Mortgage rates continued their upward trek. Specifically, the 30-year fixed mortgage rate surged to 4.42% from 4.16% the previous week. Elevated inflation and the Federal Reserve’s tightening policy pushed up mortgage rates. Since the beginning of the year, rates have already increased by 1.2%. As a result, the typical home buyer needs to spend $250 more every month to be able to purchase a home.
Impact of higher rates on home sales
Both new and existing-home sales dropped in February. Existing-home sales fell by 7.2% and new home sales declined by 2.0% compared to January. These headline figures are the seasonally adjusted figures that are reported to the news. However, this was not the actual number of sales but the number of sales after adjusting for seasonality. For everyday practitioners, simple raw counts of home sales are often more meaningful than the seasonally adjusted figures as the raw count helps better assess how busy the market has been. According to the raw count of sales, both existing- and new-home sales improved compared to January. Existing- and new-home sales rose by 1.4% and 1.6%, respectively. Compared to pre-pandemic, home sales in February outperformed. For example, in February 2018, when mortgage rates were also rising, about 320,000 existing homes were sold. By comparison, nearly 360,000 existing homes were sold last month. Although rising mortgage rates increase borrowing costs, making housing less affordable, about 40% of the millennial renters who approach family life can still afford to buy the typical starter home.
The great enforced global experiment in working from home is coming to an end, as vaccines, the Omicron variant and new therapeutic drugs bring the COVID-19 crisis under control.
But a voluntary experiment has begun, as organisations navigate the new landscape of hybrid work, combining the best elements of remote work with time in the office.
Yes, there is some push for a “return to normal” and getting workers back into offices. But ideas such as food vouchers and parking discounts are mostly being proposed by city councils and CBD businesses keen to get their old customers back.
A wide range of surveys over the past 18 months show most employees and increasingly employers have no desire to return to commuting five days a week.
The seismic shift in employer attitudes is signalled by Google, long a fierce opponent of working from home.
Last week the company told employees they must return to the office from early April – but only for three days a week.
That’s still way more than tech companies such as Australia’s Atlassian, which expects workers to come into the office just four days a year, but it is a far cry from its pre-pandemic resistance to remote work.
Hybrid work is here to stay. Employers will either embrace the change or find themselves being left behind.
Gains in productivity
Google began – under pressure – to soften its opposition to remote work in 2020. In December of that year chief executive Sundar Pichai told employees:
We are testing a hypothesis that a flexible work model will lead to greater productivity, collaboration, and well-being.
Google’s corporate headquarters in Mountain View, northern California. It has softened its historical opposition to remote working by insisting workers must return to the office for three days a week.
Its chief concern has been protecting the social capital that springs from physical proximity – and also perhaps with keeping employers under surveillance.
But longstanding (and widespread) management concerns that employees working from home would lower productivity have proven unfounded.
Even before the pandemic there was good research showing no productivity penalty from remote working – the opposite, in fact.
For example, a 2014 randomised trial involving about 250 Shanghai call centre workers found working from home associated with 13% more productivity. This comprised a 9% gain from working more minutes per shift – due perhaps to fewer interruptions – and a 4% gain from making more calls per minute – attributed to a quieter, more comfortable working environment.
Research in the past two years supports these findings.
Harvard Business School professor Raj Choudury and colleagues published research in October 2020 that found allowing employees to work wherever they like led to a 4.4% increase in output.
In April 2021, Stanford University economist Nick Bloom and colleagues calculated a the shift to remote working resulted in a 5% productivity boost. Though their working paper, published by the National Bureau of Economic Research, was not peer reviewed, it was based on surveying 30,000 American workers, which is a decent sample size.
Our relationship with work has changed
There are good reasons most of us don’t want to go back to the old normal. It just wasn’t that great.
While working from home can brings challenges of other kinds, not least the ability to switch off and stop working when work is done, working in an office can increase stress, lower mood and reduce productivity.
My own research has measured the effects of typical open-plan office noises, finding a 25% increase in negative mood even after a short exposure time.
Then there’s the time spent commuting. Not having to go into the office every day frees up hours of time to do other things. Particularly in winter it’s nice to not have to leave and arrive home in the dark.
Preferred number of days working at home, by occupation
Results from a survey of Australian workplaces during 2020 lockdowns. Institute of Transport and Logistic Studies, University of Sydney, CC BY
Changed expectations of work
The importance of these things should not be underestimated.
In a June 2021 study by McKinsey of 245 employees who had returned to the office, one-third said they felt their mental health had been harmed.
The experience of the pandemic has lowered our tolerance for this old world of work.
Nothing exemplifies this better than the growth of the “lie-flat” trend, which began in China and is now a global phenomenon. Increasing numbers of people are rejecting the idea of pursuing a career at all costs.
They don’t want to spend their life being a cog in the wheel of capitalism and are choosing to work less – even not at all.
No one size fits all
Rather than a bastion of meaning and fulfilment, the structures around how we have conducted work has for many people meant an existence of quiet desperation. The pandemic has brought an unforeseen opportunity to change this narrative and rethink both the way we work and the role of work in our lives
For some, no job is better than a bad job. The rest of us will settle for the flexibility we’ve had over the past two years.
No one size fits all. The downsides of working from home include missing coworkers and losing the benefits of serendipitous conversations. The nuances of how much time we need to spend together in the office for outcomes like creativity, belonging, learning and relationship building varies between individuals, teams and job types.
But what is certain is we don’t need to be together five days a week to make these things happen. With a shrinking workforce and an increasing war for talent, employers who don’t provide flexibility will be the losers.
The image of a shuttered ghost town that many of America’s shopping malls have become is much different than the bustling epicenters of economic and social activity that they once represented. “The mall, in its heyday, was a portal to the lifestyles to which people could aspire,” writes Misty White Sedell of the Los Angeles Times, “a stomping ground for discovery.” Pandemic lockdowns were a devastating blow to brick-and-mortar retail, but the American mall was losing to e-commerce well before then. Now, many malls are an economic deadweight, and the question of what to do with them continues to puzzle investors and landlords. If shopping malls will never again return to their place as our consumeristic hubs, how can they be put to better use?
