Notes: The Gray Report Newsletter, June 2 2022
Every week, The Gray Report publishes a video and podcast that covers the latest news, research, and reports from the multifamily industry, commercial real estate markets, and the economy. Starting this week, we will be publishing a blog post with links and notes associated with our weekly video, podcast, and newsletter. These notes may be rougher and more conversational compared to other blog posts and publications from Gray Capital, but they provide additional insight into our ongoing discussion of the most important news and research for apartment investors.
RealPage: Residential Permitting Pauses but Multifamily Starts Soar
- Single family permits are down by 3.6% since last year, but multifamily permits are up by 16.3%.
- But permits are just stage one of a process that takes a year-and-a-half to two years to complete.
- Starts are stage two, they’ve broken ground on construction. Single family starts are up 3.7%, and multifamily starts are up 42.3% since last year.
- In the third stage, completions, you see a different moment. Multifamily completions are down 33.3% since last year, and single family completions are up by 0.7%. Both multifamily and single family completions were down for the month, with single family down 4.9% and multifamily down 6.6%.
- There are a lot of confounding variables here to be able to fully explain completions. The majority of these houses and apartments were started a year or more ago, the obstacles to construction continue to make building slower and more expensive, and there’s a lot of regional variability as well.
- What was it that Jay said about the Lansing builders market? They don’t have a big core of skilled labor because it was drawn to other jobs or something?
- While it’s harder to get behind the completion numbers, they do tell a story in and of themselves. A third less multifamily units were built last year, and just under one percent more single family homes were built compared to the year before.
- New housing supply is on the way, and it’s been on the way for a long time. But it’s not here yet. There still are not enough houses and not enough apartments to satisfy demand. I almost said that there’s not enough “being built,” but at least there’s some promise in the pipeline.
- There are a lot of confounding variables here to be able to fully explain completions. The majority of these houses and apartments were started a year or more ago, the obstacles to construction continue to make building slower and more expensive, and there’s a lot of regional variability as well.
- The annual rate for multifamily permitting was up in all of the nation’s four Census regions from April 2021, with the largest annual increase in the Midwest region (up 69.6% to 105,000 units). The Northeast region’s annualized rate increased 15.8% to 88,000 units. Meanwhile, the West region increased by 9.2% to 166,000 units, while the South increased by 8.4% to 298,000 units from last April. Compared to the previous month, permitting fell by 16.4% in the Northeast and 4.2% in the West but was up 6.7% in the South and 1.7% in the Midwest region.
- Great news for new multifamily supply in the Midwest, though in absolute terms, that 69.6% increase brings it up to 105,000, which is nearly 3 times smaller than the 298,000 units permitted in the South, which increased by only 8.4%.
- My guiding question for these reports: Will slow home sales + high home prices drive multifamily growth, or are we at an intermediate point in a changing housing market?
S&P Corelogic: Case-Schiller Home Price Index
- Home prices rose in April and continue the rapid growth that began in the early days of the pandemic.
- Firstly, pending home sales are down about 3.9% according to the National Association of Realtors, which “[m]ark[s] six consecutive months of declines and . . . the slowest pace in nearly a decade.”
- There’s a few good reasons for this, and I think the clearest and most recent reason for this is that rising mortgage rates have made home buyers less interested in buying and home sellers less interested in selling.
- Sellers might still get a decent price on their home, but if they’re looking to buy another home after that, they’re going to have to get a loan that’s pricier than they want.
- In addition to the practical math of rising mortgage payments, I think there’s a little bit of a psychological element here. After two years of a white-hot market for single family homes, maybe a seller is less interested in selling now that the market is cooling off.
- So what about new homes? As we’ve seen from RealPage, there’s still some significant barriers to getting new housing supply online. The supply chain crisis has eased up in different areas, but the accumulated barriers to housing construction have never completely been eliminated. Lumber prices may not be growing as much as they were a year or two ago, but other factors, including interest rates and labor shortages, continue to make building single family homes more difficult.
Marcus & Millichap: Housing Research Brief, May 2022
- “Home buying has cooled off significantly, with the overall sales volume shrinking by 15 percent between January and April 2022, directly correlated to the recent mortgage rate surge. Higher borrowing costs are weighing on buying activity, supporting an increase in available inventory.”
- The lead paragraph says so much here. First, a full 15% slowdown in home buying in four months is huge, especially since January is not a big homebuying month compared to April.
- Second, it nails down the reason without any wiggle room. It’s “directly correlated to the recent mortgage rate surge.”
