- Institutional Multifamily Outlook and Post-Pandemic Investment Strategy - April 7, 2021
- Apartment Rent Index Posts Largest Monthly Increase Since 2017 - April 2, 2021
- CDC Extends Eviction Moratorium Once Again - April 2, 2021
The markets that saw the fastest declines in 2020 are starting to experience the most significant jumps in 2021.
Apartment rents continue to rebound across the country, according to the latest data from Apartment List.
In March, Apartment List’s national index jumped by 1.1%, which was its largest monthly increase going back to the beginning of 2017. That doubled historical growth in the month. In the previous three years, March’s year-over-year rent growth was 0.6%. In addition, the rent growth in March knocks out COVID’s declines in Apartment List’s index.
Recently, Apartment List’s index started growing ahead of seasonal trends. It saw improvement in both pricey coastal markets and smaller cities that have grown popular through the pandemic. The markets that saw the fastest declines in 2020 are starting to experience the most significant jumps in 2021.
While San Francisco is still down 23.2% percent year-over-year, it experienced the largest increase in the country, 3.4%. Rents in the city have now increased by 4.8% over the past two months after falling by an average of 3.4% each month from April through December 2020.
Additionally, Apartment List says that nine of the 10 cities with the sharpest year-over-year declines have had two consecutive months of rising rents. Boston, San Jose, and Washington, DC have experienced rent increases for three consecutive months. Boston grew 2.9% in March, followed by Chicago (2.5%), Seattle (2.2%), New York (0.9%), Washington DC (0.6%).
Even with a rebound in coastal markets, mid-sized markets that have surged during the pandemic continue to hum along. Boise, maybe the poster child for pandemic rent increases, saw prices jump 3.4% this month. Rents are now up by 16.1% year-over-year in the city, which places it in the top spot nationally.
Apartment List says the 10 cities with the fastest year-over-year rent growth all saw prices continue to increase this month. After Boise, Fresno (12%), Greensboro, NC (9%), Gilbert, Az. (9%), Riverside, Calif. (9%), Albuquerque, NM (9%), Tucson, Az. (9%) and Memphis, Tenn. (9%) saw the largest year-over-year rent increases.
Other data sources show some differences. A recent report from Yardi Matrix shows The Inland Empire and Sacramento as the top gainers, with rents up 7.6% and 6.4%, respectively. It shows the markets are also among the top three for occupancy growth year-over-year, with occupancy in the Inland Empire ticking up 2.2% in January and Sacramento showing a 1.2% increase.
Meanwhile, rents in New York, San Jose, and San Francisco remain seriously compressed year-over-year, though their monthly declines have slowed from the summer and fall of 2020. And in cities like Seattle, which showed a 7.7% decline in rent year over year, the struggle continued as tight COVID-19 restrictions dragged on, and tech workers remained decamped elsewhere.
With the federal ban on evictions set to expire in two days, the Centers for Disease Control and Prevention has once again extended the eviction moratorium, this time through June 30. This marks the third time an extension has been granted. The CDC first put the order into effect in September 2020 and was set to conclude at the end of the year. In December, it was then extended for a second time through Jan. 31. Once President Joe Biden went into the office, one of the first acts he made was calling the CDC to extend the moratorium on evictions for non-payment of rent through March 31.
However, many of those in the multifamily industry expressed concern over this decision. In a joint statement from the National Multifamily Housing Council and the National Apartment Association, the groups once again expressed disappointment, much like they did previously back in January. The groups mentioned that housing providers have hit the end of their resources after dealing with eviction moratoriums for more than a year, in addition to the financial distressed brought upon by the pandemic.
“Another extension only serves to exacerbate the challenges facing the rental housing industry and does not address the underlying financial stress of apartment residents, instead of forcing households to accumulate insurmountable levels of debt,” the statement said.
Earlier this month, NMHC released the results of its rent collections report, stating that 80.4 percent of U.S. rental households have made rent payments as of March 6. The report came the same week as the $1.9 trillion COVID-19 relief bill was approved and signed into law by President Biden.
The groups stated that direct financial assistance has shown to be the most effective when it comes to keeping residents safe and securely housed. The almost $50 billion allocated for rental assistance “will prove critical in helping those in need as the country emerges from the pandemic, and we must shift focus from legally uncertain federal eviction moratoriums to swift distribution and continued rental assistance funding,” according to the statement.