Any time a property of that magnitude sits vacant, it’s a huge problem for the municipality it sits in. A deserted mall can’t generate tax dollars for its locale just as much as it can’t generate rent for its landlord and revenue for its shareholders. At the same time, the ongoing mortgage debt from a mall that failed can outweigh the value of the property itself. Overall, the prospect of taking on a space of that scale was such a headache, especially with the decline of brick-and-mortar undermining confidence in the investment, that many lenders just elected to let defunct properties just sit unused. So what can be done about these skeletal remains of a bygone era?
Before the onset of the COVID-19 pandemic, the global supply chain was already fragile, but the burden from the subsequent lockdowns caused it to snap. As businesses tried desperately to keep up with the sudden surge of online orders, a disastrous domino effect ensued. The system couldn’t keep up with demand, causing every point of America’s transportation and logistics operation to buckle. A deluge of shipping containers piled high on cargo ships, overflowing the ports, and straining trucks and rail cars until they wheezed from the hefty weight. It quickly became obvious that the businesses that relied on a localized supply chain could keep their heads well above water while the rest struggled to stay afloat.
The businesses that found themselves in this global scramble tried to recoup their losses by ordering as much additional inventory as they could to safeguard against future slowdowns, but the problem of where to put all of this excess stuff prompted a race for storage space. By November of 2021, 96 percent of existing industrial space was in use, and in order to keep up with demand, the U.S. would need an additional billion square feet of new industrial space by 2025, according to JLL. Demand for new space prompted sky-high bidding wars, ultimately leading enterprises to get creative with converting other types of spaces to suit their storage needs.
Amazon, the online retailer that led the crusade for snatching as much vacant land and development space as possible, spent nearly $60 billion on capital expenditures in order to acquire property and equipment in 2020. Of course, Amazon had already been ballooning in recent years, but they had only spent $24 billion on capital expenditures to expand their real estate the year prior. What’s more, a significant chunk of that $60 billion went to purchasing properties. Amazon is so confident that e-commerce is the imminent reality of retail that they’re planning on operating out of the properties that they’ve purchased for the next 30-50 years minimum, compared to the 10-15 that a lease would allow them to run. But Amazon didn’t limit their spending spree to undeveloped sites, they also procured shopping malls.
The speed and frenzy of Amazon’s real estate acquisitions may make it seem like Amazon was just buying land wherever they could only to solidify a plan for it afterward, but purchasing a shopping mall with the intention of turning it into a warehouse makes logistical sense. Not only do empty shopping malls have an abundance of space, perfect for extra storage as more businesses sign on to sell their products with the e-commerce giant, but malls also have inherent proximity to large population centers.
Shopping malls came into fruition during the 1950s as suburban development sprang to life as a place for suburban residents to shop and socialize, which is how malls became known as the American cultural hub. Amazon knows that the speed at which a package you order from Amazon reaches your doorstep depends on your proximity to a fulfillment center, so buying a property that was intended to be in reach of residential developments is an understandable strategy. Yet while this shift might give the landlord of a mall that’s hemorrhaging money hope, only a small number of these sales and refurbishments have taken place. As of December of 2021, around 50 enclosed regional U.S. malls have been sold during the pandemic, most of them by lenders,” according to the Wall Street Journal, and the “limited number of ‘healthy’ malls sold may reflect unrealistic asking prices.” This is prompting many landlords to hold onto their underperforming properties in hopes that they could get more from the sale of their shopping mall after the pandemic.
Knocking down the existing mall only to build an Amazon warehouse from the ground up is also not an attractive option for landlords of malls that still have a pulse. Despite the rampant closures of retail giants of yore (Sears, JCPenney, Macy’s, etc.), many mall landlords believe that there is a creative solution that could keep the lights on while stimulating shopper activity for the smaller stores that are still operating. If the industrial warehouse sector, which has outpaced other markets over the past two years, can’t inject new life into shopping malls, what can?
Call the doctor
In a trend known as ‘medtail’, a reflection of the medical industry’s shift to retail properties, health care providers are increasingly picking former storefronts for their offices and clinics. Landlords may not have been keen on this in the past for a series of reasons, such as the regulatory burdens or the idea of people sick with a contagious disease congregating on the property. But after a prolonged period of vacancies, landlords are a bit more eager to lease to healthcare tenants with deep pockets.
The medtail shift was a growing trend before COVID-19, but interest in preventative wellness surged as a new infectious disease upended everyday life for people around the globe. While these storefronts aren’t replacing hospitals, medtail can still assist in the provision of economical, specialized, and conveniently accessible facilities for the local residents, and that convenience is a mall’s biggest selling point. “Convenience is essential to consumers… even when they’re choosing a medical office to visit,” says Les Shaver of GlobeSt, “That came to light in a recent survey from JLL, showing that 71 percent of consumers traveled 20 minutes or less to receive care.”
Yet the landlords can go much farther than converting individual stores to a dentist’s office. When the Marketplace Mall in Rochester, New York, had lost its major retailers, the University of Rochester Medical Center came to the rescue. In an undertaking that cost upwards of $227 million and multiple phases, the mall’s empty Sears store is slated to become an outpatient orthopedic center. By November, the ambulatory surgical center will open. The following spring will usher in the Center’s rehab and sports performance center, and by the fall of 2023, the ribbon for the four-story clinic space with 144 beds will be snipped. As of right now, the offices are currently open.
Marketplace Mall is not the first mall to be converted into a medical center, but it does illustrate a surprisingly beneficial symbiosis between the two sectors. The medical center gains a larger and more accessible location, the mall fills a gap that will benefit its other tenants, and, the community gains a facility that is more accessible and connected to where people are. Plus, as more of the Medical Center’s facilities open up, more employees and patients will follow suit, meaning more prospective customers in the active mall that the Medical Center is attached to.
When Misty White Sedell referred to the American shopping mall as a bastion for “discovery” in her piece for that LA Times, she was talking about fashion trends. Now, the shopping mall is a literal incubator for discovery when it comes to real estate. Amazon dedicated itself to deliberately underbidding its physical competitors in order to gain market share, but Amazon dismantling malls in order to build fulfillment centers is not the next phase in the mall life cycle. Shopping malls still have a place in the retail landscape, and things like medical office conversions might be one of the pieces to the puzzle that will reinvigorate them.
On the night of January 31st in Seattle’s Belltown neighborhood, something shocking happened as an Amazon engineer walked home from work. Video footage revealed that a homeless man had crept up behind her with a baseball bat before taking a full swing at her head. The man, Wantez Tullos, fractured the female engineer’s skull and then simply walked on. Tullos was in handcuffs before long, and police stated that the attack was completely random. Even so, the attacker had a long rap sheet to the point that prosecutors begged a judge to deny him bail. Incidents like this are rare in downtown Seattle and other big U.S. cities, but they’ve been happening more frequently amid a rise in crime.
