgh with over 50% more transactions in 2020 compared to 2019, making it one of the “hottest” multifamily market in 2020.

Every other market analyzed experienced a decrease in transactions in 2020. However, some markets more than others. In five markets, the transaction volume in 2020 was down by over 50% – Cincinnati, Inland Empire, Hartford, Cleveland, and Philadelphia.

 

Here are the 10 markets with the greatest increase in multifamily transactions in 2020:

1. Pittsburgh, PA

  • YOY Change: 53.8%
  • Total (4Q2019-3Q2020): $855.7M
  • Volume Rank:39

2. San Jose, CA

  • YOY Change: 11.7%
  • Total (4Q2019-3Q2020): $1,913.3M
  • Volume Rank: 22

3. Stamford, CT

  • YOY Change: 10.3%
  • Total (4Q2019-3Q2020): $440.9M
  • Volume Rank: 50

4. Kansas City, MO

  • YOY Change: -4.4%
  • Total (4Q2019-3Q2020): $1,063.6M
  • Volume Rank: 34

5. Memphis, TN

  • YOY Change: -5.6%
  • Total (4Q2019-3Q2020): $509.3M
  • Volume Rank: 48

6. Seattle, WA

  • YOY Change: -6.5%
  • Total (4Q2019-3Q2020): $5,524.9M
  • Volume Rank: 4

7. East Bay, CA

  • YOY Change: -7.8%
  • Total (4Q2019-3Q2020): $2,079.2M
  • Volume Rank: 21

8. Sacramento, CA

  • YOY Change: -8.9%
  • Total (4Q2019-3Q2020): $1,384.2M
  • Volume Rank: 28

9. St. Louis, MO

  • YOY Change: -12.7%
  • Total (4Q2019-3Q2020): $649.6M
  • Volume Rank: 45

10. San Antonio, TX

  • YOY Change: -13.4%
  • Total (4Q2019-3Q2020): $2,139.7M
  • Volume Rank: 20

Here are the 10 markets with the greatest decrease in multifamily transaction in 2020.

City YOY Change Total (4Q2019-3Q2020) Volume Rank
Manhattan, NY -46.6% $3,820M 8
Baltimore, MD -47.3% $1,1775.5M 32
Long Island, NY -48.3% $469.5M 49
NYC Boroughs -49.0% $2,656.5M 15
Washington, DC -49.8% $795.2M 41
Cincinnati, OH -59.3% $272.5M 52
Inland Empire, CA -60.4% $1,035.4M 35
Hartford, CT -63.2% $109.6M 54
Cleveland, OH -66.9% $240.2M 53
Philadelphia, PA 69.4% $1,013.4M 36

 

An interesting takeaway from this data supports something we talk about here a lot on the Best Ever blog: commercial real estate is very submarket and neighborhood dependent. All three top ranking cities are in the same state as a bottom ranking city (Pittsburgh and Philadelphia, San Jose and Inland Empire, Stamford and Hartford). Therefore, before making an investment decision, you need to continue to perform a high level analysis on a submarket and neighborhood level, rather than focusing on city and MSA level data. However, reports such as these can be a guide to determining which cities and MSAs to research further.

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10 States With The Most Net Migration in 2020

Tennessee ranked number 1; Arizona, Colorado, Nevada on the rise.

Each year, U-Haul ranks each state based on the net gain of one-way U-Haul trucks entering a state versus leaving that state during the calendar year based on over 2 million one-way U-Haul transactions. U-Haul states, “While U-Haul migration trends do not correlate directly to population or economic growth, the Company’s growth data is an effective gauge of how well cities and states are attracting and maintaining residents.”

As commercial real estate investors, one the the major factors we take into account then deciding where to invest are the population trends.

Generally, the more people moving to an area, the more demand for real estate. Therefore, using U-Haul’s annual migration trends report, you can determine if you are in the right market or if you should consider to transitioning to or focusing on a new market.

One of the most interesting changes in 2020 was the state that topped the list. For the first time since 2015, a non-Florida, non-Texas state had the greatest gain in one-way U-Haul trucks entering the state – Tennessee. One-way trips were up 12% year-over-year, resulting in Tennessee jumping from 12th in 2019 to 1st in 2020. Texas was number one for three straight years (2016-2018) before falling to number 2 and being replaced by Florida in 2019. In 2020, Texas held the number 2 spot while Florida dropped to number 3.

