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Is a new kind of “crash” on the horizon for real estate?

Posted on August 30, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

It doesn’t take more than a quick glance through the news to read something about the fast and wild real estate market that has risen from the chaos of a global pandemic. Listings are selling within days of hitting the market, well above asking price, and construction can hardly keep up with the demand for new residential and commercial properties. There are many factors impacting the temperature of the market which make it quite different than the real estate “boom” we know all too well from 2008 – as well as the crash that followed.

Should real estate professionals as well as buyers, sellers, and builders be wary of a similar crash on the horizon? Without a doubt, the market cannot sustain this pace indefinitely, but it also doesn’t mean it will end in a crash-and-burn (or rather explosive) style that it did in 2008. Keep reading for a high-level overview of why the 2021 real estate boom is unique, and what we can expect as the tides inevitably turn.

Noteworthy Differences Between 2021 and 2008

Lower leverage and higher down payments – When the market corrected itself in 2008, overleveraged home buyers brought down the housing market, and some of that contagion spread throughout the rest of the property markets quickly causing a “wildfire” of sorts. As we now approach Q4 of 2021, the housing market is robust with buyers coming in with lower leverage than ever. Despite record-high housing prices, we’re also seeing a record-high percentage of house buyers bringing in 20% down payment or better. Meanwhile, 26% of all houses are sold to cash buyers. With so much money being printed by the Federal Reserve and still tight underwriting standards, only the most well-qualified house buyers are getting a chance to buy and even they are swamping the available inventory.

Slow and low construction – Housing construction levels remain well below that of the 2005–2007 period, which preceded the 2008–2010 correction. Part of that is due to wary housing builders who lived through the chaos of 2008. Another consideration is the disrupted supply chains due to COVID-19 deaths, illnesses, and lockdowns. Until we can fully resolve the prolonged impact of COVID-19 on a global basis, we can expect to deal with supply chain issues and higher prices from inadequate supply. And unfortunately, with the way that variants are arising from all the global hot spots, combined with anti-vaxxers, it’s going to be a long haul out of this storm.

Falling interest rates – Right now interest rates remain at record lows and falling. Interest rates will continue to fall during the current inflation spike and after; that’s how the mechanism of Federal Reserve money printing works. But it’s not advised to expect interest rates to climb just because rates are low today. Until the Federal Reserve changes its policy direction, there is no catalyst for higher interest rates, at least not yet.

Preparing for Impact: What kind of crash to expect?

Collectively, real estate professionals agree that a crash is on the horizon for office and retail real estate. Although “crash” may be too strong of a word – rather we should view it as a natural flow to the ebb we’ve experienced, and a course correction like what must occur after any major market shift.

Here are some important things that are boiling under the surface that will have an impact on the market sooner than later. Even with the general reopening of the U.S. economy, nationally office space demand is nowhere near what the still high asking prices for office buildings would imply. Furthermore, retail is getting crushed by online shopping, which reached escape velocity during the COVID-19 lockdowns. So, those two property segments have a lot of room to fall until property owners figure out how to adapt. The hard reality is that many commercial property owners may simply run out of cash before they can adapt and some of that price drop may spread to neighboring housing in 2022–2023.

Our current market is driven by supply and demand. While no one can predict the future with 100% accuracy, I don’t think we are heading for a catastrophic “crash” per se. Rather, I see the housing market continuing strong for at least eight to ten months before we see a significant slowdown and evening out.

Key Takeaways

The bottom line is that there is a property market readjustment coming, but it’ll be quite different from what the United States experienced in 2008. Those circumstances were uniquely reckless and volatile. Though real estate will always be (not crazy about this wording), often at a rapid pace, the market right now is not a castle built on quicksand as it was 13 years ago. As a whole, the nation has learned from these mistakes and is not endorsing overleveraging of buyers. Additionally, construction has slowed for various reasons, most beyond our control, which has naturally put some “brakes” on the market.

The most important takeaway is for potential real estate buyers. As it stands, there is no general advantage to wait. As interest rates fall, housing becomes more affordable at ever-higher prices. If you are in the market for property right now, then buy right now. Simply put, the market will continue to shift and where some pros lessen, others will emerge in your favor. The best move is to hunt for opportunities overlooked by others, so you don’t end up in an impossible bidding war or jump into a property that really isn’t the right fit for you. Don’t get caught up in the manufactured chaos but remain steady in your thinking and purchasing. Most importantly, link arms with a trusted real estate professional who can help you navigate the choppy waters of the market – now and into the future.

What is your take on the current real estate market and the potential for a crash in the future? Do you agree with this prediction or have one of your own to share? Join the conversation by leaving a comment!