“It almost feels like we’re at a tipping point with crime in Seattle right now,” said Lisa Howard, Executive Director for the Alliance for Pioneer Square, a nonprofit neighborhood revitalization org. “The headline-catching violent crimes are isolated incidents. But there’s a need for more mental health services for people on the street in crisis. Also, what we see in the media sticks in our heads.”
Howard is right, random acts of violence like an engineer getting struck with a bat are rare, but they’re also easy fodder for online news sites. As they say, if it bleeds, it leads, and in the online era, bleeding gets clicks and retweets. But the statistics about rising crime in places like Seattle don’t lie, and it’s become a concern for some companies looking to get workers back in the office. Aggravated assaults in Seattle rose by 24 percent in 2021, and violent crime was up 20 percent, according to city police data. There’s a perception of disorder in parts of downtown Seattle that is unnerving office workers, according to Howard.
The city recently cleared out two homeless tent encampments in Seattle’s Pioneer Square neighborhood. Clickbait news cycles often lump crime and homelessness together, but that doesn’t paint an accurate picture. Research doesn’t show a strong correlation between homelessness and crime, and often, homeless people are more likely to be crime victims. But having people out on the street in perpetuity near an office, for example, can make some feel unsafe. Howard said there had been a lot of conversations between downtown Seattle businesses and city officials about addressing public safety. Seattle Mayor Bruce Harrell has ramped up crime-fighting efforts, saying he’ll hire an additional 125 police officers.
More large U.S. cities are dealing with crime increases, rivaling the historic crime levels of the 1980s. President Biden referred to “funding the police” in his recent State of the Union address, and there’s pressure on Democratic mayors and prosecutors after previous calls to “defund the police.” It’s a tricky political topic; getting tough on crime often disproportionally affects poor and minority communities, and the Black Lives Matter protests and riots during the summer of 2020 are still fresh for many people.
For property owners and businesses with offices in downtown areas, the politics of the situation don’t matter as much as having employees feel safe enough to come back to work. Some companies in Seattle are hiring more private security guards and even letting employees leave early, so they don’t have to commute when it’s dark out. Employees are also walking to public transit together in groups. Weyerhauser is a timber company with an office in Seattle’s downtown core and has even delayed its return to the office until April because of street crime concerns. In an email sent to employees last fall, the company’s chief administration officer said they wouldn’t reopen their office until “significant improvements in neighborhood safety,” according to the Seattle Times.
While you may not have heard about crime in Seattle, you’ve likely heard about what’s happening in New York City. New York media is all over the topic, reporting seemingly daily brazen assaults on the subway and rising crime statistics. Criminologists refer to the law of crime concentration, where 50 percent of a city’s crime happens at 5 percent of street segments. So, it doesn’t make sense to talk about crime city-wide because it’s spread out unequally across districts and police precincts.
But Rafael Mangual, Senior Fellow and Head of Research at the Manhattan Institute, a free-market think tank, points out that every major crime category has increased other than homicides in places like Midtown South. Mangual is passionate about the study of criminal justice, his father was an NYPD detective, and he grew up in Brooklyn during the crime wave of the late ‘80s and early ‘90s.
He told me crime in Brooklyn during that era forced his family to move to Long Island. He sounded convinced, as some commentators, that crime is at crisis levels in NYC right now. “There’s crime and disorder, and disorder is important because it impacts peoples’ perceptions of safety,” Mangual said. “When you see things like public drug use and organized retail theft, it communicates that people are brazen enough to do these things, and they feel they won’t get caught. So, people make a psychological calculation. If anything can happen, then I’m vulnerable.” Mangual added this was the basic premise of the ‘broken windows’ theory used by New York City officials to fight crime in the ‘90s. Cops targeted minor crimes like vandalism and loitering to stop visible signs of anti-social behavior that, according to the theory, encourage a cycle of criminality.
There’s a lot of debate about why crime is rising in so many U.S. cities, and what you think often depends on your political leanings. The interesting thing for office occupiers and landlords is that returning to the office can help fight crime. Both Mangual and Howard of Seattle’s Alliance for Pioneer Square acknowledged this. With foot traffic in downtown areas still not at pre-pandemic levels, the streets are emptier, and people don’t feel that same safety in numbers and crowds.
There’s also the economic angle. Without more office workers downtown, there’s less business, more shuttered storefronts, and more of a perception of blight. Mangual is more pessimistic about the state of New York City, noting that while Mayor Eric Adams campaigned on public safety, his efforts may not be enough. Return to office efforts are ramping up again, and now politicians are urging a return to normalcy. But Mangual thinks that if remote workers can work anywhere, why pay higher rents in the city and deal with crime? “Cities are in a much more fragile state than they seem to recognize, given the lack of urgency on the crime issue,” Mangual said.
COVID-19 kept offices largely empty for nearly two years, so is lack of public safety a new concern for corporate occupiers and landlords? It depends. Cities and downtown areas aren’t complete hellscapes, as much as some media outlets paint that picture. The more workers return to the office, the more economic activity will pick up and pump life back into downtown areas. In cities like New York and Seattle, efforts are underway to address rising crime rates and make communities feel safer. Crime may be a concern for some office tenants and employees for now, but it’s not guaranteed it’ll last long. Headline-grabbing random acts of violence in Seattle or in NYC’s subway system may stick in our heads, but the reality is always much more complex.
In 2021 the average rent increase for apartments, duplexes and single-family dwellings was a whopping 14% and even double or more than that amount in the hottest markets…Austin, Texas went up a jaw dropping 40%. Prior to that, from 2017-2019, the average rent increase hovered around 3.4%. Unfortunately, industry professionals say we should prepare for this new normal in the rental market as rents don’t appear to be dropping anytime soon, with some experts speculating a 10% average increase in 2022.
The housing market has partially fueled this rise. Inventories for both new and resale homes remain low while at the same time prices continue to rise much more swiftly than in previous years. Also mortgage interest rates are slowly creeping up thereby pushing some would be homebuyers out of the market. And those that are pushed out of the housing market are forced into the rental market. Unfortunately for them, property owners are taking advantage of the
system and charging for maximum profit due to simple supply/demand economics.