Other markets with large jump in the rankings were Arizona (20th in 2019 to 5th in 2020), Colorado (42nd in 2019 to 6th in 2020), and Nevada (24th in 2019 to 8th in 2020).

Which states had the most net loss of one-way U-Haul trips? California was ranked the worst, followed by Illinois. California has ranked 48th out of 50 or lower since 2016, and Illinois has been 49th or 50th since 2015. Other markets with large decreases were North Carolina (3rd in 2019 to 9th in 2020), South Carolina (4th in 2019 to 15th in 2020), Utah (8th in 2019 to 17th in 2020), Alabama (6th in 2019 and 22nd in 2020), Vermont (10th in 2019 and 26th in 2020), Idaho (11th in 2019 and 30th in 2020), and Washington (5th in 2019 and 36th in 2020).

 

 

Click here to see how all 50 states ranked, and here are the 10 states with the most net migration in 2020:

10. Georgia

2019 rank: 16th

9. North Carolina

2019 rank: 3rd

8. Nevada

2019 rank: 24th

7. Missouri

2019 rank: 13th

6. Colorado

2019 rank: 42nd

5. Arizona

2019 rank: 20th

4. Ohio

2019 rank: 7th

3. Florida

Florida

2019 rank: 1st

2. Texas

2019 rank: 2nd

1. Tennessee

2019 rank: 12th

 

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

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Find the True Value of Real Estate Markets

“Is the real estate market currently overvalued?” Many active investors and entrepreneurs are asking this question, and you probably are as well. The housing sector is strong despite the fact that the U.S. is officially in a recession. Home prices and rental rates are jumping in many metro markets. During unpredictable times, wise investors take cues from historical patterns. Market analytics expert Stefan Tsvetkov talks with Joe Fairless on The Best Ever Show about the power of quantitative analysis to help you find undervalued opportunities. As with other markets, your best bet is often to focus on value rather than attempting to time cycles.

About Stefan Tsvetkov

Stefan owns the data analytics firm Envvy Analytics, which specializes in business and market analysis. Its mission is to help real estate investors find exceptional opportunities and leverage market inefficiencies. Stefan brings ten years of experience in financial engineering, a field that develops and applies quantitative techniques to tackle financial problems. Stefan is passionate about using data analytics to help investors make better decisions.

Stefan has three years of personal experience as an active investor. He has privately purchased multifamily properties and knows firsthand the impact of current market trends on individual owners and businesspeople. His portfolio includes a New Jersey triplex and fourplex and a New York duplex.

Stefan found early inspiration for an analytical approach to real estate in the work of hedge fund manager John Hussman. Hussman developed a predictive metric for stock market drops by determining whether the stock market was overvalued. Stefan contrasts this valuation measure with the typical Wall Street emphasis on price-to-earnings ratio. He determined that Hussman’s metric outperformed the price-to-earnings ratio, which further motivated him to deep dive into market valuation analysis.

Look Beyond Demographics

When considering a potential real estate market, you probably look at job and population trends. You’re in good company, as commercial investing advisers stress demographics when evaluating opportunities. However, Stefan advises people to focus on market valuation. Why? For one thing, he notes, real estate markets are inefficient. It’s challenging to get a qualitative read on values for a given market.

Another compelling reason is that historical market cycles are best analyzed quantitatively. Data analytics finds patterns that qualitative analysis might overlook, allowing financial engineers such as Stefan to develop predictive models. Critically, data analysis can validate models for robustness. When you use a metric such as the one Stefan recommends below, you know its performance history. You are not guessing.

A Gold Standard Metric

Stefan’s research has yielded one metric he considers the gold standard for valuing markets. The ballpark measurement to start with is the historical ratio of housing prices to income in a given market. You then determine the current ratio and calculate its deviation from the historical norm. Typically, the metrics refer to household income and the price of single-family homes rather than commercial properties.

As an example, let’s assume that the historical housing price-to-income ratio in Texas has averaged 5. If today it is 8, you should consider whether that market is overvalued. If it is 4, perhaps the market is now undervalued. You would then consider other potential factors such as housing shortages, employer flight, or other socioeconomic influences.

Does Stefan’s metric hold true for larger investors? Whether your interest in commercial properties is via active investing or passive investing, the good news is his measure still applies. Stefan explains that the price-income formula is about 95% accurate for multifamily units. Over time, differences in appraising and returns even out. Household income still drives valuation, however, and so the metric best suits commercial investing in one-to-four-unit properties.

