Herb Tousley – Real Estate Matters
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Herb Tousley

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Minnesota Commercial Real Estate Outlook Shows More Signs of Optimism

Spring 2019 – Minnesota Commercial Real Estate Outlook Shows More Signs of Optimism for the Upcoming Two Years

The May 2019 University of St. Thomas / Minnesota Commercial Real Estate Survey is continuing to show to show changes in the sentiment of our panelists as they look out over the next two years. The biannual survey projects a two-year ahead outlook for Minnesota’s commercial real estate industry and forecasts potential opportunities and challenges affecting all commercial real estate sectors.

As was done with all sixteen of our previous surveys, the same group of 50 commercial real estate industry leaders involved in development, finance, and investment were polled regarding their expectations of near-term future commercial real estate activity. The decisions that these industry leaders are making today will determine what the CRE markets will look like two years from now.

Spring 2019 Results

Observations from May 2019 have recorded several notable changes in the panel’s expectations when compared to the previous survey conducted in Fall 2018. “There is still some concern that we are near the top of the cycle and that overbuilding and increased vacancies may occur in some product types and submarkets.” says Herb Tousley, Director of the Real Estate Programs at the University of St Thomas. “While our composite index for late 2021 remains slightly pessimistic, there are some bright spots worth noting. There is no expectation of a major downturn in the commercial real estate market in the Twin Cities within the next two years. The increase in online shopping, low interest rates, changes in housing trends and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in the coming two years.”

The panelists are very concerned about the expected increase in the cost of land and building materials and its expected impact on values and expected returns for developers and investors. There was a big change in the index for investor’s return expectations. It increased 9 points moving from a pessimistic level moving to slightly optimistic territory. This is a big change in sentiment since our last survey. It appears that our panel now expects interest rates to remain stable at current low rates. While our respondents are not expecting a major downturn, they are more somewhat concerned about where we are in the market cycle.

Index values greater than 50 represent a more optimistic view of the market over the next two years, with values of less than 50 indicating a more pessimistic view. More detailed information about each of the individual indices may be found below.

The individual indexes are detailed below:

Rent Expectations

The outlook for rental rates is essentially unchanged from our last survey. Market conditions expected in early 2021 are best described by the price for space (rental rates) and the supply of space (occupancy levels). The index for rental rates was 63 compared to 62 six months ago. This means the panel continues to be strongly optimistic in its expection of continued rent growth. The panel’s sentiment is that the economy will continue to grow and that business conditions will continue improve creating more competition for commercial space.

 Occupancy

The outlook for occupancy levels continues to be moderately pessimistic moving from 43 to a slightly less pessimistic 45. This indicates the panelist’s belief that occupancy levels and space absorption may not remain at current levels during the next two years. As a great deal of new product continues to be delivered, the panel is beginning to be concerned about the market’s ability to absorb the new space. This is especially noticeable in the multi-family and certain office and industrial segments. It is a continuation of a general trend that began 4 ½ years ago. Businesses expect to continue to grow but they are concentrating on reducing their cost of occupancy by doing more with less space.

Land Price Expectations

The rate of increase in land prices is expected to accelerate. The land price index has decreased (become more pessimistic) in the current survey moving from 46 last December to 40 this spring. Although, the lowest point for the index was recorded at 31 in the fall 2013 survey, a score of 40 for this index indicates increasing concern about the rapid rise of land prices. Since land prices are a major component of project costs, any increase has a great deal of impact. Higher land prices are a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.

Building Material Price Expectations

There is a continued expectation that increases in the price of building materials will continue to increase. The index for the price of building supplies remains strongly negative, moving from 26 in December 2018 to 32 in May 2019. The panel believes that commodity prices for lumber, concrete, steel and many of the other materials used in construction will continue to increase due to shortages and newly imposed tariffs. Since building materials are a major cost component of any development project any increases in prices will make it difficult to provide adequate returns on future developments.

Return on Investment Expectations

Our panel expects that investors return on investment expectations will remain constant. The index for investor’s return expectations made a big move, increasing from a pessimistic 42 to a slightly optimistic 51. This indicates that investors will be expecting to maintain their expected returns. The consensus among survey respondents indicates that investors will not be seeking higher returns in the next two years due to their expectation of stable interest rates. The panel’s concern remains about market fundamentals over the next two years. Investors will continue to seek out quality investments, but they will be much more diligent about how they price risk, evaluate projects and developer/sponsors when they evaluate potential return when considering their investment options.