As a buyer’s agent, I recognize inventory is tight but I also know patience, an ability to act quickly and the willingness to put in a solid offer will ultimately translate into our client being under contract on a great home…so the lack of inventory should not be the primary dissuader. And although interest rates are rising, they are still at historical lows.
Therefore I always ask the question to someone who is looking to rent, why are you not purchasing a home instead?
9 times out of 10 it’s due to finances…lack of a down payment and money for closing costs (averaging 3% of the loan amount). On occasion, it may truly be the case that the time just isn’t right for someone due to this reason. But not always…
There are still some loan options that allow for zero down or down payment assistance such as VA loans (for active military or veterans only), USDA loans (for rural areas) and FHA loans (most commonly used for those with lower credit ratings or first-time homebuyers). All of these loans are insured by the government so lenders feel more confident in approving buyers that may need assistance.
If you qualify for down payment assistance with one of these loans, this can increase your buying budget or just give you more of a financial cushion so you don’t drain your savings buying a house. Plus these are not just for first time homebuyers, they don’t require perfect credit and there is a wide range of loan amount limits.
If you move forward in purchasing a home as opposed to renting, you are engaging in the most robust, tried and true wealth building method most people will ever have in this country…building equity through home ownership. So now instead of anticipating a rent increase of 10% in a year’s time, you can anticipate your home’s value appreciating by 10% (or more) in a year’s time.
I would love to help you determine if now is the time to move out of that tiny, crazy expensive, vanilla apartment where you can hear your neighbors walking and talking. Or maybe you’re in a single-family residential rental and your landlord doesn’t care about your months long rodent infestation (true story…and contracts so highly favor the landlord that you are completely at their mercy).
Bottom line, don’t assume you can’t buy a home until you investigate all your options. You may be pleasantly surprised at the outcome.
By Holly A. Morris, Realtor
The Meridian Real Estate Group
According to new data from CBRE, companies stopped standing still in 2021 when it comes to long-term real estate decisions.
Office-using companies in major U.S. markets shifted to more relocations and expansions in the first three quarters of 2021, reflecting increased confidence in making long-term real estate decisions compared to a year earlier. In turn, companies focused less in 2021 on status-quo lease renewals and space contractions.
CBRE’s analysis of office-leasing activity found that expansions in primary markets – Manhattan, Boston, Chicago, Washington, D.C., Los Angeles and San Francisco – climbed to 24 percent by square footage last year from 17 percent in the final three quarters of 2020, after the pandemic struck. Likewise, relocations within the market – as opposed to lease renewals in the same space – increased to 33 percent from 23 percent. Conversely, space contractions declined to 5 percent from 10 percent.
“Many companies are now leasing more and better space to entice employees and new hires into the office. And many are expanding into new markets,” said Julie Whelan, CBRE’s Global Head of Occupier Research. “While the ongoing impact of COVID-19 variants on activity remains hard to predict, office market resilience amid the Delta variant in 2021 provides reason for optimism.”
The data for secondary markets tells a similar story. CBRE identifies as secondary markets 13 cities including Atlanta, Dallas-Fort Worth, Philadelphia and Seattle. Similar to the primary markets, these markets saw fewer in-place renewals and more space expansions in 2021 than in 2020. A notable difference: Secondary markets saw a larger increase in new-to-market activity than did primary markets, up to 17 percent in 2021 from 10 percent in the final three quarters of 2020. Markets in the South-Central (Texas and surrounding states) and Southeast regions accounted for most of this activity.
“The uptick in new tenant activity in secondary markets indicates more companies are seeking to expand into less expensive markets with high quality labor pools,” said Whelan.
CBRE’s analysis examined 140 million sq. ft. of U.S. office-lease transactions from the second quarter of 2020 to the third quarter of 2021. Comparisons regard the final three quarters of 2020 against the first three of 2021.
Best-in-class buildings now prioritize climate risk, carbon emissions and occupant health
Expectations for new buildings – from amenities to environmental footprint – have increased significantly in recent years, reports global property consultant JLL. Sustainability continues to move up the corporate priority list and investors are rethinking value, making the threat of a “brown discount” more real than ever.
Based on a new report by JLL, “Return on Sustainability: How the ‘value of green’ conversation is growing up,” highlights the urgency for investors to move beyond the conversation around the “value of green” to instead focus on the long-term return on sustainability. The paper explores a step-change at play around what qualifies a best-in-class building.
“The bar is being raised on what it means to be green,” explained JLL’s Global Head of Sustainability Services and ESG, Guy Grainger. “Now that the business case for sustainability is undeniable, the time has come to evolve the valuation conversation.”
There is a strong financial incentive to go green
While investors initially doubted the value of certifications like LEED and BREEAM, evidence now shows that green certifications result in a rent premium of 6% and a sales premium of 7.6%. These so-called “green premiums” are proving materially significant, however, there is another facet to consider. JLL’s research shows that buildings that don’t evolve to meet sustainability standards will suffer financially – resulting in a “brown discount.”
The definition of green is evolving
New dimensions are quickly emerging to influence the value conversation. Climate risk and resilience, carbon emissions and occupant health are increasingly contributing to conversations around what it means to be “best-in-class” in the built environment.
JLL’s April 2021 survey of nearly 1,000 executives, investors and corporate occupiers found that:
- 83% of occupiers and 78% of investors believe climate risk is financial risk.
- 79% of occupiers anticipate that carbon emissions reduction will be part of their corporate sustainability strategy by 2025.
- 42% of occupiers believe that their employees will increasingly demand green and healthy spaces.
Sustainability and wellness-focused certification systems will need to adapt to meet this new moment.
Up until now, a highly rated, green-certified building hasn’t necessarily been a building with the lowest carbon footprint. Certification standards will soon change as LEED, BREEAM and others launch new carbon-centric benchmarks, defining carbon footprint and incorporating additional elements in the calculation. As investors and companies make environmental and social commitments, they will increasingly need to consider their real estate portfolio to meet climate goals.
Time is of the essence. According to the Paris Agreement, to avoid the worst impacts from climate change on the global economy, emissions must be reduced 50% by 2030, and the world must reach net zero carbon by 2050. JLL’s paper urges those who shape the built environment to take action to avoid asset stranding and to push for sustainable, resilient and healthy places, even in the absence of the perfect case study or data.
According to the National Association of Home Builders latest Multifamily Market Survey, confidence in the market for new multifamily housing improved in the fourth quarter of 2021.