Many states and local governments are turning to software, emergency management firms, and advisory services to assist in dispersing billions of dollars in federal funding through the Emergency Rental Assistance Program.
An argument can be made for downward pressure on cap rates for popular assets like industrial and multifamily and recovery types like senior housing and retail.
Rising interest rates are unlikely to push cap rates up this year, counter to what many investors may believe, according to a new analysis from Marcus & Millichap.
The interest rate on ten-year Treasuries has nearly tripled since the end of July when it was at an all-time low near 50 basis points. But rates remain near historical lows, a good sign for investors, according to John Chang, Senior Vice President and Director of Research Services at Marcus & Millichap.
It’s true, Chang says, that there’s been upward pressure on rates for the last six months, and some economists have increased 2021 forecasts to the 8% range.
And “normally that kind of growth—especially when fueled by trillions in stimulus—will put upward pressure on inflation, and of course, the counterbalance on inflation is to push interest rates up,” he says. “But that said, inflation remains exceptionally low,” at a “tame” 1.3%. Generally, the Fed wants to see inflation in the 2% range, according to Chang.
So why exactly are rates rising? “Falling uncertainty and expectations of growth,” Chang said. “Because we can see the light at the end of the pandemic tunnel and the investor market expects growth to be strong in 2021, money is flowing out of safe havens like bonds and Treasuries and into growth investments like the stock market and yes, real estate. That flow of money is putting upward pressure on interest rates”
Chang also challenges the commonly-held investor beliefs that cap rates move with interest rates. “Historically, that’s not true,” he said. “Yes, over decades both have trended together. But when you look at the year to year movement the spread narrows and expands.”
For example, in pre-recession 2007, the yield spread narrowed to just 200 bps, while it opened to 580 bps during the Great Financial Crisis when interest rates went down and cap rates went up.
The current spread is 480 bps, Chang said. “Economists have a bullish outlook for 2021,” he noted. “Liquidity is good and rates low. Investors are increasingly less fearful of the pandemic.”
Chang posits that even if rates rise, they probably won’t push the caps rate up. He says an argument can be made for downward pressure on cap rates for popular assets like industrial and multifamily and recovery types like senior housing and retail.
“I encourage every investor to set aside the idea that interest rates and cap rates will move together,” Chang said. “Focus instead on the outlook for each asset. What’s on the horizon for demand driers and supply risks? That combination can put the long-term context of an asset into a much better perspective.”
Nearly all of the 50 largest metro areas have become less affordable for renters and first-time homebuyers since 2001, forcing low- and moderate-income residents to pay almost 8 percent more of their incomes for housing than two decades ago, according to a new research report from the Mortgage Bankers Association’s Research Institute for Housing America.
The report found that in 2001 a low- and moderate-income household could spend less than 30 percent of its income to rent a median unit in 38 of the largest 50 metropolitan statistical areas. By 2020, that could occur in only 17 metro areas, noted report author Michael Eriksen, West Shell associate professor of real estate at the University of Cincinnati & academic director of the real estate program. Eriksen said in prepared comments the highest- and fastest-growing rents have been in cities with strong employment and population growth that doesn’t have much developable land, primarily due to geography and land-use restrictions.
The report states house prices and rent appreciation have exceeded growth in earnings for many Americans resulting in economic obstacles for both renters and first-time homebuyers. Household median incomes appreciated on average 0.8 percent per year net of inflation during the 20-year time period. During the same timeframe, rents appreciated on average 175 percent faster than median incomes. The area with the largest difference between those two growth rates was Seattle at an estimated 376 percent.
The population-weighted median rent for a two-bedroom house across those 50 MSAs is projected to be $1,629 per month this year, up 4.3 percent from 2020, but lower than the 4.6 projected increase that occurred in 2020. The report notes that’s higher than the average 2.0 percent increase in projected rents between 2001 and 2020.
“This is the seventh consecutive year rents were projected to increase faster than inflation,” the report stated.
Researchers found the projected growth of median rent range from Sacramento with a 10.5 percent increase to a 7.4 percent decrease in Seattle, which was experiencing new supply in recent years that could have had an impact. Eight of the 10 cities projected to see the highest appreciation of median rents this year are cities with below-average levels and appreciation since 2001 including Richmond, Va., and Buffalo, N.Y., which are both projected to rise by 10.2 percent. Researchers point out those increases could be an impact from the pandemic as renters left higher-priced cities for more affordable markets.