Lessons from the Great Recession

Stefan’s interest in quantitative real estate valuation was partly inspired by a seeming prophet of the big crash, Ingo Winzer. As early as 2005, Winzer declared on CNN that specific markets were significantly overvalued. A year later, he reiterated his belief that certain metro areas were dangerously overpriced.

By 2007, the most overvalued U.S. real estate markets were Arizona, California, Florida, and Nevada. These states ranged from being 49% to 68% overvalued. Stefan estimates that the subsequent market falls correlated 83% with these markets’ deviations from their historical price-to-income ratios. Their prices plummeted 45% to 56% after being overvalued and held steady when their values aligned with historical norms.

According to Stefan, the median market deviation from historical ratios preceding the crash was 26%. A 22% price plunge followed this peak in value. In contrast, real estate markets with variations under 10% could be considered fairly valued. Price drops in these areas averaged only 11%. A clear correlation seems drawn between the percent deviation of a given market from its historical price-to-income ratio and its percent drop in a recession.

Overlooked and Undervalued

The Great Recession has lessons for investors seeking quality undervalued markets. Stefan emphasizes that it’s easy to forget that some state markets were undervalued during this time. About 12 states, including Texas, experienced price drops in line with their undervaluation. Texas was undervalued by 5% in 2007 and dropped only 4%, in contrast to the historic losses experienced in many other regions.

In parallel, national income declined 4%. This loss of household spending power hit over-leveraged homeowners particularly hard. However, the story isn’t as bleak for undervalued states. When considered with single-family home prices, income and homeownership costs kept pace in many regions.

Stefan believes these historical patterns still apply, and today’s markets offer opportunity. Regardless of whether the overall market peaks next year or in five, undervalued markets should resist the steep losses of a correction.

Scaling Market Peaks

How do you identify a market peak, especially in today’s volatile landscape? Stefan insists that you can’t. He explains that a market peak is when prices top out and then drop significantly. Prices can plunge quickly or bottom out over two to five years. We identify market peaks in hindsight. We can’t predict them, and even an active investor shouldn’t hinge a strategy on timing.

Quantitative market valuation offers tools to navigate cycles in the absence of timing peaks. In consideration of complex housing markets in certain metro regions, Stefan is refining the price-to-income metric. He cites San Francisco as an example of a complex housing market. San Francisco housing is expensive due to supply and demand and thus should not be assumed to be overvalued. Prices there are driven by a housing shortage.

People often discuss historical market peaks as singular events. In reality, market cycles vary regionally. During the Great Recession, some areas peaked in 2005 while others topped out in late 2007.

Does this uncertainty mean that you should stay out of hot markets? Not necessarily. Large, strong markets in areas such as Texas tend to hold their value across cycles. Stefan believes that large states with robust economic activity offer the best opportunities. What you need to watch for is significant overvaluation that could signal a powerful forthcoming correction.

How to Find Undervalued Opportunities

According to historical performance numbers, undervalued markets are less likely to drop substantially in a downturn following a peak. If you want to invest cautiously, focus on identifying undervalued markets. You can work with a financial expert like Stefan or do your research based on Stefan’s guidelines.

Your investor profile matters when deciding on potential markets. If active investing, you have more control over responding agilely to changes in markets or investing goals. If passive investing, you generally have little say in the timing of market exits. You want an undervalued but strong market that lets you sleep soundly at night.

Your investing scope matters as well. Buying a triplex in a residential neighborhood differs from investing in retail shopping centers.

Along those lines, Stefan notes that we should distinguish between metro and state scope. Though an undervalued state such as Texas may hold reasonably steady, specific communities may fluctuate more widely. Factors such as employment and migration affect individual cities and counties.

The key is to find strong markets that are undervalued and weigh their strengths against weaknesses. Many U.S. states are undervalued by Stefan’s criteria, but not all of them offer equal opportunity. Currently, Stefan names the most undervalued states as being Arkansas, Connecticut, and Illinois. However, Connecticut has issues that make it unattractive to investors.

In contrast, Indiana is 6% undervalued and up 27% from its 2007 peak. If you are an investor starting small, you would most likely consider Indiana over Connecticut. Larger investors looking at retail shopping centers or other commercial investing should consider big markets.