The MMS produces two separate indices. The Multifamily Production Index (MPI) increased one point to 54 compared to the previous quarter while Multifamily Occupancy Index (MOI) decreased six points to 69.
The MPI measures builder and developer sentiment about current conditions in the apartment and condo market on a scale of 0 to 100. The index and all of its components are scaled so that a number above 50 indicates that more respondents report conditions are improving than report conditions are getting worse.
The MPI is a weighted average of three key elements of the multifamily housing market: construction of low-rent units-apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units-apartments that are built to be rented at the price the market will hold; and for-sale units–condominiums. Two of the three components increased from the third to the fourth quarter: The component measuring low-rent units fell seven points to 48, the component measuring market rate rental units inched up one point to 61 and the component measuring for-sale units posted a six-point gain to 53.
The MOI measures the multifamily housing industry’s perception of occupancies in existing apartments. It is a weighted average of current occupancy indexes for class A, B, and C multifamily units, and can vary from 0 to 100, with a break-even point at 50, where higher numbers indicate increased occupancy. Even though the MOI fell six points to 69, it remains as high as it’s been at any time prior to the second quarter of 2021.
“Multifamily developers remain largely optimistic about this segment of the market,” said Sean Kelly, executive vice president of LNWA in Wilmington, Del., and chairman of NAHB’s Multifamily Council. “Demand in many parts of the country has been strong enough to compensate for the rising costs of land, labor and materials.”
“The strength of the MPI is consistent with Census production statistics, which show 750,000 apartments under construction and new apartments being started at a rate in excess of 500,000 per year,” said NAHB Chief Economist Robert Dietz. “The modest decline in the very strong MOI number is not likely to result in any significant change in Census rental occupancy rates, which are still rising and will likely remain high given the strong 69 index number from our survey.”
Talk about a strange summer. Between the continued threat of the novel coronavirus, a wobbly economy, and layoffs happening left and right, it’s no surprise that many who may have hoped to sell their home this season are wondering whether to put those plans on hold—or they’ve already thrown in the towel.
Such hesitancy is understandable. Yet the irony is that, after closely examining the current housing market conditions, many real estate experts believe this summer could be one of the best times to sell a home in years.
“Given the pandemic and uncertainty it’s caused, the general sentiment [among some owners] is that now is not a good time to sell your home,” says Danielle Hale, chief economist at realtor.com®. “Yet so far, the data suggest the opposite—that buyers outnumber sellers in the housing market, which means it’s better to be a seller than a buyer.”
So if you’re a home seller who assumed they should write off this summer’s home-selling season as a lost cause, it’s time for a reality check! Here are a few reasons why the market could actually be moving strongly in your favor.
1. Home buyer demand is back with a vengeance
Granted, in the spring, when COVID-19 was spurring many states to enforce quarantine and ban open houses, home selling understandably went dormant for a while. But now that lockdown restrictions are loosening up in some states, home buyers are out with a vengeance—and many of them are eager to make up for lost time.
Indeed, the real estate market is already seeing strong signs of a rebound, according to the National Association of Realtors®‘ Pending Home Sales Index (a forward-looking indicator of home sales based on contract signings). In May, after two months of decline, pending home sales shot up 44.3%—the highest month-over-month jump since 2001, when the index began.
“There’s very significant demand,” says Matthew Gardner, chief economist at Windermere Real Estate. He adds that demand is strongest right now in the suburbs and in smaller, cheaper cities—as buyers look to escape the biggest metros and more companies follow tech titans like Google, Amazon, and Microsoft in allowing employees to work remotely for the foreseeable future.
“If we continue to see an increase in working from home, people can move farther away, where they can get more bang for their buck,” Gardner says.
2. Home inventory remains low
Yet amid this glut of home buyers, the number of homes for sale to actually meet this pent-up demand is at an all-time low.
“There was insufficient supply last year,” says Lawrence Yun, chief economist of the NAR. “This year during the pandemic, the shortage has intensified.”
According to realtor.com’s market outlook, housing inventory in June was 27% lower than a year earlier.
And some reasons for the shortage of available homes have little to do with the recent coronavirus crisis. The number of homes for sale is at a “generational low,” says Gardner, because people are living in their homes longer than they used to. In fact, NAR data shows that Americans are spending an average of 13 years in their homes before moving.
The lower inventory is also the result of fewer distressed properties on the market, “due to the massive government stimulus support, including mortgage forbearance and generous unemployment benefits,” Yun explains.
3. Home prices are up
With demand for homes up and inventory down, the conditions are perfect for home sellers to get high prices.
“Many sellers can get top dollar in the current market conditions,” says Yun.
According to NAR , single-family home prices increased in most markets during the first quarter of 2020, with the national median single-family home price increasing 7.7%, to $274,600.
This good news may come as a surprise to sellers, since it was expected that the housing market would take a hit and home prices would drop because of the pandemic. That’s quite the contrary.
“Home asking price growth is actually higher now than it was before the pandemic,” Hale explains.
4. Mortgage interest rates are low, too
Another factor pushing home buyers to shop are the historically low mortgage interest rates.
According to Freddie Mac’s July 2 report, average interest rates recently reached a new record low of 3.07% for a 30-year fixed-rate mortgage. Given this means homes could cost potentially tens of thousands less over the lifetime of the loan, it’s understandable that mortgage purchase applications have jumped since last year.
5. The economy is showing slow signs of recovery
While the pandemic led to record high unemployment rates in March, these levels have recently fallen slightly, which could be a good sign that people are still eager and able to buy a home.
Continuing spikes in COVID-19 infection rates may have a negative impact on employment numbers in some areas going forward, but for now the national trends are heading in the right direction.
“The pandemic sharply curtailed economic production and consumer spending in March, April, and part of May. As a result, joblessness soared,” Hale explains. “But data from May and June suggests that businesses are adding back jobs as consumers get back to spending, and some companies are now scrambling to keep up demand. Some speculated that we’d see a sharp bounce back in activity, and I think it’s fair to say that’s what we’re seeing so far.”
6. Home buyers’ needs have changed
Along with working remotely, people have been spending more time at home in general—and this, in turn, has sparked a fresh deluge of home buyers whose current homes no longer seem as comfortable or roomy as they were pre-COVID-19. That is, if your dining table now doubles as your “office,” you might be tempted to trade in your short commute for another room or two so all can work from home in peace.