The researchers stated increases in gross rents don’t necessarily mean higher profits for property owners. A chart in the report provided to Multi-Housing News compares growth rates of gross rents with net operating income and multifamily property values since 2001, not adjusted for inflation. It stated NOI on average increased 3.6 percent between 2001 and 2020, less than the 4.3 percent increase in gross rents paid by tenants during the same time period. With exceptions for the Great Recession in 2009 and the current pandemic, multifamily capital market trends have been favorable resulting in higher valuations per unit of NOI. Multifamily property values increased an average of 6.3 percent for the time period except for a 30 percent decrease in 2009. Between 2009 and 2019, they increased an average of 10.7 percent annually, “with a 1.3 percent further appreciation in 2020 despite decreases in NOI associated with the COVID-19 pandemic.”
Cities that had the highest median household incomes also had the highest rents with annual median rents coming in on average $324 higher for every $1,000 increase in household median incomes. For households earning 60 percent of the MSAs median income in 2020, an additional $3,228 per year was needed to spend less than 30 percent of its income on a median rental unit.
The report found more than 11 million renter households had income less than 60 percent AMI in 2019, representing 43 percent of all renters in those cities with the highest percentage found in Cincinnati at 51 percent. Renter households earning less than 60 percent AMI had grown by 1.4 million households between 2005 and 2019 for a growth rate of 14.8 percent. The number of households earning between 60 percent and 80 percent AMI increased 22.2 percent during the same time period.
Almost 40 percent of subsidized rents under Low-Income Housing Tax Credit and Housing Choice Vouchers, the largest rental subsidy programs, lived in a neighborhood with a poverty rate greater than 20 percent in 2019. The report stated in 2020 there was less than one rental subsidy available for every three households that would otherwise be eligible because of their incomes. Meanwhile, 67 percent of occupied public housing units are still located in high-poverty neighborhoods.
MBA’s RIHA reported the federal government spent an estimated $52 billion subsidizing the rent of lower- and middle-income households in 2019. During the recent presidential campaign, then-Democratic candidate Joe Biden issued a wide-ranging plan to invest up to $640 billion in federal funds to improve public housing and provide various forms of rental assistance to a larger number of Americans, including issuing Section 8 housing vouchers to every eligible family and increasing funding. The $1.9 trillion American Rescue Plan Act recently approved by Congress and signed into law by President Biden includes $40 billion in essential housing and homelessness assistance, including $26 billion for rental assistance and $5 billion to assist people who are homeless.
Among individual markets across the country, there’s a nearly 30 percentage point difference between the largest increases and the steepest decreases in rents over the pandemic. For example, Riverside/San Bernardino was the biggest beneficiary, with rents rising 9% over the past year. San Francisco, on the other hand, took the biggest hit, with rents dropping almost 21%.
And while such a wide range in performance among the nation’s metropolitan areas is one thing, the difference can be just as big among neighborhoods in any single one of those metro areas. In Washington, DC, for example, rents jumped more than 10% in one Virginia suburb but plunged 20% in a more urban neighborhood just outside of the District proper.
There are similarly large differences in performance among neighborhoods in and around big cities up and down the coasts. These gateway markets are seeing the greatest bifurcation largely because of significant weakness in their pricey, dense downtown areas, where square footage comes at a premium. Meanwhile, less expensive suburban neighborhoods are still doing relatively well, and apartment operators there are finding that they can still raise rents despite the challenges from COVID-19. Though it’s more pronounced in big gateway markets where the cost of living is high, this urban-suburban divide is a trend seen nationally, driving down prices for urban-dwelling apartment renters – even in the Sun Belt – and increasing pricing in the more affordable, less dense suburbs.
Across major apartment markets, Washington, DC saw the largest rent change disparity among its neighborhoods. Some of the deepest rent cuts in the nation were seen in the District-adjacent Crystal City/Pentagon City submarket, where prices have come down by 20% since the onset of the pandemic. In fact, while the market overall saw rent declines ease a bit in between January and February, this submarket saw declines get deeper. On the other hand, the suburban Fredericksburg/Stafford area of Virginia has seen notable rent growth of 10.5% since February 2020. Despite these performances, rents are still about $400 cheaper in Fredericksburg/Stafford.
