Commercial Real Estate Investors Follow Migration Trends | Think Realty
What the housing shortage in the US means for commercial investors
Housing shortage back in the spotlight.
The growth in employment, the reopening of economies and the resurgence of population mobility in the first half of 2021 resulted in more people looking for housing after being incarcerated for much of last year. This compounded the ongoing housing shortage in the U.S., an act largely camouflaged by more relevant narratives that surfaced during the pandemic. Despite record levels in single-family and multi-family housing development, demand will exceed supply and could worsen the shortage over the next decade. More than 1 million new households are expected to be built every year by 2031, a pace that builders will find it difficult to keep up with. The current landscape of historically high material costs and insufficient labor in the construction industry will also create additional barriers.
Demographics and the growing affordability gap predict greater tenant demand.
The accelerated household growth over the next few years is primarily due to the aging millennial cohort. Most of the grouping is entering their early 30s, an age range typically centered on starting a family and transitioning to home ownership. The housing shortage, however, has pushed sales prices for single-family homes to new heights and raised the bar for first-time home buyers. The difference between the average monthly home rent and a typical single-family home mortgage payment in the United States more than doubled over the past year. As a result, many households looking to buy a home but are expensive are choosing to rent it, which is driving demand towards apartment buildings, especially in luxury apartments for the marginalized. At the same time, some young households prefer the flexibility of a shorter lease and reduced maintenance costs, as well as the lifestyle and amenities that higher-end apartment complexes offer. The improved demand for luxury rentals was reflected in the national Class A vacancy rate falling 100 basis points to 4.5 percent in the second quarter.
The economic dynamism catalyzes the multi-family sector.
To illustrate the state of the recovery so far, the multi-family sector recorded one of its strongest performance periods in the second quarter. In the period from April to June, over 218,000 apartments were absorbed, a record that goes back at least to 1993. Pandemic levels. The sharp rise in tenant demand was driven by several factors, including employment growth and household formation. More than 1.7 million jobs were created in the United States from April to June, making it the strongest quarter in household formation in nearly 20 years. Many who were previously unemployed found a sustainable source of income that enabled them to move into their own apartment after living with family or friends during the pandemic.
Strengthen inner-city apartments as young adults can find work.
Many college graduates were unable to find employment last year when the pandemic disrupted hiring activities. Some have been able to fulfill distant roles, which may have led them to live with family or friends during the health crisis to save costs. As companies start bringing workers back into the office and hiring more people, more and more younger generations are taking on jobs and moving. This is a tailwind for housing demand, especially in urban areas, as people in their twenties often prefer the downtown lifestyle and nearby amenities. The allure of downtown life has been revitalized with the reopening of shops, entertainment and attractions. These trends were evident in the second quarter when the urban cores of major markets combined recorded 40,000 absorption units, the largest quarterly total from the beginning of this century.
Investors who focus on outperforming the Sunbelt markets and putting cap rates under pressure.
Many people prioritize quality of life and cost of living aspects when deciding where to live, which makes moving to the Sunbelt a priority. Phoenix, Dallas-Fort Worth, Atlanta, Houston and Las Vegas all recorded immigration of at least 35,000 people last year. The additional residents increase housing performance on these subways and attract the attention of more investors. In Phoenix, the vacancy rate reached a historic low of 3.2 percent in the second quarter, which led to a noticeable increase in the average effective rent of 16.6 percent compared to the previous year. Similarly, the vacancy in Las Vegas fell to a low of 3.3 percent, leading to a 13.9 percent year-over-year rental increase. Other metropolitan areas with annual rental growth of over 12 percent include Riverside-San Bernardino, Tampa, Sacramento, and Jacksonville.
Many commercial real estate investors follow migration trends and concentrate on secondary and tertiary markets in the sunbelt, which expands the pool of buyers and intensifies competition for assets. In Phoenix, Columbus, Jacksonville, Atlanta, Las Vegas, and Pittsburgh, the average unit price of homes sold rose more than 10 percent last year. Nationally, the average price rose half that amount, up five percent per year to $ 171,000 per unit for trades priced at $ 1 million and above. Meanwhile, the average cap rate fell to 5.1 percent, the lowest level in more than two decades and 100 basis points from 2013. On the other hand, price growth is lagging behind in some gateway metropolitan areas such as San Francisco and New York City. However, the rebound in these markets has turned things around and opportunistic investors remain active.
John Chang is the National Director of Research Services for Marcus & Millichap. He is responsible for producing the company’s extensive commercial real estate research publications, tools, and services. Under his leadership, Marcus & Millichap has grown to become a premier source of market analysis, insights and forecasting, and the company’s research is regularly cited across the industry and mainstream business media.
John leads a team of dedicated real estate research professionals who create the company’s 1,000+ annual research publications and conference presentations. These detailed reports, analyzes, and presentations integrate economic and financial market trends with insights into all major commercial property types including: hotels, industrial, prefabricated houses, apartment buildings, offices, medical practices, multi-tenant retail, single-tenant retail, self-storage and senior housing.
John is a seasoned industry analyst who has been cited in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force, and the NAIOP Research Foundation. He regularly presents at a variety of conferences and events hosted by industry-leading organizations such as NMHC, NAIOP, ULI, CCIM, ICSC, SSA, and numerous others.
John joined Marcus & Millichap in April 1997 as Research Manager in the Seattle office. After holding senior marketing and e-business positions with leading residential real estate companies in the Pacific Northwest, he returned to Marcus & Millichap in November 2007 as Head of Research Services. John was elected vice president in 2010, first vice president in 2013, and senior vice president in 2018.