- Third is their very suggestive phrase “supporting an increase in available inventory.”
- That’s ultimately the logical conclusion where I found myself after reading about the declining home sales and still-elevated home prices because, as we saw in the recently-released Case Schiller Home Price Index, home prices haven’t gone down, not even month over month.
- Yes, home prices are a lagging indicator, but I also think that the changing interest rate environment has made some sellers less likely to sell and some buyers less likely to buy.
- Marcus & Millichap does note that, significantly, the amount of home listings has ticked upward since last month, which makes sense because it’s the right time of year for homes to be listed, so it will be interesting to see how this affects home prices moving forward.
- That being said, we’re not in the same kind of seller’s market right now, and it’s not hard to find a home on Zillow that has decreased in price, a home that, six months ago, would have sold well over list price on its first day on the market.
- So, if people are holding off on selling a home, then really, “an increase in available inventory,”—building new homes—is maybe the only way out here. On the other hand, if home listings continue to increase, (perhaps even outpacing home sales for the first time since mid-2020) then prices could change.
- There is a lot of momentum from the hot single family home market to keep home prices elevated though. Even with the declining home sales and rising listings, the average time a home spends on the market is 34 days, lower than any time in the past 6 years.
- That’s ultimately the logical conclusion where I found myself after reading about the declining home sales and still-elevated home prices because, as we saw in the recently-released Case Schiller Home Price Index, home prices haven’t gone down, not even month over month.
Monthly Rent Reports
Apartment List: National Rent Report
Redfin: April 2022 Rent Report
- These reports measure different months, but they were released within a couple weeks of each other, so I want to tackle them as a pair.
- Rent growth
- Redfin: 15.1% year-over-year, down by 1.6% from last month
- Apartment List: 15.3% year-over-year, up 1.2% from last month
- In Redfin’s graph, year-over-year rent growth has increased every single month since April of last year, when it was down by .2% from March 2021.
- Apartment List recorded a dip in month-over-month rent growth in December of 2021, followed by increasing growth for each month of 2022.
- A quote from Apartment List points to a similar story for both of these reports: “[R]ent growth is trending well behind last summer’s scorching pace, but ahead of the pre-pandemic norm.” I think rents are not just “ahead,” they’re well ahead of the pre-pandemic norm, but the point still stands.
- Top three Redfin markets
- Austin, TX; Portland, OR; Ft. Lauderdale, FL (46%, 33%, 31% rent growth, respectively)
- Top three Apartment List markets
- Miami, Orlando, and Tampa, FL. (28%, 26%, 24% rent growth, respectively).
- The numbers for these markets are different!
- Just for fun, the top three markets in last month’s Yardi Matrix rent report were Miami, Orlando, and Inland Empire at 24.6%, 24.1%, and 16.8% respectively (14.3% national average).
- Does… does that mean that no single report is perfectly accurate?
- Correct. Except for maybe The Gray Report, no report is perfect. Each report has its own strengths and weaknesses, but none of the reports that we share with you is an absolute stinker. All of them have valuable insights for multifamily investors and professionals.
Real Capital Analytics: US Commercial Real Estate Price Growth
- A continuation of the discussion we had last week about the appreciation of CRE assets, we’re got a few quick paragraphs and a very readable set of graphs from Real Capital Analytics. Just because it’s brief doesn’t mean it’s bad!
- You see the 5-year trajectory of the CRE markets at a glance, and they explain the specific numbers in their short summary.
- Growth ebbed. Prices themselves are not ebbing. The rate of growth is ebbing.
- CRE prices rose 17.3% year-over-year. Industrial: 26%. Retail: 18.4%. Multifamily: 23%.
- Notably, multifamily prices seem to have the most stable growth when you look at the 5-year graphs. Where the other property types, as a whole, experienced a clear slowdown in price growth that began in early 2022, apartment properties have been seeing roughly the same amount of price growth as they had at the beginning of the year.
- Again, we’re talking about the rate of growth, the acceleration of price increases. This acceleration is staying the same for apartment properties.
- For retail and industrial properties, this acceleration is going down a downward “jerk” if you will. Prices are still going up, but the acceleration is going down.
Newmark: Trucking Sector Trends May Impact Warehouse Location Decisions
- The list of the major industrial markets in each region includes information on the population size that is reachable in 250 miles and in a 1-day drive. Indianapolis scores very well in both of these metrics, #2 for 250-mile radius, and of the markets highlighted here, it can boast the largest population reachable in a 1-day drive.