“People are looking at their existing home and saying, ‘If I have to work from home, then maybe my house just doesn’t work,’” Gardner says.
“Spending three months locked up at home taught a lot of people that where they live is important,” agrees Jed Kliman, managing broker at Windermere Real Estate in Seattle. “Clients I’ve been working with recently are trading up because they’ve spent more time in their homes and realized it didn’t meet their needs.”
Home offices, more privacy, outdoor spaces, and just more room are becoming more important to homeowners. Kliman says playing up these features and amenities when you sell your home can attract buyers. Home staging and visually appealing listing photos, though always important, are especially crucial in today’s market.
“Staging, professional photos, even video and 3D virtual tours—those are all really important because people start their home search online, and they have to be moved and captivated to go see a house,” Kliman says.
In addition to understanding market conditions, home sellers will want to know that the process from offer to closing may work a little differently today.
For example, social distancing may mean home inspections and repairs take a little longer. Kliman says some of his sellers have been doing their own pre-inspections and making reports available to interested buyers to speed up the process.
The bottom line: “You want to make it as easy as possible for a buyer to make an offer,” he says.
Just be prepared for the unexpected, Hale says.
“The time it takes to sell a home does seem to be shrinking, as states lift restrictions on business and consumers feel more confident and comfortable,” she says. “But depending on how infection rates evolve, this could change. This doesn’t mean we’re out of the woods completely.”
U.S. house prices are set to climb in double digits this year even as the Federal Reserve embarks on its expected series of interest rate hikes, according to a Reuters poll of property analysts who forecast a sellers’ market for another two years.
Record low interest rates and a scarcity of homes to buy, combined with unexpectedly explosive demand during the pandemic, sent the average house price up 17% last year, the strongest annual rise in at least two decades.
That has stretched affordability ever further, particularly for aspiring new homebuyers, a common theme across most developed economies as the global economy emerges from the worst of COVID-19 and central banks raise interest rates.
The Feb. 8-28 poll of 33 property analysts suggested U.S. house prices would rise 10.3% this year. That was an upgrade from 8.0% in the December poll, suggesting underlying demand for housing is still strong and housing supply is still tight.
Prices are forecast to rise 5.0% next year and 4.1% in 2024, marginal upgrades compared with 4.0% and 3.7% in the last poll.
Predictions are based on the Case/Shiller index.
Russia’s invasion of Ukraine and the ensuing conflict has injected some caution into interest rate expectations, which could keep 30-year mortgage rates lower and in turn may leave the near-term trend largely intact.
“The recent pace of home price increase is clearly unsustainable,” said Brad Hunter, head of independent consultancy Hunter Housing Economics, who expects just under 8% house price inflation this year, followed by 4.1% in 2023.
“The expectation is for the rate of increase to slow to a pace closer to the pace of income growth of households made up of people who are in their late 20s and early 30s. The millennials are driving the surge in demand for single-family homes. There is, however, very little risk that home prices will decline in this cycle.”
When asked what federal funds rate would bring about a significant slowdown in the housing market this year, analysts returned a median of 1.75%. That is 50 basis points above where a separate Reuters poll predicted it to end 2022, at 1.25%, and also well above money market pricing.
“We consider a funds rate above 2% to be restrictive, a rate that would slow economic growth and probably dampen housing activity,” Nancy Vanden Houten, lead U.S. economist at consultancy Oxford Economics, said.
In the meantime, house prices are set to keep climbing.
A like-for-like analysis showed 12 of 18 analysts had upgraded their predictions from the December poll. While four kept them unchanged, two analysts downgraded them.
Roughly 57% of analysts, or 17 of 30, predicted double-digit house price rises this year, nearly double the 30% in the last poll. All but one of 27 analysts said it would remain a sellers’ market this year and will only turn in 2024.
Already at historic lows, housing inventory levels are likely to worsen as rising input costs encourage builders to build more expensive homes where profit margins are better than the starter homes which are in such high demand.
Existing home sales, which make up about 90% of total sales, were expected to average a little over 6 million annualized units this year, around where they’ve been over the past 19 months.
Asked to rate U.S. house prices on a scale of 1 to 10 where 1 was extremely cheap and 10 extremely expensive, analysts who in most Reuters polls since 2017 had rated it 7 or below nudged the median assessment higher in the latest survey to 8.
In late November 2018, the worlds largest industrial property REIT, Prologis, erected the nation’s first multi-story warehouse located minutes from downtown Seattle. Amazon quickly leased a considerable chunk of the three-level, 590,000-square-foot industrial space, Home Depot soon followed suit. Multilevel warehouses are typical in Asia, some industrial buildings in Hong Kong are as high as 27 stories. It’s a much newer development in North America, but Prologis’ warehouse behemoth won’t be the last. Adventurous developers plan to build taller warehouses in New York, San Francisco, and Washington, D.C.
Prologis’ Seattle facility foreshadowed the predicament industrial real estate currently finds itself in: an insatiable demand for warehouse space and a scarcity of land to build on. Industrial real estate was already hot before the pandemic, but the boom in e-commerce during the lockdowns has put things into hyperdrive. Across much of the world, industrial vacancies are at record lows, rents are going through the roof, and developers can’t keep up. This perfect storm of factors has created an intense industrial market that shows no signs of letting up.
“I’ve been working in industrial real estate for 27 years, and I’ve never seen it this intense,” said Kris Bjorson, International Director of Industrial Brokerage at JLL. “It’s a really unprecedented time for the U.S. industrial market. It’s unbelievable to be under a 4 percent vacancy rate nationally. It’s usually in the double-digits.”
Industrial rent growth in the U.S. and Canada hit a record-high of 17.6 percent in 2021 due to the rise in e-commerce, supply chain disruptions, and retailers boosting inventories to ensure customers get goods on time, according to a recent Prologis Research report. With vacancies so low, retailers are finding themselves in bidding wars for new space. And in some gateway logistics markets or close to major ports, rent growth is astronomical. For example, industrial rent growth in California’s Inland Empire, located in easy delivery distance to much of Southern California’s coastal area, was an incredible 58 percent in 2021.