In New York’s very expensive Financial District, rents were cut by 23.7% since the start of the pandemic downturn. Meanwhile, rent growth of 4.4% was seen in the Northern Suburbs of Orange and Ulster counties, which is the only New York submarket with monthly prices below $2,400. The range in monthly rents among neighborhoods in New York is the widest in the nation, with the expensive Lower East Side of Manhattan commanding rents that are $2,627 ahead of the least pricey Northern Suburbs. In between, the remainder of the very expensive Manhattan areas logged rent cuts between about 13% and 19%. On the other hand, the only other submarket in New York to see rent growth in 2020 was the Bronx, with an increase of 3.8%.
In Chicago, operators in The Loop cut rents by 18.1% in the year-ending February, while declines were also steep at 12.5% in the Streeterville/River North submarket next door. These are the two most expensive parts of Chicago, with monthly prices topping $2,000, and both have experienced steep occupancy declines in recent months. On the other hand, the Cook County-adjacent Merrillville/Portage/Valparaiso area – a northern Indiana suburb where rents are just over $1,000 – saw significant price growth of 9.3% in the past year.
While the rent change spread in San Francisco was pronounced, this market stands out for the fact that not a single submarket logged any rent growth during the pandemic. The deepest decline of 26.9% was seen in Downtown San Francisco, while steep cuts of more than 20% also registered in SoMa and Central San Mateo County. Marin County, north of the San Francisco Peninsula, saw the market’s best performance, but even then, there were cuts of 5.6%. Among the nation’s 50 largest apartment markets, only one other saw a complete absence of growth in 2020, and that was neighboring San Jose. The spread there was slightly less pronounced, with cuts of 22.8% in the worst performing submarket (North Sunnyvale) and cuts of 5.4% in the best (East San Jose). The range in monthly rents across the three Bay Area markets is relatively small at about $600 to $620 because even the lowest-priced submarkets are still expensive. Not a single neighborhood in the Bay Area rents out apartments for less than $1,900.
Atlanta’s story is the opposite of the Bay Area’s. The Georgia market was a top performer for rent growth overall during the pandemic, and its southern suburbs accounted for six of the nation’s 10 best rent growth performances in the past year. The best five showings in the nation were seen in Henry County (16.2%), Far South Atlanta Suburbs (14.8%), Southeast DeKalb County (14.5%), Stone Mountain (13.3%), and South Fulton County (12.5%). Atlanta’s Clayton County ranked at #8 in the U.S. with a growth of 11.4%. All of these top-performing Atlanta submarkets have monthly rental rates that are at or below $1,300. On the other hand, trouble spots in Atlanta are the more expensive urban core neighborhoods that have received lots of new supply over the past decade and rely on office-based employment. Rent cuts of roughly 1% to 3% were seen in Midtown Atlanta, Northeast Atlanta, West Atlanta, Buckhead, Briarcliff, and Dunwoody, where rents are between $1,400 and $1,800.
Among this group of metros with a 20 to 30 percentage point differential in neighborhood rent change levels, the average effective asking price difference is also sizable. On average, rents in the most expensive submarkets of metros in this group are $1,225 ahead of the least pricey areas.
But in many of the nation’s metros where the cost of living isn’t as high, neighborhood performances in the past year are more uniform. Among the nation’s markets with the least variation in neighborhood rent change – between only about 3 to 7 percentage points – the average monthly price difference among submarkets is much tighter as well. In this group, rents in the most expensive submarkets are only about $422 away from the most affordable.
Nowhere was rent change in the COVID-19 era more uniform than in Providence. Each submarket in Providence logged rent growth in 2020. The strongest (5.2%) was in Bristol County, while the softest growth (2.8%) was in the Providence submarket. The difference in average monthly rents between Providence’s most expensive submarket (Bristol County) and the least expensive (Providence) was only $84, the smallest in the nation.
Contributing to the narrow spread in Providence’s submarket performances and average rents is the absence of a true downtown in this Boston-adjacent metro. That’s a characteristic shared by many other markets having the smallest differences in neighborhood rent performances, including the Los Angeles-adjacent Anaheim and Miami-adjacent West Palm Beach. One could argue that two markets – Greensboro/Winston-Salem and Raleigh/Durham – have two lesser developed downtown areas across their combined metros.