The Bottom Line

When overarching factors such as the current pandemic muddle qualitative analysis, a quantitative view brings objectivity and historical context. Rather than try to guess the market’s peak, focus on identifying undervalued yet strong markets. If you’re a larger investor, choose big metro regions. Accurate market valuation supports portfolio growth while buffering against plunges. It outlasts rollercoaster cycles, and so can you.

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.

  

However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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Top 10 Markets with Greatest Forecasted Migration in 2020

Each year, Marcus and Millchap releases their Multifamily North American Investment Forecast. You can download the full 2020 report by clicking here.

Last week, I wrote a blog about Marcus and Millichap’s top 10 forecasted multifamily markets for 2020 based on their National Multifamily Index (NMI), which you can read here.

They also forecast the net migration into each of the major metros. The net migration is the total number of people moving into an area minus the total number of people moving out of an area. It is a measure of how well a market is at attracting and maintaining residents.

As real estate investors, the more people who are moving to and remaining in our target investment market, the more demand there is for rentals, flips, and other real estate related products.

Here is a map from Marcus and Millichap indicating the net migration for the largest markets in the country.

As you can see from the map and the title of the map, Marcus and Millichap predicts that migration will favor the south and southwest over other parts of the country.

Here are the 10 states with the greatest forecasted net migration in 2020:

10. Seattle-Tacoma

10Best

Forecasted Net Migration: 33,400

Net Migration as a % of Population: 0.8%

 

9. Austin

Visit Austin

Forecasted Net Migration: 36,300

Net Migration as a % of Population: 1.6%

 

8. Tampa-St. Petersburg

Parade

Forecasted Net Migration: 40,800

Net Migration as a % of Population: 1.3%

 

7. Orlando

10Best

Forecasted Net Migration: 48,400

Net Migration as a % of Population: 1.8%

 

6. Las Vegas

Destination360

Forecasted Net Migration: 48,700

Net Migration as a % of Population: 2.1%

 

5. Houston

Visit The USA

Forecasted Net Migration: 54,800

Net Migration as a % of Population: 0.8%

 

4. Atlanta

Atlanta Narcity

Forecasted Net Migration: 55,400

Net Migration as a % of Population: 0.9%

 

3. Southeast Florida

Expedia

Forecasted Net Migration: 68,700

Net Migration as a % of Population: 1.1%

 

2. Dallas/Fort Worth

D Magazine

Forecasted Net Migration: 69,600

Net Migration as a % of Population: 0.9%

 

1. Phoenix

TripSavvy

Forecasted Net Migration: 77,600

Net Migration as a % of Population: 1.5%

 

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

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Top 10 Forecasted Multifamily Markets for 2020

Each year, Marcus and Millichap releases their Multifamily North American Investment Forecast (you can download the full report here). Their annual report includes National Multifamily Index (NMI).

The NMI is based on forward-looking economic indicators and supply-and-demand metrics, including projected job growth, vacancy, construction, housing affordability, rents, historical price appreciation and cap rate trends. These are the same economic and supply and demand metrics we use to select our target investment markets.

Here are the top 10 forecasted multifamily markets for 2020:

10. New York City

Business Insider

2019 Rank: 3

2019 to 2020 Change: -7

9. Sacramento

Opendoor

2019 Rank: 11

2019 to 2020 Change: +2

8. Boston

The Boston Globe

2019 Rank: 8

2019 to 2020 Change: 0

7. Minneapolis-St. Paul

Pioneer Press

2019 Rank: 1

2019 to 2020 Change: -6

6. Phoenix

TripSavvy

2019 Rank: 13

2019 to 2020 Change: +7

5. Tampa-St. Petersburg

Parade

2019 Rank: 12

2019 to 2020 Change: +7

4. Riverside-San Bernardino

Flickr

2019 Rank: 7

2019 to 2020 Change: +3

3. San Diego

Wikipedia

2019 Rank: 2

2019 to 2020 Change: -1

2. Seattle-Tacoma

10Best

2019 Rank: 5

2019 to 2020 Change: +3

1. Orlando

10best

2019 Rank: 6

2019 to 2020 Change: +5

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Texas and Florida Add The Most New Jobs in 2019

Each month, the US Bureau of Labor Statistics (BLS) releases a monthly Metropolitan Area Employment and Unemployment Report, which includes the current total number of civilian labor force and unemployment by state and metropolitan area (MSA), as well as the same metrics 12 months prior in order to determine the change in the labor force and unemployment over the past year.

