Did Landlords Bet Too Big?

April 18, 2023

THE BIG SPLASH

Did Landlords Bet Too Big?

Investors who pumped billions into apartment buildings during the pandemic are now facing fault lines in their investments. 

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  • While office spaces have been impacted by remote work, apartment buildings have experienced robust demand from tenants.

  • However, investors who paid top dollar for these assets and depended on substantial rent increases and low interest rates to achieve profitability are now facing challenges as rents have plateaued or even come down in some markets, and expenses have skyrocketed.

  • The problem could worsen as more mortgages expire at properties where fix-and-flip strategies have stalled, throwing a growing number into default. Compounding these issues is falling property prices, which MSCI estimated had fallen on average by about 8.7% year over year, while Green Street estimated they had declined by 21% from a year ago.

  • Furthermore, some of the most speculative deals were done with mortgages that ended up in a riskier part of the securitized-loan market known as commercial-real-estate collateralized loan obligations.

  • As these short-term debts come due, they will be difficult to swap with commensurately sized loans today because of the falling values, higher interest rates, and lender caution, forcing landlords to pour in millions of dollars to pay the difference.

A SCOOP OF RENTS

Rents Take a Dip in First Annual Decline Since 2020

For the first time since March 2020, home rents in the U.S. have seen an annual decline of 0.4% in March 2023, according to a Redfin analysis.

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  • The drop in demand can be attributed to people hitting their price limits, with rents still remaining 20% higher than pre-pandemic levels and overall inflation taking its toll.

  • On the supply side, there has been an increase in the number of newly constructed multifamily apartments hitting the market at a record pace, as per data from the Joint Center for Housing Studies of Harvard University.

  • However, this doesn't necessarily mean that affordable housing is suddenly within reach for everyone, as rents continue to remain historically high.

  • While some cities like Chicago and Austin have seen rents drop by 9% and 11% respectively, others such as Raleigh and Cleveland have experienced rent increases of 17% and 15%.

  • Moreover, much of the new construction has been in high-cost rental markets, further exacerbating affordability challenges for many renters.

A SCOOP OF HOME BUILDERS

Homebuilder Sentiment Gains Ground in April

Homebuilders are feeling positive as builder sentiment in the market for newly built homes rose for the fourth consecutive month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

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  • The index climbed to 45, a 1-point gain, marking the highest reading since September. Builders cited a lack of listings on the resale market as a driving factor, giving them a competitive edge.

  • Slightly lower mortgage rates also helped boost demand, although rates are still higher than a year ago. Builders expressed optimism about further declines in mortgage rates, which they believe will spur demand for housing.

  • However, the industry continues to face challenges related to building material shortages and lack of access to electrical transformer equipment.

  • While there are concerns about tight AD&C loan conditions, the data suggests that recent regional bank failures have not significantly impacted the lending environment for builders and land developers.

  • Despite some builders reducing home prices and using sales incentives to boost demand, the share of builders cutting prices has decreased, indicating a relatively stable market.

A SCOOP OF BIG MOVE

New Yorkers Flock to Florida for Lower Taxes and Better Quality of Life

The trend of New Yorkers moving to Florida to escape high taxes and crime rates during the pandemic is showing no signs of slowing down, according to real estate adviser Jenna Stauffer.

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  • About 10,000 New Yorkers have already fled the state in the first quarter of 2023, with Florida seeing a surge of new residents from predominantly blue states with high taxes, such as New York, New Jersey, and Illinois.

  • Stauffer, from Sotheby's International Realty, cited lower taxes and a pro-business environment as factors that attract homebuyers seeking a better quality of life.

  • However, she also noted mixed signals in the housing market, with factors such as persistent inflation, geopolitical uncertainties, and interest rates keeping some buyers on the sidelines.

  • While some markets are experiencing price declines, others are seeing price gains due to strong job growth and immigration. Florida cities like Sarasota, Bradenton, and Palm Beach have been reportedly "bursting at the seams" with new residents, and state officials claim that the infrastructure is prepared to accommodate the growing demographics.

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