Rent growth in Virginia Beach, also lacking a distinct downtown district, was one of the best among the nation’s largest apartment markets during the pandemic. This market also avoided rent cuts across all submarkets during the past year. Federal government jobs and private-industry defense-related employment that anchors the area helped minimize economic fallout in 2020, keeping occupancy and rent growth well above national and South region norms. The most solid rent growth here was in the Virginia Beach East, Newport News, and Hampton/Poquoson neighborhoods, with each seeing rents, climb around 6% to 8%. The softest showing was in Southern Norfolk, with milder growth of 4.1%. In Virginia Beach, the difference between the most expensive Chesapeake submarket and the least pricey Northern Norfolk is modest at $280.
Two other markets with a tight spread in neighborhood rent change levels – Greensboro/Winston-Salem and Las Vegas – were among the national top 10 for overall rent growth in the past year. In Greensboro/Winston-Salem, all submarkets saw rent growth between 4.4% (North Winston-Salem and North Greensboro) and 8.2% (High Point). Only one submarket – Burlington – garners rental rates that are above the $1,000 mark.
In Las Vegas, each submarket also saw rents grow during the pandemic, with an upturn of 8.9% in Sunrise Manor ranking as the highest, while the more expensive Southwest Las Vegas, Green Valley, South Las Vegas, and Summerlin/The Lakes all saw increases between 2% and 4% in the past year. The difference between rents in the most expensive submarket (Summerlin/The Lakes) and the least expensive (Central Las Vegas) is a little over $450.
Why has the presence of a downtown area affected rent change patterns in the metro so much throughout COVID-19? Urban core submarkets have been particularly impacted by job loss in the past year. Offices have closed and more employees are working from home, removing the location-specific attraction to downtowns. Additionally, when downtown bars and restaurants closed, professionals that had been previously attracted to the quality of life that urban cores afford started to dissolve their households – either by choice or because a laid-off roommate could no longer pay rent.
Further complicating those dynamics, urban core districts have seen intense apartment building activity in recent years, leaving these areas at a disadvantage during times of depressed demand. The already elevated construction levels in urban cores are scheduled to increase further, making full occupancy goals – and therefore pricing power – more difficult, at least until jobs return and workers go back into the office.
Not surprisingly industrial and multifamily are among the sectors where prices are expected to increase.
Investors are most bullish on the industrial sector as 2021 marches on, followed by the self-storage and multifamily sectors, according to a recent survey of 500 commercial real estate investors by Marcus & Millichap.
Investors were asked to consider only the property in their current real estate portfolio in answering whether they expect property values to increase, decrease, or remain the same in 12 months, according to Marcus & Millichap senior vice president and director of research services John Chang in a recent video. The survey examined the apartment, hotel, industrial, office, retail, self-storage, and senior housing sectors and grouped results into three primary clusters: momentum investments, recovery investments, and uncertainty investments.
Multifamily, industrial, and self-storage property types comprised the first cluster of momentum investments, which investors expect will maintain low vacancy rates and high rent collections. Sixty-four percent of apartment investors, 72% of industrial investors, and 71% of self-storage investors expect values to rise this year. Of those sectors, industrial had the highest investor outlook, with an 8.2% average increase in expected value and pricing, followed by self-storage at 6.5% and multifamily, which has stabilized significantly since the fourth quarter of 2020, at 5.2%.
Industrial has been on a hot streak throughout the duration of the COVID-19 pandemic as firms scramble to bolster e-commerce and last-mile delivery strategies. The sector posted 8.3% annual growth—the top among all property types—in 2020, according to Real Capital Analytics. The pipeline for industrial also remains strong, particularly in cities like Indianapolis and Memphis, with new research from CommercialEdge showing that nearly 28 million square feet has already been delivered in 2021 with another 337.8 million square feet under construction.
The second cluster—recovery investors—includes hotels and senior housing, both property types that took a “significant hit” from the COVID-19 pandemic and lost both income and value. Around 59% of senior housing investors surveyed believe prices will rise 6.7% this year, according to Chang, while 47% of hotel investors think hotel prices will increase, generating an average lift of 4.3%.
Office and retail round out the third category of uncertainty investments. Chang noted that “different subtypes of retail in different parts of the country face very different realities,” and said that 30% of retail investors surveyed expect values to rise.
“But I need to point out, you cannot paint the entire retail sector with a single brush,” Chang said. “There is simply too much variance within the sector.”
In the office sector, only 27% of surveyed investors expect a price gain over the next 12 months, resulting in an average value decline of 2.7%.
“The big question is what percentage of workers will return to the office after the pandemic ends and whether office space needs have materially changed,” Chang said. He noted, however, that the results are part of an investor survey and not a forecast, and are focused on the immediate short-term of one year. For that reason, “I encourage investors to look at the longer-term drivers and keep their eyes on the horizon,” he said.
