Nurul Hana Adi Maimun

The largest U.S. apartment landlords are betting that hordes of millennials streaming into cities will keep pushing rents sky-high.

But an expected spike in new supply in some key markets suggests their wager might be shakier than they thought.

After a five-year boom in which rents have jumped by about 20% nationwide, some of the nation’s biggest cities—New York, San Francisco, Seattle and Boston among them—are beginning to see slower increases. Annual rent growth for high-end urban apartments peaked at nearly 8% at the end of 2011 and has since slowed to just over 3%, according to MPF Research, which tracks the apartment market.

The downdraft is likely to become more pronounced as many of these cities see increases in the number of new apartments being delivered in 2016 and 2017. In 25 of the largest U.S. cities, multifamily permits in urban areas were up 39% in 2015 compared with a year earlier, according to a study by housing-research firm Zelman & Associates.

New York, for example, is poised to see 2.6 times more apartments come online in the next year than the historical average, according to the analysis. Boston is likely to see 2.5 times as much supply growth as usual, while Philadelphia is bracing for twice the usual supply increase.

When a number of new buildings compete to attract renters in a neighborhood, developers often offer generous concessions to help lure them, such as one or two months of free rent. That forces owners of existing buildings to lower rents or risk losing tenants, placing downward pressure on rents across the market.

After the recession, “everyone rushed into the cities, land prices got bid up, construction got more expensive, so what you’re seeing is a lot of new supply coming on at the high end,” said Alexander Goldfarb, an analyst at Sandler O’Neill + Partners. “You throw on a bunch more supply and the market really feels it.”

The slowdown already is beginning to be reflected in company results. This month, Equity Residential, the nation’s largest publicly traded landlord, lowered expectations for revenue growth this year, saying it was seeing more sluggishness than expected in New York and San Francisco. The company said it expects revenue to increase between 4% and 4.5% for the full year of 2016, down from previous expectations of 4.5% to 5%, because it isn’t getting the rents it anticipated on new leases.

The company’s stock plunged 9% in the days following the announcement and has since recovered to about 5% below where it was trading before.

Essex Property Trust Inc. saw revenue decline 2.2% for the San Francisco area compared with the fourth quarter, as the market in the Bay Area proved softer than expected, although overall revenue still increased 1.1%. valonBay Communities Inc. said New York rents grew by about 2% in the first quarter, half the pace at the same time last year. Rents in Northern California grew by 6%, compared with 11% in 2015. Overall, the company said rents grew 3.7% in the first quarter and 4.2% in April, below expectations of 4.5% rent growth this year.

Economists say the overall apartment market remains solid. Rents are continuing to rise quickly for more moderately priced apartments in the suburbs, tempering the urban slowdown.

But while average rent growth across the U.S. stood at 5% in the first quarter, it is expected to cool to 4% by the end of the year, according to MPF.

The largest apartment companies, which have enjoyed strong rent growth in big-city markets over the past five years, are likely to see rents in those areas grow tepidly or flatten, analysts say, which hurts them because their portfolios are disproportionately concentrated in areas with the most supply coming online.

According to Zelman & Associates, new apartment completions in the neighborhoods where Equity Residential’s portfolio is concentrated, such as Manhattan’s Midtown West, are forecast to increase 57% in 2016 compared with 2015. AvalonBay is likely to see a 50% increase in new supply in the neighborhoods where it has the strongest presence. “You can lean on the millennial argument…you can spin a story of how demand will absorb all of this,” said Dennis McGill, director of research at Zelman & Associates. “Demand is not going to change by 50% in a year.” Overall, shares of publicly traded apartment companies are down 6% in 2016, according to Mr. Goldfarb at Sandler O’Neill. Student-housing companies, in comparison, are up 17%, while mall owners are up 4% and office companies are up 2%. Analysts say it could take markets like New York years to recover. Washington saw a surge in apartment completions four years ago and rent growth remains nearly flat. Some analysts are urging apartment companies to place more emphasis on close-in suburbs with good job growth.

Equity Residential is especially exposed to a slowdown. The company sold a $5.4 billion chunk of its suburban portfolio last year to Starwood Capital Group, choosing to focus on cities, where executives say there is more demand from young, affluent renters and higher construction barriers. Equity Residential has no intention of switching course. “The demand to live in these high-density urban markets remains very strong from both millennials and aging baby boomers,” wrote David Neithercut, president and chief executive of Equity Residential, in an email message. “This gives us great confidence that we are right where we want to be for the long term.”

Source: realestate_iq

Blackstone Real Estate Partners confirmed this week that its Equity Office affiliate had finalized the acquisition of the two-building Market Center office complex in downtown San Francisco. The sale price was not disclosed.

Formerly known as Chevron Towers when it served as the oil company’s headquarters, the office complex totals 752,738 square feet and was 93% leased at the time of sale. Major tenants include Uber, Tibco Software, PNC Bank and the Bank of San Francisco.

