Multifamily and industrial help lead US real estate recovery
13:06, 13 December 2021
US President Joe Biden’s Build Back Better bill should add fuel to two leading real estate segments – multifamily and industrial – at a time when conditions are at a “perfect storm”, analysts said, though any hike in interest rates may threaten future expansion.
Biden’s $1.75trn programme will expand federal subsidies to build or rehab more than one million affordable rental housing units and will include investments to retool factories and improve supply chains, the White House said in July.
The US Senate aims to vote on the package by Christmas, Senate Majority Leader Charles Schumer wrote on 6 December.
‘Perfect storm’ for commercial real estate price appreciation
In a blog post last week, real estate research firm Green Street said a “perfect storm” of low bond yields, record capital investment from private equity and open debt markets will spur continued price increases in commercial real estate.
“The recent surge in pricing has been broad based, but industrial, apartment, manufactured home park and self-storage have led the way with outsized gains,” Green Street said.
Attorney Michael Eidelman, chair of the Insolvency, Bankruptcy and Corporate Reorganisation Group at international business-focused law firm Vedder Price, echoed the sentiment: “I have never seen so much cheap money from so many available sources”.
Eidelman made the comments Friday on a panel discussing real estate restructuring at the American Bankruptcy Institute’s Winter Leadership Conference in Rancho Palos Verdes, California.
Green Street noted Lone Star, Carlyle and Oaktree Capital have all recently closed funds in the $5bn–$10bn range.
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Multifamily real estate valuations go ‘crazy’
The expiration of Covid-19 eviction moratoriums has had little impact on apartment vacancies.
In fact, Kimberly Byrum, multifamily managing principal at real estate analytics firm Zonda, said she is seeing the best apartment fundamentals in her 30-year career. Byrum said apartment rents increased in the first quarter of 2021 and jumped significantly beginning in July.
Occupancy rates moved above 97% in the third quarter of 2021 and are expected to stay at that level for several years as the demand for apartments exceeds supply. Byrum said 500,000 apartments are needed to bring occupancy rates down. However, apartment deliveries are expected to total 272,783 in 2021, 295,677 in 2022 and 302,513 in 2023.
“Apartment valuations have gone crazy,” said Ben Pickering of professional services firm Ernst & Young (EY). “The eviction moratorium has not seemed to have had an impact at all”.
Apartment valuations are up 20% compared to 2019 and up 30% in the Sunbelt states, said Pickering, a principal in restructuring advisory services.
Commercial real estate services and investment company CBRE said on 8 December that US multifamily investment volume in 2021 is expected to reach a record of nearly $213bn and increase at least 10% in 2022 to $234bn.
Three multifamily REITs
- Mid-America Apartment Communities (MAA) is the largest US apartment owner with an interest in 102,271 units in 16 states, including communities under development. The stock is up 76% year to date.
- AvalonBay Communities (AVB) is the fourth-largest US apartment owner with 293 apartment communities containing 87,416 apartment homes in 13 states and the District of Columbia. The stock is up 57% year to date.
- Equity Residential (EQR) is the fifth-largest US apartment owner with 307 properties consisting of 79,322 apartment units. The stock is up 51% year to date.
Online shopping drives industrial real estate
Industrial real estate is benefitting from the shift to e-commerce. CBRE found that e-commerce accounted for around 20% of total sales in Q3 2021.
EY said industrial real estate has rebounded after bottoming out at the end of 2019/beginning of 2020 as companies look to build and expand warehouses.
Vacancy rates are near all-time lows and next day delivery is causing double-digit rental rate growth near population centres and port hubs, EY said. CBRE said industrial rents grew 1.4% from the previous quarter in Q3 2021, the highest quarterly increase since 2007, and were up 4% year over year.
“What is happening now is there is a supply constraint between not enough land available to do it (and) not enough people available to build the facilities,” Pickering explained.
EY notes companies are moving away from centralised hubs and are opening smaller facilities to bring products closer to customers in order to fulfil accelerated delivery commitments.
“Because of e-commerce they can actually put into warehouses what is more popular in your area,” Pickering said. “It has created a real need for an uptick in the industrial space”.
Green Street noted industrial values have increased 39% in the past year.
Two industrial REITs
- Prologis (PLD) is the largest REIT focused on industrial properties with $177bn of assets under management and 994 million square feet of modern logistics space. The stock is up more than 65% year to date.
- Duke Realty (DRE) is the leading US pure-play domestic-only, industrial property REIT with 160 million rentable square feet of industrial assets in 19 key US logistics markets. The stock is up more than 60% year to date.
Pickering said e-commerce growth is pressuring second- and third-tier shopping malls, the so-called B- and C-malls. Ernst & Young cited Green Street research, which estimated that market-level occupancy and rent will fall 1.4% at Class A malls through 2025 but 5.6% at Class B and 10.8% at Class C malls.
Certain low-performing malls have been converted into industrial or residential spaces.