The employment situation in a market is an indication of the demand for real estate. People need jobs to pay living expenses, which includes paying for rent. The more people with jobs in the market, the more potential “customers” for us as apartment investors.

BLS releases a lot of relevant economic data on a month basis, which can be found here. You can also view archived new releases for previous years here.

50 states, the District of Columbia, Puerto Rico, and 396 MSAs are included in the data.

Currently, we focus on the Texas and Florida markets for our deals. Here are some interest highlights from their December 2019 report about those two states:

  • 10 states added over 100,000 jobs
  • #1 was Texas (253,056 jobs) and #2 was Florida (178,978 jobs)
  • 31 states had a reduction in unemployment
  • 19 markets added over 25,000 jobs
  • The #2 market (Dallas-Fort Worth-Arlington) added more jobs than the total number of jobs added in 40 out of 50 states
  • The #10 market (Orlando-Kissimmee-Sanford) added more jobs than the total number of jobs added in 34 out of 50 states
  • The #19 market (Tampa-St. Petersburg-Clearwater) added more jobs than the total number of jobs added in 26 out of 50 states
  • 275 out of 396 markets had a reduction in unemployment

Here is the BLS data for our markets from December 2018 to December 2019

State of Texas

Visit Austin

  • New Jobs Added Ranking: #1 out of 50 states
  • Total Jobs 12/2018: 13,975,415
  • Total Jobs 12/2019: 14,228,471
  • Total Jobs Added: 253,056
  • Job Growth: 1.81%
  • Total Unemployment 12/2018: 501,787
  • Total Unemployment 12/2019: 470,429
  • Unemployment Rate 12/2018: 3.6%
  • Unemployment Rate 12/2019: 3.3%
  • Change in Unemployment: -0.3%

State of Florida

Florida Politics

  • New Jobs Added Ranking: #2 out of 50 states
  • Total Jobs 12/2018: 10,284,492
  • Total Jobs 12/2019: 10,463,470
  • Total Jobs Added: 178,978
  • Job Growth: 1.74%
  • Total Unemployment 12/2018: 338,922
  • Total Unemployment 12/2019: 265,350
  • Unemployment Rate 12/2018: 3.3%
  • Unemployment Rate 12/2019: 2.5%
  • Change in Unemployment: -0.8%

Dallas-Fort Worth-Arlington MSA

D Magazine

  • New Jobs Added Ranking: #2 out of 396 MSAs
  • Total Jobs 12/2018: 3,956,122
  • Total Jobs 12/2019: 4,054,399
  • Total Jobs Added: 98,277
  • Job Growth: 2.48%
  • Total Unemployment 12/2018: 128,944
  • Total Unemployment 12/2019: 117,547
  • Unemployment Rate 12/2018: 3.3%
  • Unemployment Rate 12/2019: 2.9%
  • Change in Unemployment: -0.4%

Orlando-Kissimmee-Sanford MSA

10best.com

  • New Jobs Added Ranking: #10 out of 396 MSAs
  • Total Jobs 12/2018: 1,348,435
  • Total Jobs 12/2019: 1,386,798
  • Total Jobs Added: 38,363
  • Job Growth: 2.85%
  • Total Unemployment 12/2018: 40,421
  • Total Unemployment 12/2019: 33,987
  • Unemployment Rate 12/2018: 3.0%
  • Unemployment Rate 12/2019: 2.5%
  • Change in Unemployment: -0.5%

Tampa-St. Petersburg-Clearwater

Parade

  • New Jobs Added Ranking: #19 out of 396 MSAs
  • Total Jobs 12/2018: 1,531,930
  • Total Jobs 12/2019: 1,558,569
  • Total Jobs Added: 26,639
  • Job Growth: 1.74%
  • Total Unemployment 12/2018: 49,086
  • Total Unemployment 12/2019: 41,111
  • Unemployment Rate 12/2018: 3.2%
  •  Unemployment Rate 12/2019: 2.6%
  • Change in Unemployment: -0.6%

You can view the full report for all US states and markets by clicking here.

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

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10 Large Cities with Most Explosive Rent Growth in 2019

One of the most important factors used to evaluate a potential target investment market is supply and demand.

The demand side of the equation is measured in part by the change in median rent year-over-year – an increase in median rent indicates an increase in the demand for rental properties in a particular area, and vice versa.