Following the acquisition, Equity Office plans to move its Northern California regional headquarters to the location and begin a major upgrade program that will entail creating new tenant suites more suited for today’s popular creative workspace designs. “The opportunity exists to add value to Market Center with a strong focus on innovation as we deliver a new workplace setting that meets the dynamic needs of today’s companies,” said Frank Campbell, managing director for Equity Office’s western region.

John Hancock Real Estate, the U.S. division of Manulife Financial, sold the two buildings at 555 and 575 Market St. Hancock had owned the property since September 2010 when it acquired the property for $265 million. Considered a bold move at the time, the deal now appears prescient given the six-year boom in San Francisco’s office market.

The 40-story 575 Market St. was built in 1975 and the smaller 555 Market St. in 1964. The buildings, which had served as the headquarters of Chevron Corp. until 2001, were renovated prior to Hancock’s acquisition.

Equity Office will keep CBRE as the leasing representative for the property. The listing team includes Bill Cumbelich, Tom Poggi and Alexis Walsh. Eastdil Secured represented seller John Hancock, while Blackstone was self-represented in the transaction.

The asset will be held by Blackstone Real Estate Partners VIII, an opportunity fund with a total equity of $15.8 billion that focuses on major property acquisitions in the U.S. and Europe. The fund targets returns of 20% gross levered IRR with average leverage between 60% – 65%.

Both the San Francisco Employees Retirement System and the California State Teachers Retirement System have made $150 million in total commitments to the commingled Blackstone fund.

Source: realestate_iq

The appetite for U.S. real estate continues to flourish, but international buyers are shifting their sights from luxury to less-pricey properties. This may be due to overall higher home prices, along with a stronger U.S. dollar, which both cost foreign buyers more at the negotiating table. There are also fewer nonresident foreigners investing in the market.

“Weaker economic growth throughout the world, devalued foreign currencies and financial market turbulence combined to present significant challenges for foreign buyers over the past year,” said Lawrence Yun, chief economist of the National Association of Realtors (NAR). “While these obstacles led to a cool down in sales from nonresident foreign buyers, the purchases by recent immigrant foreigners rose, resulting in the overall sales dollar volume still being the second highest since 2009.” Foreign buyers purchased $102.6 billion of residential property in the U.S. between April 2015 and March 2016, according to NAR’s annual report on international activity in U.S. real estate. That is a 1.3 percent decline in dollar volume from the previous survey. The number of properties purchased, however, rose 2.8 percent to 214,885. The value of homes bought by foreigners was typically higher than the median price of all U.S. homes.

“The slight drop in dollar volume can probably be accounted for based on the types of properties purchased, and the locations of many of those properties. We’ve seen at least some evidence that foreign buyers — both investors and people just looking for a home — have begun looking beyond expensive markets like San Francisco, New York City and Washington D.C., and buying properties in smaller, less-expensive cities in the Southeast and Midwest,” said Rick Sharga, executive vice president at Ten-X (formerly Auction.com), an online real estate marketplace .
Another major shift was in the makeup of international buyers. Chinese purchasers continued to outpace all others, with their dollar volume exceeding the total of the next four ranked countries combined.

Their dollar volume of sales, at $27.3 billion, was a slight decrease from last year’s survey but was still three times as much as Canadian buyers, who were ranked second. Chinese buyers also bought the most expensive homes at a median price of $542,084. “Although China’s currency modestly weakened versus the U.S. dollar in the past year, it’s much stronger than it was five to 10 years ago, thereby making U.S. properties still appear reasonably affordable over a longer time span,” wrote Yun in the report.
Given today’s volatility in global financial markets, real estate is one of the safest investments available. U.S. real estate in particular is relatively inexpensive compared to properties in Asia. “The explosive growth of the Chinese economy created a very large number of very wealthy people. As that country’s economy has slowed down, those individuals are looking for better investment alternatives, and many have concluded that U.S. real estate is a smart bet,” added Sharga.

London had been a favorite of foreign investors, but the impact of the Brexit vote is already hitting the housing market there. Buyers from the United Kingdom were the fourth-largest consumer of U.S. real estate in the data that was gathered before the Brexit vote. “Sales activity from U.K. buyers could very well subside over the next year depending on how severe the economic fallout is from Britain’s decision to leave the European Union,” added Yun. “However, with economic instability and political turmoil outside of the U.S. likely to persist, the world view of American real estate as a safe investment should keep demand firm even as pressures from a stronger dollar continue to weigh down on affordability.” As for U.S. destinations, five states accounted for half of foreign buyer purchases: Florida, (22 percent), California (15 percent), Texas (10 percent), Arizona and New York (each at 4 percent). Latin Americans, Europeans and Canadians, who historically favor warmer climates, were most prevalent in Florida and Arizona. Asian buyers flocked to California and New York. Texas was more a mix of buyers from Latin American, the Caribbean and Asia. Texas may be more of an investment play, as demand for single-family rentals there remains strong.

Sales to nonresident foreign buyers fell to the lowest dollar volume since 2013. Shares to foreign residents increased. The shares had been evenly split, but higher home prices and the depreciating value of foreign currencies likely played into that dynamic.

