The following is reposted from The 2019 “Emerging Trends in Real Estate” the annual real estate report put together by the Urban Land Institute and PwC published on October 16th.
The 2019 “Emerging Trends in Real Estate” is the annual real estate report put together by the Urban Land Institute and PwC. When it comes to overall housing, the recently-released report offered good news and not-so-good news.
On the good news front, fundamentals continue driving demand for apartments. “Millions of 20-somethings are still funneling along at high amplitude into rentals, now solidly supported by a macro economy that has reached virtually ‘full’ employment,” the report notes. Also adding to the demand influx is the growing pool of renter-by-choice baby boomer demographic.
The not-so-good news? Scarcity of product for certain populations. “Even at 360,000 multifamily starts (in 2018), we’re not building enough units in the right places to meet demand, and keep rents in check, and now construction costs are going up faster than we can raise rents,” observed a CEO of one of the nation’s top multifamily developers.
Additional trends impacting the multifamily sector include:
Technology increase. Technologies are impacting all facets of multifamily, from property management to automated building. “Technology provides one of the biggest opportunity areas to address the decoupling of household budgets and development expense,” the report observed.
A plethora of regulations. Legislative and regulatory issues such as density and rent control are becoming issues on the municipal and county level. While rent control is being used as a method to control affordability, regulating rent increases negatively impacts NOI which, in turn, can suppress development.
New renting models. Four new models pertaining to long-term living leases are Airbnb units, co-living, single-family rentals and micro apartments — as well as hybrids between them all. These are “on the fringes of the long-term lease, cash-generation business models that dominate the multifamily space today,” the report noted.
Read the article at https://www.connect.media/emerging-trends-the-two-sides-of-multifamily/?utm_source=mlApartments&utm_campaign=mlApartments-2018-10-18_17:30
Median Sale Price Up – Supply of Homes For Sale Down – Sales Volume Flat
Homeowners Are Staying Put Longer
One of the side effects of the continuing shortage of homes for sale and median sale prices rising faster than the cost of living is that remodeling contractors have become very busy. This is a trend that has been developing over the last couple of years. Homeowners are realizing that if they sell their home it will be very difficult to find a new home. As a result, many are choosing to stay where they are and remodel their current home. The data shows that the average length of home ownership in the United States has been steadily increasing. In 2007, the average homeowner stayed in their home for about seven years and in 2008 it had increased to nine years. By 2016 this number had increased to ten years. According to the Home Buyer and Seller Generational Trends Report – 2017 by the National Association of REALTORS Research Department prospective buyers now expect to live in their homes for a median of 12 years, while18 percent say that they are never moving.
As result many remodeling contractors are booked ahead well into next year. Several of the local remodeling contractors I have spoken with recently have indicated that business is very good. According to the Joint Center for Housing Studies at Harvard University remodeling activity in U S major metro areas have reached a peak level of activity and the Twin Cities is no exception. Remodeling activity in the Twin Cities is expected to increase at 7.8% in the coming 12 months. In comparison the average growth projection for other U S major metro areas is 6.8%. As more homeowners elect to remain in their existing homes for longer periods that means that these homes will not be available for sale, further contributing to the shortage of homes available for sale. I expect this increasing length of ownership trend will continue for the foreseeable future contributing to the ongoing shortage of homes available for sale.
The shortage of homes for sale continues to impact the local housing market. Median sale prices were flat between July and August at $268,000, however, the Twin Cities housing market continues to show a year over year gain in sale prices, marking an 6.3% percent annual increase in August 2018. The annual rate of increase has remained on pace with increases that were recorded earlier this year. The number of homes sold in August 2018 was 6,605 an increase of 5.4% compared to last month and a decrease of .2% compared to August 2017
On the supply side at the end of August there was a 2.5 months supply of homes available for sale. In comparison in a normal, balanced market there is about a 6 month supply. In August 2018 there were 12.193 homes available for sale, 8.2% less than the 13,280 that were available in August 2017. A relatively high annual growth rate in median sale prices and historically low supply will continue to dominate the market for the foreseeable future.
New listings in August were 7,813, an increase of 8% from the 7,263 recorded in August 2017. Although the number of new listings has increased slightly compared to last August. If the number of new listings remains at this level compared to current sales levels it appears the shortage of homes for sale will continue to be the new normal for now.
Since the June and July housing numbers have been published there seems to be much more uncertainty about the current state of the housing market. People are beginning to ask questions about the housing market. Is the decrease in sales volume a warning sign? Are we in a bubble? Will there be another housing market correction? One or two months data by themselves doesn’t signal a major change in the direction of the housing market. We will need to look at several more months data to understand more about where the market is headed.
