ENCINO, CA- On a recent apartment webcast, 57% of participants predict that renter demand will get stronger in 2012, while 2% says it will be weaker, with 40% saying it will stay the same. The 2012 Apartment Market Outlook Video Webcast was put on by Marcus & Millichap Real Estate Investment Services, and was generally optimistic in the sector’s “continuation of modest growth in 2012.”
According to William Hughes, managing director of Marcus & Millichap Capital Corp., from a lenders standpoint, the improving apartment fundamentals have supported their level of confidence in the marketplace. “It has been easy to finance core assets all the way down to C assets across the board,” he said. “It becomes a little choppy as you move into tertiary and smaller assets, but even those are being financed by local and regional banks.” Continue reading “Moderate growth in Apartment sector will continue”→
After climbing in early 2010, home prices have dropped once again, and have reached a new eight-year low. According to data from the S&P Case-Shiller Index, prices are down by 3.5% year-over-year, and by 32% from their peak in 2006. Sales activity is also down, by 12.9% year-over-year, albeit from a high level in 2010 that was stimulated by a home-buyer tax credit. The nation’s homeownership rate has dropped from a peak of 69% in 2006 to 66.4% as of Q1 2011, a rapid decline drop in such a short time period.
What is driving this downturn? Two dominant factors: Negative consumer psychology and still-high foreclosure activity.
Households that are under water with their existing mortgage or that have recently been foreclosed upon are not in a good position to purchase a new home at this time. Millions of homeowners whose credit scores dropped during the Great Recession and no longer meet toughened mortgage-lending requirements are also not in a position to buy a new home. Still others look at their finances – or in many cases financial losses – and at the headlines regarding home depreciation, and say “Not now.”
Foreclosure activity remains disturbingly high, despite a drop of 36% in the past year and 45% since the peak in Q1 2009 in sale of homes either owned by banks or in some stage or foreclosure, according to data from RealtyTrac. While the number of distressed sales is down, so is the number of total sales, keeping the percentage that is distressed at 28% according to the most recent data, down from 32% a year ago. And it appears that the distressed-sale factor will remain with us through at least year-end 2012, placing a damper on price appreciation.
The downturn in the housing sector is placing a clear drag on the nation’s general economy. Profits and job growth remain weak in sectors that are related to housing, including construction, building materials, real-estate finance, architecture, engineering and real-estate brokerage. Manufacturers and retailers of appliances, furniture and garden equipment have also been negatively impacted. According to Moody’s, cuts in spending in residential fixed investments accounted for more than 30% of the decline in the GDP in recent years.
But is it all bad news?
Not completely. We are making progress on clearing the inventory of distressed loans. The market is finding a new equilibrium. In addition, prices have dropped and fundamentals have improved to the point where the market is now under-priced. For-sale housing costs, which take mortgage rates and prices into account, are low relative to long-term relationships between for-sale housing costs and: (1) incomes and (2) rents. Total vacancy rates are currently low to moderate, and appear likely to drop into very tight territory in coming years due to a dearth of construction activity. In addition, employment growth is taking place once again.
The for-sale housing market will inevitably correct upward to reflect the new fundamentals. However, we have to wait until consumer sentiment turns positive and/or the inventory of foreclosure product is substantially reduced before we see any major improvement. This could take well into the second half of 2012 and even 2013, assuming job growth returns back to a healthier 200,000 positions a month. At this still lackluster pace, the economy won’t be expanding sharply, but enough demand will be released from demographics-based household growth to improve sales and pricing.
The implications from the recent double dip in the housing market include less-than-normal growth in the economy and in CRE demand during the early recovery years (i.e., 2010, 2011 and into early 2012). However, once the housing market finally begins its recovery, it could stimulate above-normal growth in the economy and in demand for CRE late in the recovery cycle: 2012, 2013 and into 2014. This is a very different pattern from previous recovery periods and will likely be amplified for CRE product that is sensitive to the real estate market, including home-improvement stores, appliance stores and office and retail space geared toward real-estate industry-dependent tenants. It also will likely be amplified in development-prone communities, such as Las Vegas, Phoenix, the Inland Empire, and parts of Texas and Florida.
Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at email@example.com.
I have investors ask me every week to send them information on the “good’ deals. You know, the deals where they can buy properties substantially below replacement cost, with an 9%-10% cap rate and 10% cash on cash returns. After all, there must be a lot of properties that banks have foreclosed on and want to dispose of at bargain prices just to get them off their books.
This is not 1989-1994 where there was an RTC to force banks to take action when loans are delinquent. Banks are not foreclosing. There are really very few REO properties banks are trying to sell. Investors are holding on to their cash waiting for the opportunities that I don’t think will ever materialize.
There as an article in the Wall Street Journal yesterday that illustrates this point completely. It is about “Distressed Property” funds. Private equity funds formed by the major investment banks to take advantage of the great bargains that were going to emerge in commercial and multifamily properties. Those funds are returning billions of dollars to investors because there are no properties to buy that meet the investment criteria. Continue reading “So Where are the “Good” Deals?”→