Five Things You Need to Know: Multifamily Rents Down Again, but ...
And another California city considers doubling down on rent control
During a stint at Minyanville, a financial news and education media company, I was fortunate to work under the tutelage of a talented editor named Kevin Depew. Depew is now the deputy chief economist at consulting firm RSM, and wrote prolifically during the Great Financial Crisis, brilliantly capturing the mood of America during that trying time. His "Five Things You Need to Know" was required reading every week, and covered topics from high finance to macroeconomics to social trends. This series is an homage to "Pep," who once quipped "I majored in philosophy, but since none of the big philosophy firms were hiring, I went into finance."
1) Multifamily Rents Down Again, But ....
Apartment rents nationwide have been slipping since mid-2022, a trend which continued in the first month of 2024, according to data from ApartmentList.com. (You can read my deep dive on US rental housing HERE).
Rents slipped 0.3% in January compared to a month ago, which is a slower rate of decline than recent months. But given seasonal swings as prospective tenants typically call off searches during the holidays, year-over-year numbers are more reliable for evaluating the true state of the rental market.
Rents were down 1.0% from last January, but rates of declines have stabilized at the national level and many regions are showing signs of improvement.
And another metric is suggesting that behind the scenes markets could be healing themselves earlier than many experts suggest.
I am always looking for an edge, a metric or clue that puts me ahead of the consensus view. And recently I have been tracking the percentage of markets that are seeing rents higher or lower than a year before. This type of analysis doesn’t try to pin down quantitative moves, but rather seeks to suss out the trends beneath the numbers, offering a clue to what may be evolving but not showing up in headline statistics.
As can be seen below, in June of 2022, this ratio began to slip a few months before rent declines started to show up in the nationwide data. Similarly, even as rents started to dip again last summer, this metric bottommed out and began to rise, indicating that there were pockets of strength despite negative overall rent growth.
Now with rent declines slowing, despite record new deliveries in many housing markets, the coming months will help us see whether this metric is as prescient as it has been in the past.
2) Multifamily Distress Follow Up
As I noted last week, multifamily distress is picking up steam, as floating rate debt taken out during the US property market’s blow off top of 2021-2022 comes due amid a declining rent environment.
The graph below, created by CRE data provider Trepp and posted on X by @ReidBennettCCIM, suggests that distress levels vary widely by geography.
Distress is most pronounced in formerly high-flying markets in the southeast and midwest, with a sprinkle of problems in the northeast. Notably, the west coast — despite calls that California is going to fall into the Pacific — is hanging in better than most other regions.
Now with the Fed signaling that investors will have to wait a bit longer for lower rates, expect the first part of 2024 to be a continuation of 2023’s dismal market conditions.
3) Angry CrowdStreet Investors Go for the Jugular
In a bizarre twist to last year's banking crisis (which as I mentioned last week isn't quite resolved), a group of disgruntled investors is suing real estate crowdfunding site CrowdStreet for improper use of funds.
According to Bisnow, the group is alleging that poor internal controls allowed now infamous Nightingale Properties to use investor funds to bet on First Republic Bank options contracts rather than their intended use of buying an Atlanta office complex.
Leaving aside the absurdity of a sponsor using LP funds for options speculation, the situation highlights the questionable viability of the real estate crowdfunding business model and underscores what investors should understand about sponsors who use these platforms to fundraise.
Crowdfunding sites like CrowdStreet, Fundrise, RealtyMogul and others post investment opportunities from real estate investment managers (or “sponsors”) who use funds from private investors for their projects. The platforms offer access to their investor clients and in exchange the sponsor gains access to another source of capital.
It's a novel model which took hold during the 2010s market boom, but has several qualities which should make investors question allocating money to deals on these platforms.
First, experienced sponsors with good deal flow and a strong operating track record don't generally fall short on fundraising for good deals. If they've taken care of investors and are making investments within their area of expertise, they shouldn’t need to tap into crowdfunding platforms.
So, by their nature crowdfunding platforms negatively select for sponsors with a hard time fundraising on their own. This could be because they have a limited track record, investors have soured on their performance or they’re looking for new LPs because a existing investors aren’t opting in for a particular deal. These are not great characteristics of an attractive investment.
Second, the same negative selection bias for sponsors applies to the deals themselves. "Great deals always get funded" is a mantra that anyone who has been in this business for long enough lives by. Perhaps not exclusively, but deals posted on these sites will trend towards those that are struggling to get funded by traditional means.
Third, and as the case with Crowdstreet shows, shoddy due diligence on sponsors stemming from misaligned incentives puts investor capital at risk. Having explored crowdfunding as a source of investor capital (and declining the opportunity), I can attest that these firms due diligence on their sponsors is spotty, at best.
Crowdfunding platforms’ motivation is to generate deal flow, and while of course they'd rather that the deals perform well, driving near-term deal volume began to trump strict due diligence procedures as competition heated up within the space.
Now as top-of-market investments blow up across property sectors, expect these platforms to come under pressure as investors begin to wonder if their promise of real estate riches with the click of a mouse were perhaps too good to be true.
4) Concord, CA Mulls Expanding Rent Control Restrictions
The City Council of Concord, California, is considering adding further restrictions on the city's property owners, despite the Bay Area suburb of 125,000 already being covered under California's statewide rent control regulations.
The proposal would mirror similar rules already in place in nearby San Francisco and Oakland, which have some of the strictest rent control regimes in the country. If approved, rent increases in Concord would be limited to 60% of the CPI index or 3% of current rent, whichever is lower. The ordinance would also place limitations on landlords' abilities to evict tenants without "just cause," according to the Mercury News.
Long considered an affordable corner of a high priced region, Concord has seen rents rise 22% since 2017, in line with rent growth statewide, but below nationwide rent growth of almost 30% during that time period, according to data from ApartmentList.com.
Rent control advocates argue that limits on rent increases slow tenant displacement and curb gentrification, helping retain the character of working class neighborhoods.
Opponents however, suggest that rent control raises housing costs more broadly, burdening new arrivals with expensive apartments and making it harder for small-time property owners to cover operating costs.
The pros and cons of rent control are a longer topics, but Concord considering rent control is another data point for real estate investors and management companies who say that doing business in California is just not worth the effort and risk.
5) Chicago gets its First Vertical Warehouse
CoStar reports that Chicago is the latest US city to get a so-called "vertical warehouse," an evolution in urban logistics which has been touted for years as the solution to Next Mile shipping challenges.
Developed by Logistics Property Co., the 1.2 million square foot project is slated to be completed later this year after two years of construction. In addition to multi-story warehousing and truck ramps, the facility will include clear heights up to 36-feet.
Meanwhile, after a decade-long run, demand for warehouse space in the US is finally slowing. Nationwide industrial vacancy is up to around 6%, below the 20-year average of 7.3% but well off record lows below 4% hit in 2022, according to CoStar.
Vertical warehouses have "been a thing" for years in Europe and Asia, where developers in tight downtown districts have gone up instead of out to facilitate urban deliveries. Long-promised as the savior of the challenges of meeting high demand from urban populations now accustomed to next and even same-day shipping, vertical warehouses have been slow coming to market. High land value and construction costs, not to mention tricky building requirements to facilitate long tricks climbing to upper floors, make them challenging projects to take from the vision board to reality.