The number of closed sales were down 12.5% between June and July of this year. However, number of home sales in the Twin Cities was essentially unchanged in July 2018 compared to July 2017. If you look at the overall seasonal pattern for the number of homes sold is following a very similar pattern compared to previous years. Looking at the data for the median sale price, the number of closed sales, and the number of homes available for sale you will notice that the pattern for 2018 is very similar to 2016 and 2017. People have expressed
Homes Sold YTD 2018 vs. YTD 2017
concern that the number of sales is declining. When you look at 2018 year to date sales there have been just over 1,000 fewer homes sold this year compared to last year. About half of this amount occurred in May. I think that we are going to need to see a few more months data to understand if this is a long-term change in the market. At this point much of the decrease in the number of homes sold seems to be a result of the continued decrease in the number of homes available for sale. The number of homes available for sale was 12.3% less than last July. Median sale prices continue to increase, up 6.6% year over year compared to July 2017.
What really drives the need for housing?
Many people correctly point to increasing population and job growth as the primary reason. Job growth doesn’t drive housing demand, housing demand responds to job growth. Few people are against job growth, it is considered by many as sign of “progress”. There are many local economic development groups trying to attract new jobs by offering incentives for potential employers. Almost all communities are in favor of job growth but what about the housing needs that are created by this job growth? In many of the communities where people want to live creating more housing translates to more density. The truth be told, many people are in favor of more housing and more affordable housing as long as it not near them. According to recent DEED statistics employment in the Twin Cities metro area in the last 12 months has increased by 30,800 jobs. We have not been creating enough new housing units to keep up with that growth rate. As a result, we have a chronic shortage of homes available for sale, median sale prices are increasing faster than wage growth, a very low vacancy rate for rental housing, and rents that continue rise faster than the cost of living. It’s becoming increasing difficult and expensive to develop and create any type of for sale or rental housing. If we are going to continue to have strong economic growth, then we are going to have to figure out a way to create enough new housing units at all price levels to keep up with the increasing employment growth.
What about new housing? Why does it take so long? Why is it so expensive?
Lack of entitled land
Difficulty and length of the entitlement process
Excessive impact and local fees
Zoning and bias against density
Rapidly increasing construction costs
Rapidly increasing land costs
As long as our local economy continues to grow and is creating more jobs these are some of the issues that need to be addressed if we are going to come up with meaningful solutions to our housing market issues.
As the economy has stabilized in the past few years, the high-end multifamily housing market has experienced strong growth. Meanwhile, however, a latent demand for affordability has emerged as an untapped market that’s been underserved for years.
Increasingly, developers are looking to affordable projects, which are more appealing to lenders when they reach the cap on the high-density/high-rent projects that had been ruling many markets. The balance between high-rent and more-affordable apartments is also affected by land costs, construction and labor costs, and development speed.
Cost-consciousness is increasingly important as conventional construction costs remain steady despite the industry slowdown. In fact, contractors reviewing work over the past several years have seen construction costs go up on multifamily construction by about $10 per square foot per year. Shaving time off the construction schedule saves money on the construction loan and extra months of interest while getting to revenue generation sooner.
One hedge against labor and construction costs as well as schedule overruns is modular production. In addition to increasing the speed and reducing the cost of construction, modular building provides consistent quality and shortens the design time by providing a kit of parts design teams can work with rather than needing to design everything from the ground up.
Transitioning to the Modular Mind-Set
Changing the speed and method of construction requires changing the mind-set of the design and construction teams. Savvy design is directly tied to how well the teams understand the manufacturing process. In short, to succeed with modular, the teams must rethink how they put things together.
The key is to take the best ideas in terms of both exterior and interior spaces and figure out how to execute those ideas in the factory rather than build them piece by piece in the field. Each individual component requires its own set of considerations: from interiors, including bathrooms and kitchens, to the common spaces, including elevators and stairs, to exteriors, including cladding and framing.
The modular construction trend started with the same philosophy as micro-unit prototypes that emerged a decade ago. At that time, architects and designers sought to make small units for infill projects that also happened to be great places to live. The key to making these smaller spaces more appealing was proper proportions and correct lighting.
Layouts that were shallower from corridor to glass allowed for more daylight across the window width, opening up the room. The smaller size also allowed more room in the budget for upgraded finishes, resulting in a small but well-appointed space. For residents, the smaller, more-affordable units provided access to urban neighborhoods that otherwise might have been beyond their budgets.