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Economic Impact of Rising Commercial Construction Costs

Posted on July 14, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

When a global pandemic first hit, the main concern was rightfully on the health and wellbeing of our population. As we slowly gained knowledge and tools to bring the spread of this virus under control, something equally as powerful and disruptive was already burning through the economy like wildfire.

Ongoing pandemic-related disruptions in the supply chain of a range of construction materials are undermining project demand and this has trickled down to impact just about every industry imaginable. Most directly, the delays and cost increases fall on construction businesses, their workers, and their clients who are waiting on them to complete projects varying from a single-family home to mega complexes that have been in the works for years.

These mass shortages caused by the inability to ship or receive some of our economy’s most essential materials, such as lumber and steel, have the construction industry in between a rock and a hard place. And we can be sure that they will not be the only sector to feel the blow of delayed project timelines and skyrocketing costs. How does all of this stand to impact the progress and financial health of our economy? Keep reading for key insights.

Understanding the Impact

According to construction project estimators, one of the biggest reasons for material shortages is the inability to ship available materials by rail or truck. Due to container and trucking shortages being felt across the country, anything with significant shipping and logistics components is highly likely to cause lead time issues. If the easing of tariffs is put into place, pricing and availability should begin to return to normal levels, which would have a positive impact on current projects and the market as a whole. However, with the shipping container and freight backlog that currently exists, bringing in significant quantities of overseas material only adds to the current challenge.

GRAPH COURTESY OF AGC OF AMERICA

Shortages Drive Cost

While general contractors can usually protect against the expectation that costs will increase, the construction industry has not experienced such dramatic material cost increases in recent history. Material cost increases, coupled with the already existing labor and housing shortages, will continue to impact the industry, domestically and globally, for the foreseeable future. Such shortages could delay the start of new projects around the country and may trigger additional claims on projects that are currently underway.

These increases and challenges are cause for concern; it’s important for business owners to consider the types of materials that their project will require. While commercial construction material costs have risen as well, it is not to the extent that residential construction costs rose due to its heavy reliance on softwood lumber. For commercial construction, steel prices generally have a greater impact.

Delays Across the Board

Some material suppliers have completely canceled their bids or contracts due to the lack of materials. While others have indicated delays of six months or more and are currently quoting prices for materials (like engineered wood products) that will not ship until early 2022! Because of these setbacks, the industry can expect an increase in claims and disputes over material prices and associated delays.

Getting Creative with Contracts

Project participants might consider amending their contracts, incorporating new or modified cost-escalation provisions, or adding riders for adjustments to contract terms based on certain material cost increases, such as based on express percentage increases. Parties might also negotiate contract allowances for certain materials or incorporate cost-sharing for material price increases that exceed certain thresholds.

Push On or Wait?

Borrowing is very inexpensive right now, and even a slight increase in lending rates down the road could add hundreds of thousands of dollars in overall costs, depending on the length of the loan agreement. Project owners need to weigh the risks of waiting for material prices to come down against the probability of rising inflation and interest rates. Likewise, if waiting means you can’t expand your production capacity, grow your business, or address the needs of those you serve because of your facility’s limitations, the long-term implications could negate and even overshadow any potential savings.

What’s most important to keep in mind is that the market has demonstrated again and again that everything flows. Trends (and troubles) will come and go, and when the market experiences a negative impact caused by something else, it will look to correct itself almost immediately. To address the delay of construction materials and labor, and the rise in construction costs, as a result, we can see solutions already emerging. These range from using alternate materials, negotiating more flexible terms within a contract, phasing out projects, and getting creative with how and when to borrow money to take advantage of low-interest rates.

The commercial construction industry will rebound, if not even stronger than it was before the pandemic hit. The lesson here is to remain patient, seek innovative and collaborative solutions, and keep your eyes set on the long-term evening-out of any negative impact you may be experiencing today.

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Census Data: National and Local Trends You Need to Watch

Posted on June 3, 2019 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Census data provides a fascinating look into population growth trends that stand to have a profound impact on our economy, both locally and nationally. More than just being “interesting” data to study, population growth and decline points us to important trends that will reshape supply and demand in various industries, one of the most prominent being real estate.

Just last month, the US Census Bureau released new population estimates. These estimates account for and compare the resident population for counties between the dates of April 1, 2010 to July 1, 2018. The outcome? There are shifts in population taking place across the nation that may differ from what you might assume. Let’s take a look at some of the highlights from this data from a national and local level.