Effective asking rents for U.S. apartments climbed 0.6% in February, rising at the fastest single-month pace seen since the middle of 2019. The increase in pricing power proved widespread, as 140 of the 150 metros tracked in RealPage’s core data set logged at least a little rent growth.
Even the country’s gateway metros, where rents were slashed in 2020, experienced at least slight rent bumps in February. Pricing climbed 0.6% to 0.7% during the past month in Boston, Chicago, Los Angeles, and San Jose, while smaller increases of 0.1% to 0.3% were seen in San Francisco, New York, Washington, DC, and Seattle.
Average monthly rent across the U.S. now stands at $1,422.
Influencing results for the past month, leasing activity is still occurring at a time when seasonal weakness in demand is normal. Preliminary calculations show the nation’s occupied apartment count up by more than 30,000 units in February, whereas there typically is no or very little net demand when U.S. temperatures are at their lowest.
Looking to the bigger picture, the annual change in effective asking rents remains negative at -0.9%. The decline primarily reflects huge price cuts in the gateway locales. Rents are off by 14% to 21% year-over-year in San Francisco, San Jose, and New York, by 7% to 8% in Seattle, Boston, and Oakland, and by roughly 5% across Washington, DC, Los Angeles, and Chicago.
At the other end of the performance spectrum, effective asking rents are up sharply year-over-year in some locations. Riverside/San Bernardino leads the way, registering 9% rent growth. Sacramento and Memphis also are doing quite well, as prices are up 6.7% and 6.5%, respectively, in those two spots.
Other metros posting annual rent growth of at least 4% include Greensboro/Winston-Salem, Virginia Beach, Phoenix, Las Vegas, Detroit, Tampa and Atlanta.
Atlanta’s appearance among the rent growth leaders is one of the more notable performance results seen in early 2021. All but a handful of the jobs lost in Atlanta back in Spring 2020 now have been replaced. In turn, there’s been strong demand for apartments at a time when ongoing construction, now at slightly fewer than 15,000 units, has cooled to a five-year low.
U.S. apartment occupancy has been hovering between 95% and 96% since late 2019. The February figure of 95.4% matches January’s result and is basically in line with the February 2020 level of 95.5%.
Despite a tumultuous 2020, a year in which the country was turned upside down by a deadly pandemic that led to economic upheaval, the commercial real estate lending community overwhelmingly believes brighter days are ahead on the business front.
France Media’s 2021 forecast survey of direct lenders and financial intermediaries nationally reveals that 84 percent of respondents expect the total dollar amount of commercial and multifamily loans closed by their firm this year to increase when compared with 2020 deal volume.
Only 6 percent of survey respondents anticipate business volume will decrease at their firm on a year-over-year basis, and 10 percent project business volume will remain the same.
“I expect our loan volume to increase by 50 percent in 2021 versus 2020, as many lenders were unable to make decisions or even set loan policies during COVID,” says Ben Kadish, president of Maverick Commercial Mortgage, a Chicago-based mortgage banking firm.
“As the vaccine process expands, and the world opens up, lending for more property types will expand. Some lenders will start looking at retail, office, and hospitality now.”
As of late February, the death toll in the United States from COVID-19 had surpassed 500,000, according to Johns Hopkins University. U.S. President Joe Biden has said that it will take several months at a minimum to get most Americans vaccinated because the process is such a massive undertaking.
Among survey respondents who anticipate an increase in total loan volume in 2021, nearly half expect growth to exceed 20 percent. Approximately one-quarter expect growth to range from 6 to 10 percent.
Survey participants were asked which property sector(s) they believe provide the most attractive financing opportunities for lenders today.
Multifamily was the most frequently cited property sector by respondents (93 percent), followed by industrial (76 percent), mixed-use (21 percent), office (19 percent), and retail (15 percent).
Not a single lender or financial intermediary identified the hotel sector as being among the most attractive financing opportunities.
“Financing for apartments, mobile home parks, and self-storage assets is measurably more attractive than for any other category presently,” says Kadish. “Industrial is also attracting strong interest from lenders.”
On the flip side, survey participants were also asked which property sector(s) they believe provide the least attractive financing opportunities for lenders.
An overwhelming number of respondents (91 percent) cited hotels, followed by retail (60 percent), office (22 percent), mixed-use (7 percent), industrial (6 percent), and multifamily (3 percent).