“Led by Venezuela (45 percent) and Brazil (24 percent), at least eight countries, including China and Canada, saw double-digit percent increases in the median sales price of a U.S. existing home when measured in their country’s currency,” added Yun.

Source: realestate_iq

Where have all the houses gone? That’s the question economists and, more importantly, would-be homebuyers are asking themselves. Demand is healthy and home values are rising. Owning a home remains a better deal than renting one and mortgage rates are near record lows, meaning borrowing money to buy is cheap. Nevertheless, inventory is scarce and falling. “At a time when rising prices should be inducing inventory, exactly the opposite is happening,” explains Ralph McLaughlin, chief economist at real estate data firm Trulia. “That has been the biggest story in the last six months and it will continue to be a story for the rest of the year.” According to Zillow, also a data firm, in May inventory of low- and middle-tier homes fell 8.9% and 9.7% respectively, compared to a year earlier. Top-tier inventory fell 0.5%. Now that we’re halfway through 2016, here’s a glimpse how the rest of the year is likely to play out:

The Dynamics. Mortgage rates could reach all-time lows. Fitch Ratings expects U.S. mortgage rates to reach all-time lows following the United Kingdom’s vote to leave the European Union. This is because Brexit pushed the Treasury rates that serve as a benchmark for mortgage rates to new lows. The 30-year fixed-rate hit a record low of 3.31% in 2012 and is currently about 3.6%. Low rates could spur demand for homes, as well as a spat of current loan refinancing.

Brexit has drawn new attention to rates, but mortgage have been relatively cheap for so long that economists have finally stopped forecasting a rise. According to a Trulia survey this is in line with average consumers, who rank interest rates a distant third among their housing market concerns–behind finding a home they like and qualifying for a mortgage.

New construction remains slow. In May, groundbreakings stood at an annual rate of 1.138 million, below the 1.5 million needed to get supply back in line with demand. Adding to the pain–most of the homes that have been built in recent years have been for the luxury consumer, rather than lower price starter homes.

It is often asked if Millennials will ever buy homes, but the better question may be will builders ever build homes Millennials can buy? Maybe. Price growth has slowed to about 4% at the top end of the market but has risen to 8% on lower end. (The median home price has risen 5.4%.) Economic theory suggests rising starter home prices should entice new construction in the segment, says McLaughlin.
Homeowners aren’t selling. Meanwhile, people aren’t moving as often, meaning fewer existing homes are coming onto the market. Prices have risen so much that potential sellers can’t afford to buy that next level home in their current neighborhood. McLaughlin calls the phenomenon “gridlock.” While Svenja Gudell, chief economist at Zillow, describes it as a game of musical chairs where someone is left without a seat. Says Nela Richardson, chief economist at web-based broker Redfin: “Yes people can sell their home in a New York or San Francisco minute, but they won’t have anything to buy.” Demand is still strong. Home values are currently appreciating an annual rate of 5%, well above the historical average of around 3% to 3.5% and a pick up from a year ago. Gudell attributes the strength to low inventory, low mortgage rates and a strong labor market. (Yes, the May jobs report was disappointing, but trend is still solid and wages seem to be picking up.) Plus across the country buying remains more attractive than renting. Zillow finds that the current breakeven point for home ownership–the time you would have to live in a house before buying would be financially advantageous over renting–is 1.8 years. Trulia judges that interest rates would need to cross 7% for that national dynamic to change.

What it means for you.

Have your checkbook ready. Right now the typical home is selling in just 42 days; in markets like Denver, Portland and Seattle sales are happening in a week or less. That is the shortest time on market Redfin has seen since it began tracking in 2009 and it is a full week faster than a year ago, meaning this ultra-fast market is speeding up. With no clear supply bump on the horizon this trend is likely to continue.

Be prepared to pay asking. At 95.3% of asking price the average sale-to-list percentage is also the highest Redfin has seen. In some markets, including around San Francisco and other West Coast cities, the sale-to-list percentage is over 100%. In San Francisco homes are selling about 7% over asking price, though that’s down from 10% a year ago. “The faster the market, the more likely the buyer is to overpay,” explains Richardson. “People who need to act quickly can’t negotiate.” Other things to watch.
The Fed. The Federal Reserve isn’t expected to hike short term rates more than once this year, meaning monetary policy will have negligible sway on mortgage rates. However, if markets are caught off guard by a hike there could be some ripple effect, but this is unlikely.

The Election. Brokers are noticing some hesitation to list or buy a home given the uncertainty surrounding the presidential election. At the same time, in a survey of housing economists Zillow found that market forecasts would not be affected or even positively affected if someone like Hillary Clinton were elected. However if someone more outside the mainstream like Donald Trump were to become president (at the time of the survey Ted Cruz and Bernie Sanders were still eligible candidates) the economists’ forecasts would be negatively impacted.

However, a new person occupying the White House is not expected to have a major impact on the overall housing market. Says McLaughlin: “It is a big ogre, it’s tough to move.”

Source: realestate_iq