At a National Level

South and West Lead Population Growth

The census data confirmed that counties with the largest numeric growth are located in the south and the west regions. In fact, Texas claimed four out of the top 10 spots. Looking at population growth by metropolitan area, Dallas-Fort Worth-Arlington, Texas, had the largest numeric growth with a gain of 131,767 people, or 1.8 percent taking place in 2018. Second was Phoenix-Mesa-Scottsdale, Arizona which had an increase of 96,268 people, or 2.0 percent. The cause of growth in these areas is the result of migration, both domestic and international, as well as natural increase. In Dallas, it was natural increase which served as the largest source of population growth, whereas in Phoenix I was migration.

Fastest Growth Occurred Outside of Metropolitan Areas

Surprisingly, no new metro areas moved into the top 10 largest areas. Of the 390 metro areas within the US (including the District of Columbia and Puerto Rico), 102 of these areas, or 26.2 percent experienced population decline in 2018. The five fastest-decreasing metro areas (excluding PR) were Charleston, West Virginia (-1.6 percent); Pine Bluff, Arkansas. (-1.5 percent); Farmington, New Mexico (-1.5 percent); Danville, Illinois (-1.2 percent); and Watertown-Fort Drum, New York (-1.2 percent). The population decreases were primarily due to negative net domestic migration.

North Dakota Claims Fastest Growing County

Among counties with a population of 20,000 or more, Williams County, North Dakota claimed the top spot as the fastest-growing county by percentage. This county increased by 5.9 percent between 2017 and 2018 (from 33,395 to 35,350 people). The rapid growth Williams County experienced was due mainly to net domestic migration, 1,471 people, in 2018. The county also experienced growth between 2017 and 2018 by both natural increase of 427 people, and international migration of 52 people.

More Growth than Decline

Out of 3,142 counties, 1,739 (or 55.3 percent) gained population between 2017 and 2018. Twelve counties (0.4 percent) experienced no change in population, and the remaining 1,391 (or 44.3 percent) lost population. Between 2010 and 2018, a total of 1,481 (or 47.1 percent) counties gained population and 1,661 (or 52.9 percent) lost population. Though there has been more growth than decline overall, the numbers indicate that this can easily shift year over year.

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

The most notable trend to take place between 2010 and 2018 in Central PA is that these counties all experienced consistent growth year-over-year. Moreover the growth occurred fairly evenly over the last 8 years. This provides consistency and enables the economy to respond to the growth over a reasonable amount of time.

Counties Also Maintain Same Order of Ranking in Population

Another trend worth noting is that the counties have maintained the same order of ranking based upon population for 8+ years. For example, in 2010 these counties in order of smallest population to largest population was Cumberland, Dauphin, York, Lancaster. This is the same ranking we see in 2018, and every year in between. No county surpassed another at any point.

Lancaster Remains Largest and Fastest Growing County

Lancaster County has a major lead in population over the others. At 984 square miles, it is also the largest of the 4 counties. Between 2010 and 2018 it also experienced the largest numeric growth at 24,112 people. Number two in numeric growth was actually the smallest of the four counties, Cumberland County, which grew by 16,017 people. York County grew by 13,301 people and Dauphin County grew by 8,997 people.

Overall, the latest US Census offers valuable and insightful information related to population growth between 2010 and 2018. Understanding the cause of either growth or decline provides framework for how these shifts may continue on their course, or change in the future.

A deeper dive into the census data reveals several demographic changes impacting commercial real estate development: household formations, aging baby boomers, growing millennials, women in the workforce, and migration toward the South.

Today’s demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands.

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Predictions for Trends and Changes in Commercial Real Estate in 2017

Posted on February 6, 2017 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

It’s the start of a new year and naturally this turns our attention toward what we predict will happen in the coming 12 months. Specifically in the commercial real estate market, there are several noteworthy trends and changes we predict to take place in 2017. What are these and how will they impact the various sectors of commercial real estate? Here’s the breakdown!

Office Real Estate

Experts are predicting that suburban markets will outperform downtown markets in 2017. Suburban rent growth is anticipated to exceed 2% while vacancies will only increase 10 base points (to 14.5%). In contrast, downtown vacancies are expected to increase by 30 base points (to 10.9%). The explanation to this growth is that suburban development is catering to millennials who want to live, work and socialize all in the same area. While national occupancy in downtown office space will still far exceed the suburban markets, suburban office space will have a much higher growth rate in 2017, relatively speaking.

Industrial Real Estate

Out of all of the sectors, industrial real estate will have the best year in 2017. Major growth in e-commerce as well as technological advancements, like driverless vehicles, have been fueling this sector’s growth. As these industries continue to thrive, so will industrial real estate! Availability sits at a 15-year low while net occupancy achieved its 26th quarter of record gains (as of Q3). Best of all, rents continue to climb toward a record-setting high. Because it wouldn’t be fair not to throw in a little bad news to keep things balanced, the sector is expected to slow down a bit as the result of a wane in user demand.