Helping Renters Caught in the Middle
Since the recession, there’s been a gap in mid-level housing development while developers focused on affordable, subsidized housing and high-density, luxury projects in urban areas with higher rents. People whose incomes are too high to qualify for subsidies have more-limited options, which presents an opportunity for modular designs that drive costs down and fill the gap with quality housing at affordable prices.
When they’re designing multi-unit housing, developers look at the bottom line: Higher rents are the biggest driver, and if nicer fixtures command higher rents, there’s no reason to downgrade. The only way to alter this calculus, then, is to change how the apartment itself is built. Modular building provides the means to do so.
There have been movements in the past toward greater efficiency that have helped the individual construction trades from a built-product standpoint but not a labor standpoint, so the developer didn’t realize the savings. But with manufactured components, efficiency reaches a whole new level.
Trending to the Future
Changes to the overall structure of the community, with demographic shifts, can have a ripple effect. New projects generate work in places that haven’t seen development in the recent past, helping to revitalize a neighborhood.
Redevelopment spurs communities to initiate improvement efforts and attracts new residents. In this way, modular components ultimately can redefine multifamily living by providing quality housing with more-reasonable rents, thereby attracting more tenants and giving the entire town a boost.
Traditional Median Sale Price Up $82,300 (43.8%) From Low Point in Feb 2012.
Rapidly rising median home sale prices have been a major source of wealth creation for homeowners since the low point in median home sale prices that occurred in February 2012. Since then median home sale prices in the Twin Cities have increased by $82,300, a gain of 43.8%. In April the median home sale price was $266,500 eclipsing the prerecession high water mark of $238,000 observed in July 2007. As has been noted before this rapid rate of increase has been fueled by the historically low availability of homes for sale coupled with improving economic conditions and relatively low mortgage rates. Another positive development is that in February 2012, 61.5% of all the sales in the metro area were distressed sales compared to the 3.3% that was observed this April. The percentage of distressed sales has since returned to pre-crash levels at less than 5%. The wealth creation effect of continued increases in home values will ripple throughout the economy as homeowners will be able use this newly created equity for investments or purchases.
How long will this trend continue?
In the near term a rapid rise in interest/mortgage rates and/or an increase in inflation would begin to make homes in all price ranges less affordable for many potential homebuyers. A decrease in the number of qualified buyers would put a damper on the demand for homes, reducing the upward pressure on home prices. In the short term it appears that neither one of those scenarios is likely to occur. Until that happens expect to see the supply of homes for sale remain very low and annual price increases in the 6% to 8% range. As in the past the current shortage of homes for sale has been most acute in lower to moderately priced homes (See the table below)
At What Price Range is the Shortage of Homes for Sale the Greatest?
% of Homes Available For Sale in April 2018
% of Closed Sales in April 2018
Less than $200,000
$200,000 – $399,999
$400,000 – $599,999
More than $600,000
Median Sale Price $266,500
Median sale prices increased 3.3% between March and April ($258,000 to $266,500 respectively). The Twin Cities housing market continues to a show strong year over year gains in sale prices, marking an 8.8% percent annual increase in April 2018. While this is great news for sellers, a continuation of this rate of increase is going to create affordability issues for some potential buyers since this rate of increase is much higher than the growth rate of area income. On the supply side in April 2018 there were only 9,100 homes available for sale, 24% less than the 11,964 that were available in April 2017. A high annual growth rate in median sale prices and historically low supply will continue to dominate the market.
The number of homes sold in April 2018 was 4,664 an increase of 15.5% compared to last month and a decrease of 4.6% compared to April 2017. At the end of April there was a 1.8 months supply of homes available for sale, In comparison in a normal, balanced market there is a 6-month supply. Distressed sales accounted for only 3.3% the recorded home sales in April, similar to percentages observed before the housing market crash in 2007. New listings in April were 7,325, a decrease from the 7,890 recorded in April 2017. The decrease in new listings indicates that the supply of home of homes for sale situation will continue to tight in the near future.
In the beginning the Dorothy Day Center was meant as a training center, but because of a need in St. Paul seen by community members, Catholic Charities decided to help. It became a consistent resource for many homeless year round and soon had to turn people away due to space limitations.
Early last year, Catholic Charities of Saint Paul and Minneapolis announced the largest public-private partnership of its kind. Backed by broad support and funding from both public and private sources, the vision was for a new Dorothy Day Center – two buildings with temporary and permanent residence plus support structures to empower and dignify those in need.
In January 2017, Higher Ground St Paul opened its doors to a community in need. The 5 story building across from the Xcel Energy Center in downtown St Paul contains 193 single room and apartment style units. Already, these units are filled and assisted 473 people of all backgrounds from the elderly, veterans and young adults struggling to make ends meet.