More than a shed
It is becoming more expensive than ever to build a warehouse. Prologis Research says the price of construction materials rose 40 percent in the U.S. in 2021, while land values spiked 50 percent in the U.S. and Canada. Today’s logistics facilities are more complicated than ever to build due to popular requests like indoor and outdoor amenities for workers and infrastructure for robotic automation. At the pandemic’s start, warehouse developers hesitated on many new projects, which has had long-lasting effects. The project development cycle slowed down, and construction timelines continue to drag on. Everything from increased costs, materials shortages, and increased regulatory hurdles have pushed timelines back. All these factors are creating hellish market conditions for warehouse tenants who have no choice to pay for exorbitant rent increases.
The U.S. will need an additional 330 million square feet of warehouse space by 2025 to keep up with e-commerce growth, according to CBRE. The real estate services firm estimates that e-commerce sales will rise by $330 billion between 2020 and 2025. The problem is that developers are running out of land. Land scarcity is leading developers and retailers to come up with creative solutions. Multi-story warehouses are one solution, but so are conversions of big-box retail stores into fulfillment centers. Bjorson of JLL said tenants are also increasingly willing to compromise on new space. They’re considering Class B and Class C warehouses and second-and third-tier markets.
Converting retail to warehouse space can be complicated, though, and they amount to very little of total industrial inventory. Cushman and Wakefield reports that retail-to-warehouse conversions account for less than one-tenth of one percent of total industrial space in the U.S. There are several challenges in retail-to-industrial conversions, including community acceptance, building design, location, and lease considerations. For example, most retail tenants don’t benefit from having a warehouse as a neighbor. A neighboring warehouse can lead to loss of retail foot traffic and a potential loss of revenue because of lower rent rates. Alternative tenants for landlords of vacant retail buildings are usually more attractive, such as healthcare and even daycares.
Two hours from my back yard
Community acceptance of warehouse space is another thorny issue that adds to the challenges of land scarcity. Many residents associate warehouses with noise, pollution, and truck traffic. In places like north and central New Jersey, there’s considerable resident pushback against warehouse sprawl. Residents there see the increase of warehouses overtaking the older form of residential development and eating up the region’s open space. More than 100 warehouses totaling 26.5 million square feet of rentable space are planned for New Jersey in the next three years. This growth has spawned numerous lawsuits by community groups. A recent lawsuit aims to stop plans to build a 510,000 square foot warehouse in Phillipsburg, New Jersey, which residents say is ‘utterly incompatible’ with the town’s purpose as a place to escape crowded developments.
These warehouses need to be built closer to urban areas so community education is something industrial brokers have had to do, according to Bjorson at JLL. One reason that communities have opposed warehouses is because of the expectation the jobs will be low-paying. While that used to be the case, Bjorson said warehouse jobs are much better-paying than they used to be. When Bjorson talks to local communities, he often avoids the words ‘industrial’ and ‘warehouse’ and sticks with the safer term of ‘fulfillment center,’ which has a better connotation. He said opposition still exists, but more communities are coming around because they realize these facilities must exist due to the e-commerce boom.
“People want their packages the same day or maybe even within 20 minutes,” Bjorson said. “This demand is being driven by us customers. And it can’t always be from a store. Sometimes it needs to be from a nearby warehouse.”
Community opposition to warehouses is a challenge for industrial real estate, especially as vacancies remain low. Overcoming it requires developers and tenants to talk about how they limit nuisances, such as reducing hours of operation and banning engine idling. When safety and environmental considerations are enforced, warehouses can also be a boon to the local economy by increasing property tax revenue.
The industrial real estate market is hot right now, perhaps too hot for its own good. Record rent growth and low vacancies are squeezing tenants who are scouring America for scarce land to build on. Tenants and developers are getting increasingly creative about securing space, as a large percentage of new construction in the pipeline is already pre-leased in much of the nation. Innovations like multi-story warehouses will likely become more common, as well as developers looking to convert retail sites and move to secondary markets. Land supply and entitlements will continue to be a hot topic in the industrial real estate world in 2022. E-commerce will continue to boom and supply chain disruptions could drag on for the rest of the year. The perfect storm of factors creating this market intensity may mean the only place to go for industrial real estate is up, perhaps literally, in the form of verticle warehouses.
First off, what is the metaverse? A simple definition is what our current version of the internet looks like, but instead, it’s fully immersive. Right now, metaverse platforms exist like Decentraland and The Sandbox, but they’re 2D and primarily browser-based. The long-term vision of the metaverse is to have enhanced virtual reality and augmented reality capabilities. An example of this vision would be to step into a virtual shopping mall, purchase a unique digital item for your avatar, and then sell the same thing later in a different virtual world.
Metaverse activities would also include attending concerts or anything else you’d do IRL, except you’re interacting with people all over the world via an internet based platform. We currently consume content on the internet, soon metaverse enthusiasts say we will experience it. All the metaverse platforms now exist separately, but the eventual goal is interoperability so users can jump from world to world. For this lofty vision to happen, there will need to be a new internet infrastructure and VR and AR tech will have to improve with higher internet speeds and super processors that handle hyper-realistic graphics.
Since Facebook morphed into Meta, CNBC reports that digital plots of land have skyrocketed by 500 percent. Digital currency investor Greyscale predicts the metaverse will grow into a global market of goods and services worth $1 trillion annually. The Metaverse Group formed recently, claiming to be the world’s first “vertically integrated real estate company focused on the metaverse economy in the world.” The company has assembled a portfolio of digital properties in the ‘Big Four’ virtual worlds of Decentraland, Somium Space, Sandbox, and Cryptovoxels. Real estate sales in those four platforms reached $501 million in 2021, according to MetaMetric Solutions, a metaverse data provider. At its current pace, metaverse real estate sales could top $1 billion in 2022.
Meanwhile, high-end retailers like Louis Vuitton and companies such as Nike and Walmart are also joining the metaverse gold rush. Walmart recently filed a trademark application and plans to offer its own cryptocurrency and NFTs in metaverse stores. And don’t forget about the celebrities cashing in. Snoop Dogg announced last year he’s planning his own virtual world on the Sandbox platform called the ‘Snoopverse’ that’ll feature “virtual hangouts, NFT drops, and exclusive concerts.” An NFT collector going by the name of P-Ape doled out $450,000 to buy a piece of digital land next to Snoop’s virtual mansion.
Metaverse enthusiasts believe buying and selling a digital property will one day become a part of the global real estate industry. The vision is of a real estate company adopting virtual world strategies and portfolios alongside their real-world portfolios.