Retail Real Estate

2016 was not a good year for retail and it looks like 2017 will continue to get worse. Brick-and-mortar stores are closing and consolidating while e-commerce proves to be the way of the future. Online sales are expected to increase by 15.5% (to 9.2%) this year. On a brighter note, Class A malls are expected to maintain or increase their rents per square foot, as they have for the past five years. Also, experts predict that mixed-use lifestyle developments will be a possible solution for brick-and-mortar locations to compete with e-commerce. Finally, community strip centers are expected to grow by 1.7% in 2017.

Hotel Real Estate

In 2017 we expect to see a healthy labor market and wage growth which will ultimately benefit hotel real estate through an increase in leisure and business travel. However, major competitors to the hotel market, such as Airbnb and similar home-sharing businesses will continue to thrive. This is expected to steal sales from hotels as the concept of home-sharing becomes more mainstream and robust.

Multifamily Real Estate

Overall, experts are optimistic for the multifamily real estate market in 2017, but that’s not without a few key challenges. An increase in supply this year will drive up vacancy rates and impact rental rates as a result. Interestingly, it’s the high-end apartments that will experience the most shrinking rents, while Class B and Class C apartments will be less impacted. This is the first time since the Great Recession that supply outpaced demand, as it did in 2016. It’s expected to continue into 2017 which leaves some major hurdles to face moving forward.

What sector of commercial real estate do you think will be the most changed in 2017? Share your insights by leaving a comment!

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Commercial Real Estate Predictions for 2015: Central Pennsylvania and National

Posted on December 19, 2014 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

With the end of the year upon us, we can finally take a complete look at how the commercial real estate market has performed throughout 2014. However, 2015 holds an endless array of unknowns. How will the market perform? What other factors can we expect to impact commercial real estate? How will this differ nationally to locally?

These questions do not yet have answers, but we can offer our best predictions for what we can expect to happen within the commercial real estate market for 2015. Let’s take a look at where the current trends are likely to lead us in the coming months for both nationally and locally within Central Pennsylvania.

National Market Predictions:

Multi-Family: The rent market is predicted to remain in the landlords’ favor in 2015. Vacancy rates are expected to stay below 5 percent which will likely lead to an increase in rental rates, well above inflation. Apartment rents were projected to increase 4 percent in 2014 and are again expected to increase by 4.1 percent in 2015.

Office: Vacancy rates are predicted to fall from 15.7 percent to 15.6 percent in 2015, with rents expected to rise by 3.3 percent.

Retail: Experts predict that vacancy rates nationwide will drop from their current 9.7 percent to 9.5 percent in 2015 with average retail rents increasing by 2.5 percent.

Industrial market: Industrial real estate vacancies are expected to rise from 8 percent to 8.4 percent next year, while annual rents will continue to rise by another 2.9 percent.

Central Pennsylvania Market Predictions:

Multi-Family: The multifamily investment sales market will see continued appetite for apartment properties. Rents will increase to more than $1.25 per square foot and the market will continue to absorb new units as they get delivered. Overall, 2015 will be a good year for multi-family real estate.

Office: Market fundamentals continue to trend in a positive direction. The combination of measured new construction, tenant expansion and lessening office contractions will continue to contribute to restoring health to the Central Pennsylvania market. We expect asking rents to continue to stabilize and rise modestly in 2015. On the office investment side, we anticipate medical office space will continue to receive the most investor attention.

Retail: The retail sector will continue to see retailers moving into smaller spaces as they balance brick-and-mortar locations with online shopping. We also predict continued growth of fast-casual restaurants and an expansion of fast-fashion and discount retailers. Owners of power centers and grocery-anchored retail properties will rethink how they use space to fill vacancies in 2015 and beyond.

Industrial: Three main themes are emerging in the industrial sector that will follow into 2015: Rents will continue to climb; tenants will begin shifting to leasing light industrial, or smaller industrial properties in the 50,000 to 250,000-square-foot range; and companies leasing industrial space and landlords developing these properties will increasingly begin to provide more on-site amenities to employees. Development of mega distribution facilities will be limited by the availability of suitable locations.

These predictions for the New Year are what you might expect when looking at the current trends in commercial real estate. It’s important to think ahead as to how they might impact your business or the community in which you live. While some sectors are expected to contract, others show signs of promising growth. In addition to the future of the commercial real estate market, the success of 2015 still lies in our own hands. Best wishes for your best year yet – from your friends at Omni Realty Group!

Share your own predictions for the commercial real estate market in 2015 by commenting below!

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