Ideally, the change in rent for your target market is positive (obviously) and is greater than the average national change in rent. From January 2019 to January 2020, the average national change in rent was +1.6% (compared to +1.6% and +2.6% over the same time period in 2018 and 2017 respectively). This would indicate that rent growth is continuing to be sluggish on a national scale compared to previous years. However, the top markets in the country are continuing to outpace the current and past two year averages.

Overall, 217 of the 712 US cities experienced rent growth of 2% of more. 96 had rent growth of 3% or more. 36 had rent growth of 4% of more. And 12 had rent growth of 5% or more. The city with the greatest rent growth was the city of Madison in Alabama (population of 47,959) – 6.9%.

Here are the top 10 large US cities where rents increased the most from January 2019 to January 2020:

 

National Averages

  • Median 1 BR Rent: $962
  • Median 2 BR Rent: $1,193
  • Y/Y Change: 1.6%

10. Arlington, TX

Loews Hotels

  • Median 1 BR Rent: $1,016
  • Median 2 BR Rent: $1,262
  • Y/Y Change: 2.6%

9. Plano, TX

NCTCOG.org

  • Median 1 BR Rent: $1,186
  • Median 2 BR Rent: $1,474
  • Y/Y Change: 2.8%

8. Stockton, CA

Downtown Stockton Alliance

  • Median 1 BR Rent: $994
  • Median 2 BR Rent: $1,304
  • Y/Y Change: 2.8%

7. Las Vegas, NV

Destination360

  • Median 1 BR Rent: $963
  • Median 2 BR Rent: $1,193
  • Y/Y Change: 3.2%

6. Austin, TX

Visit Austin

  • Median 1 BR Rent: $1,191
  • Median 2 BR Rent: $1,470
  • Y/Y Change: 3.3%

5. Nashville, TN

Andrew Jackson’s Hermitage 

  • Median 1 BR Rent: $947
  • Median 2 BR Rent: $1,163
  • Y/Y Change: 3.3%

4. Colorado Springs, CO

DowntownCS.com

  • Median 1 BR Rent: $986
  • Median 2 BR Rent: $1,272
  • Y/Y Change: 3.3%

3. Phoenix, AZ

TripSavvy

  • Median 1 BR Rent: $883
  • Median 2 BR Rent: $1,101
  • Y/Y Change: 3.7%

2. Henderson, NV

 

Wikipedia

  • Median 1 BR Rent: $1,127
  • Median 2 BR Rent: $1,397
  • Y/Y Change: 4.2%

1. Mesa, AZ

 

  • Median 1 BR Rent: $915
  • Median 2 BR Rent: $1,140
  • Y/Y Change: 5.1%

If you are investing in one of these markets, do not assume that the future rent growth will be the same. Always conservatively estimate the annual income growth factor – 2% to 3% maximum. That way, if the rental rates slow, you’ll still hit your projections. And if the rental rates continue or increase, you’ll exceed your projections, which means more money for you and your investors.

 

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2019 H2 Cap Rates of the Nation’s Top 50 Multifamily Markets

Every 6 months, CBRE releases their bi-annual North American Cap Rate Survey, which calculates cap rates and expected return on cost based on recent transactions and interactions with active investors in markets across the country.

Download CBRE’s second half of 2019 report here.

The cap rate is the rate of return based on the income that an asset is expected to generate More specifically, it is the ratio of the net operating income and the current market value of the asset (cap rate = net operating income / current market value). Generally, at the same net operating income, the higher the cap rate, the lower the property value.

In multifamily investing, the cap rate is used by appraisers in order to determine the value of an apartment building being purchased or sold. Therefore, as investors, the cap rate can be used on the front end to help us determine a fair purchase price – although it is not as important as cash-on-cash (CoC) return and, if you’re an apartment syndicator, the internal rate of return (IRR). However, the cap rate is very important on the back end, because it is used to determine how much the investor or syndicator can sell their asset for, which determines how much profit they can make at sale.

 

Here are the cap rates at the end of the second half of 2019 of the nation’s top 50 tier I, II, and III multifamily markets for Class A, B, and C asset classes .

 

Tier I Markets

Tier 1 multifamily cap rate

CBRE Research

 

Tier II Markets

Tier 2 multifamily cap rate

CBRE Research

 

Tier III Markets

Tier 3 multifamily cap rate

CBRE Research

 

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