Catholic Charities wanted to bring more dignity to their services in this renovation of the Dorothy Day Center. The new buildings include showers, storage lockers, and light meals. Some residents have said,
“Catholic charities is my backbone, they’re there to pick me up, they rescued me in a time when I needed them…”
– Markeus from room #327
“Catholic Charities is a blessing for everybody in need.”
– Camille Pasha
Phase 2 of the project is underway in St. Paul. The building will contain the Opportunity Center and Dorothy Day Residence, and the goal is to be up and running in the next 12 months. This building will serve for more daily services such as emergency housing, transition housing, a health clinic, mental health services center, education guidance, veteran services, and employment services ranging from training to job placement. Truly a place for the benefit of all community members.
In Minnesota, the Dorothy Day Place project is the largest public-private social services collaboration in history. Funded with the support of local and state government and private sector leaders, the Dorothy Day Place project is a unique real estate development helping those in need.
The latest report, just published today by the Shenehon Center for Real Estate is not a significant shocker. Current trends of single family housing supply shortages continue. Herb Tousley, Director of the University of St. Thomas’ Shenehon Center for Real Estate, gave interesting insights this month. Many people have attributed the shortages to simple reasons such as increased demand due to millennials and generation X’ers beginning to settle down which are true, but Mr. Tousley brings up a point seemingly looked over, the recent actions of investment vehicles.
“Nationally, over the past five years, the single family rental home has become its own institutional asset class with over $50B investedContinue Reading
Earning an undergraduate Bachelor of Arts degree in economics and speech communications from Macalester College in St. Paul and an MBA from the Carlson School of Business at the University of Minnesota, Mike Ohmes has a wealth of commercial real estate experience from a broker to a manager.
Today as Executive Vice President Mike Ohmes is responsible for leading Cushman & Wakefield’s Transaction and Advisory Services business. This group includes the company’s Brokerage, Capital Markets and Real Estate Advisory.
Since joining the Cushman & Wakefield in 1991 as a broker in the office division, Ohmes consistently was among the top producers. He has received the company’s Offshore Club designation for his performance a total of 7 times (each year from 1993-1999). In 2000, Ohmes earned the company’s President’s Award for his outstanding contributions to the company, and in 2003, he was recognized by The Minneapolis/St. Paul Business Journal as one of their “40 Under Forty.”
The Shenehon Center for Real Estate is proud to present this opportunity to gain insights into the commercial real estate industry. Founded in 2000, the Shenehon Center for Real Estate looks to provide both resources and a public forum for real estate industry professionals and the public.
The September Residential Index report from the Shenehon Center for Real Estate came out last week. Mr. Tousley, director of the Shenehon Center, was not surprised by the continuation of the supply glut, but in this latest report, he pointed out that the housing market is now being driven by the Millennial generation and Generation Z. Some key takeaways,
Over half of home sales this year have been to people 36 years old or younger
Home price appreciation continues to outpace income growth
Inventory remains significantly below demand
Price and inventory are affecting the “typical” renter
As seen in Minneapolis, many major cities are being pressed by a combination of decreased household sizes, sociocultural trends for “more” space, and an influx of people coming to live in the cities not seen since the 1940’s. The report states, Millenials and Generation Z’ers while interested in buying Continue Reading
According to Minnesota Compass, 48.4 percent of Minneapolis households are overburdened by housing costs. To explain, these households pay more than 30% of their gross income towards housing. Just for reference, a house in Minneapolis is averaging around $200,000 which for a first time home buyer with 10 percent down payment amounts to a monthly mortgage around $1,400 including an estimates for coverages and taxes.
There are many factors affecting this overburdened number. According to a Minneapolis City Council housing report, the city’s current population [approx. 412,000] has not been this high since the 1970’s which is still lower than the peak seen in 1950 [reported 521,718]. Further exacerbating the issue is the fact that there are about the same amount of units today as in 1950 in conjunction with a decrease in average household size. In 1950, it was roughly 3.3 persons per household compared to today’s 2.3 persons per household.
The most recent residential housing report from the University of St. Thomas and the 2017 Housing Market Comprehensive Analysis by HUD, give evidence that the cost burden is a result of the simple economic principle of supply and demand. The influx of demand for housing within Minneapolis has increased the risk of displacement. Housing prices are up year over year and there remains record low vacancy levels of 4 percent. Talks with a political liaison, Mark Stenglein, and local developer and founder Bob Lux of Atalus, LLC, reinforced the challenges to affordable housing Continue Reading