“Office, hospitality, and retail are in the Wild West as far as the wide range of loan quotes varying by size, sponsor, location, and loan-to-value,” observes Kadish. “The same loan could receive a quote from a life company or a hard money lender, depending on the location and size.”
Private-label CMBS issuance in the United States totaled $56 billion in 2020, down nearly 43 percent from the $96.7 billion of issuance in 2019, according to Trepp LLC. The New York City-based data analytics firm projects CMBS issuance to reach $78 billion in 2021.
Participants in the France Media survey were much less bullish on the near-term prospects for the CMBS market than Trepp. The largest group (22 percent) expects total issuance to be less than $49 billion in 2021, followed by 18 percent who believe it will range between $50 billion and $59 billion, and 17 percent who expect issuance to range from $80 billion to $89 billion.
There was a statistical tie (15 percent) between respondents who expect CMBS issuance to range from $60 billion to $69 billion and those who project issuance of $70 billion to $79 billion, according to the survey results.
Three-quarters of the lenders and financial intermediaries surveyed expect interest rates to remain relatively steady in 2021, 20 percent project rates will increase, 3 percent indicate they will decrease and under 2 percent are uncertain.
Where will the yield on the 10-year U.S. Treasury note stand at the end of 2021? About two-thirds of respondents (67 percent) indicated that they expected the 10-year Treasury yield to finish the year somewhere between 1 percent and 1.5 percent.
At the close of business on Friday, Feb. 26, the 10-year Treasury yield stood at 1.44 percent following a rapid spike, its highest mark in more than a year. That figure, which represents an 88-basis-point increase from the nadir of 0.52 percent in early August, marks the most current data that was available at press time.
Two of the hardest-hit property types from COVID-19 continue to be the lodging and retail/restaurant sectors due to factors such as travel restrictions, safety protocols, and government bans on in-person restaurant dining.
Lenders and financial intermediaries were asked to provide their best guesses as to how long it will take for each sector to return to pre-pandemic levels of business activity.
Some 36 percent of respondents think the hotel sector will need three years or longer to recover. Another 31 percent believe it will take two years to return to pre-pandemic levels of business.
Meanwhile, 41 percent of survey respondents indicate that it will take two years for businesses in the retail and restaurant sectors to return to pre-pandemic levels of business. According to the National Restaurant Association, more than 110,000 eating and drinking establishments closed in 2020 either temporarily or for good.
In the write-in portion of the survey, lenders and financial intermediaries were asked to highlight what they see as the greatest opportunities and/or challenges facing the commercial real estate industry in 2021. The question garnered nearly 40 write-in responses from industry professionals who had the option to remain anonymous or provide their names.
Charles Krawitz, vice president of commercial lending and loan trading with Chicago-based Alliant Credit Union, believes that falling occupancies and rental rates across most markets and all asset classes pose a major challenge to property owners today. “Borrowers will need to envision entirely new uses/concepts for their assets, and invest heavily to reposition properties for success in a very different world,” he states.
Daniel Hartnett, senior director of capital markets for Greysteel, wrote that the greatest opportunity in commercial real estate this year will be in some of the asset classes that have either been overlooked or passed over because of pandemic-related “drop-offs” [in real estate fundamentals].
Hotel and core retail assets will rebound once the vaccine has been fully deployed and the market comes back, Hartnett believes. “These are the best yield pickups if the basis is correct. We are also bullish on the build-to-rent, single-family residential product, as institutional capital is aggressively chasing the space. We expect it to continue to be strong through 2021.”
Mike Caffrey, president of Overland Park, Kansas-based Caffrey & Co. LLC, says the biggest challenge is forecasting the future for entertainment venues, travel-related enterprises such as the airlines and hospitality, and sporting events. But the uncertainties surrounding commercial real estate go much deeper, he says.
“Did the pandemic that required people to work from home permanently reshape demand for office space? When office leases expire, will the tenants renew, downsize or go to the work-from-home model? Has the acceleration of online retail purchases forever reduced the demand for retail storefronts? Will densely populated communities such as New York City permanently lose population? These concerns make it challenging to forecast future demand for many sectors of commercial real estate,” wrote Caffrey.
Jonathan “JB” Kieswetter, president of California-based Grace Capital Group, was succinct in his assessment of the current situation. He says the biggest challenge is “getting businesses back to work so the consumer is back in action.”