A brokerage company like eXp Realty could be the first to try it. eXp is a fully remote organization with more than 60,000 agents in 17 countries worldwide. The company has built a $6 billion business without a single brick and mortar location, and in 2016 they teamed up with Virbela, a metaverse world for work and education, to develop a virtual office environment in the cloud called eXp World. Agents create their own avatars and log onto the virtual campus to conduct business. Everything from interviewing to onboarding takes place in the eXp World. It’s not a stretch then to imagine a firm like eXp having agents selling digital plots of land in worlds like Decentraland.
Other firms like Toronto-based Tokens.com and Republic Realm are already spending big money buying and developing digital land. Republic Realm, a metaverse real estate firm, paid a record $4.3 million for land in Sandbox, where it plans to create 100 islands with villas and a market of boats and jet skis. Ninety of the islands sold for $15,000 a piece on the first day and some are now being re-listed for $100,000. Tokens.com recently raised $16 million to invest in digital real estate, which it’ll use to buy land and hire staff. The company recently spent $2.4 million for land near Decentraland’s Fashion District, where it plans to host fashion events and virtual retail shops.
The value of a digital property is tied to how popular the particular virtual world is. Decentraland, one of the more popular worlds, says it has about 300,000 active monthly users and 18,000 daily users. The Sandbox boasts rapid growth with about 500,000 users and 12,000 unique virtual landowners, and the platform has attracted major brands and celebrities.
These pale in comparison to online games like Fortnite, which has an estimated 80.4 million active monthly users. Video game platforms like Fortnite are not one of the ‘Big 4’ metaverses where companies buy digital land. But, these are immersive environments where users can make in-app purchases and should also be labeled a metaverse, according to Colin. He said investors are placing bets on the platforms that look like they’ll be big players. The investors who gobble up land now stand to make a fortune. But if a platform fails and gets abandoned, it could be a considerable loss.
Investors have been bullish on the metaverse, betting that young people used to spending so much time online will naturally gravitate toward it. But the verdict isn’t out yet on whether people actually want to spend their time in a metaverse. Twenty-one percent of Americans familiar with the metaverse are ‘suspicious’ of it, and 23 percent think it’s “tech companies trying to figure out a new way to make money,” according to a survey by Ipsos MORI, a market research firm. These opinions could change over time, much as most people warmed up to social media. And more than likely, younger generations will drive the metaverse’s growth. Skeptics only have to look at the vast engagement numbers of Fortnite to see there’s growth potential. And the money spent on in-game purchases in Fortnite shows people are willing to spend real dollars. Epic Games, the maker of Fortnite, announced in April 2021 that it was worth $30 billion.
Despite skepticism from some, digital properties are being bought and sold in virtual worlds, and there are emerging ways for real estate investors to get involved. Top sales in Decentraland for the seven days ending January 29, 2022, include a property that sold for $425,100, according to Motley Fool. The previous owner had bought the digital land in 2019 for less than $8,000. Minimum asking prices for parcels in Decentraland have recently been around 3.087 Ether, which is the equivalent of $13,675. There’s even an emphasis now on enabling people who own virtual land to monetize it through things like e-commerce and generating capital as digital landlords.
Buying virtual real estate has its own idiosyncrasies. Every metaverse platform that sells real estate has a marketplace where you buy it. The marketplaces vary with each platform, but they generally include the property’s unique coordinates on the virtual map, the asking price, and where the property is located in relation to business districts, transit, and other popular locations. There are also a couple of third-party marketplaces to buy property, OpenSea and Non-Fungible.com. These sites list virtual properties from more than one metaverse platform at any given time.
TerraZero Technologies is a newer company calling itself a ‘metaverse land developer,’ acting as a real estate company of sorts for entrepreneurs and small businesses who want to do business in the metaverse. CEO Dan Reitzik says they will provide the upfront capital for people looking to buy metaverse land, and then they can pay it back over time like a digital mortgage. TerraZero has also created a tool with listings and provides information on metaverse properties available on different platforms. “Very soon, a company like Apple will go to their commercial broker, and they’ll say they want a new store in Chicago and also a new store in the metaverse,” Reitzik said. “The commercial broker will have to figure out how to get that land in the metaverse.”
When buying virtual real estate, investors first need a digital wallet to purchase the cryptocurrency for the platform they’re interested in. For example, you can buy digital land in Decentraland with that platform’s currency, called MANA, but you can’t use MANA for other metaverses like The Sandbox. Some platforms allow investors to use the cryptocurrency Ethereum, which can be used directly or in exchange for the platform’s currency. Making an offer and closing on a digital property is a breeze compared to IRL properties. In most cases, you make an offer on the platform, and the owner ejects or accepts it. Once the price is settled, clicking the buy button is all that’s left to do. Blockchain funding happens quickly and the transaction is recorded in a digital wallet, which indicates the investor holds the NFT title for the digital land.
As for appraisals in the metaverse, there’s no standard formula. Digital real estate is new, very experimental, and very volatile. Until recently, investors could buy a parcel of virtual land for a few hundred bucks on most platforms. Now, asking prices are usually a few thousand. Investing in metaverse real estate is highly speculative because there’s not much of a transaction history. And unlike real property, if the platform folds and goes offline, you no longer have that virtual land because it no longer exists.
There’s also the problem of scarcity in decentralized platforms like Decentraland. There are only so many parcels of land available, so that’ll inevitably lead to prices going higher, said Reitzik of TerraZero. Centralized platforms like The Sandbox, owned by private companies, don’t have this problem, as they can increase the number of land parcels if they want. Some say location doesn’t matter because users can quickly jump all over the virtual worlds, while others say getting a piece of digital land next to prominent attractions is an obvious benefit. Look at the aforementioned $450,000 sale price of the digital land next to Snoop Dogg’s Sandbox mansion for evidence of this.
As exciting as metaverse real estate investing sounds, it’s also extremely uncharted territory. No one quite knows how the digital land market will behave, so investors curious about virtual land buying and selling will probably be cautious about how much money they allocate to it. That’s all the more reason why the vast sums invested by some big brand names seem a little shocking. Many predict 2022 will be a year where activity in metaverse platforms ramps up even more, so more real estate investors may start taking notice. Prices for digital land parcels have skyrocketed, and they could continue to grow but any metaverse investor has to face the reality that these platforms could be abandoned making their property completely worthless. It’s a bit of a gold rush right now, and just like the real-life California Gold Rush, some virtual land speculators will make out big, and others will fail spectacularly.