Lending Expectations

Equity and loan to value requirements are not expected to increase. The index for the amount of equity required by lenders remained unchanged from our last survey at 41. That recorded level is somewhat pessimistic but, now that appears interest rates have moderated and are expected to stay that way, the panel’s belief that is even if interest rates were to increase moderately credit will still be available for good projects. However, they expect lenders will continue be more risk adverse by tightening their underwriting criteria in the coming two years.

 

 

 

 

 

Best of Real Estate Matters, Commercial Real Estate, Development, Economics, Industry News, Minneapolis / St. Paul Housing, Minnesota Real Estate Hall of Fame, Real Estate Programs, Twin Cities Real Estate, Upcoming UST Events, UST Program News

Real Estate Hall of Fame is Seeking Nominees for 2019

University of St Thomas

Minnesota Real Estate Hall of Fame

Award Criteria

The basic criterion for acceptance into the Hall of Fame is outstanding business performance coupled with a high standard of ethics. Usually the honorees are responsible for successful and/or innovative business activities and have made major life-long contributions to our industry.

– All nominees must be retired from their primary business   or

– Must be at least 65 years of age   or

– Be deceased

Nominations are not limited to University of St Thomas graduates.

Nominees can represent any discipline related to real estate in Minnesota.  The nomination committee is encouraged to nominate candidates from all  disciplines of both commercial and residential real estate.  The committee is encouraged to solicit recommendations from the real estate community and to encourage others from outside the committee to make nominations to insure a wide variety of candidates.

The Selection Committee will consider the following when making their selection of honorees:

  • Business: the nominee has made a significant contribution as a leader in the field of real estate;
  • Nominees are expected to have made a significant impact in their particular area of real estate and be recognized primarily as a person that is an exceptional role model in their discipline.
  • Weight will be given to such accomplishments as starting and building a business, leading an established business to significantly greater achievements, major transactions, and innovative projects.
  • Among the factors to be considered are industry recognitions and accomplishments, being an industry pioneer and/or leader, and recognition by others for achievements.
  • Community: the nominee has had concern for improving his/her community as a business leader
  • Ethics: the nominee has displayed the highest level of ethics in their business practices.

Beyond the criteria noted here, the Selection Committee has the responsibility   and discretionary power to make their determinations from the pool of nominations submitted.

Access the Nomination Form: https://centers.stthomas.edu/shenehon/wp-content/uploads/sites/7/2019/05/2019-REHoF-Nomination-Form.pdf

Nomination deadline: June 14th 2019

Economics, Home Prices, Housing, Housing Trends, Investment Real Estate, Minneapolis / St. Paul Housing, Real Estate Brokerage, Real Estate Trends, Residential Real Estate, Technology, Twin Cities Real Estate

iBuyers are Changing The Landscape of the Housing Market

April 2019

University of St Thomas Twin Cities Housing Market Update

What is an iBuyer?

An iBuyer is a company, in many cases an institutional investor, that will make an offer on your home within hours (or days) based on a proprietary valuation model. If you choose to accept the offer, you can close the sale in as little as a couple of days. The recent big news in the Twin Cities market is that last Monday Zillow began offering its Zillow Offers service to home sellers in the Twin Cities. The Twin Cities is the 10th metro area in the nation where they are offering this service. In addition to Zillow there are a number of local and national iBuyers here already with a number of new companies on the way.

How is the iBuying process different?

Traditionally, home values are calculated by using recent comparable sales of similar homes in the nearby area. The issue is that no two homes are identical and adjustments need to be made to account for the differences. Some of these adjustments are hard to calculate and can be somewhat subjective. Many of the newer, well capitalized iBuyers use “automated valuation models” or algorithms using computers to process massive amounts of home sales data to arrive at a value. Based on that value and information that home sellers upload about their homes they can close a sale in as little as a few days. There are some iBuyers may require a visual inspection by a local real estate partner.

Is iBuying the apocalypse for traditional agents and brokers?

The short answer is No. Nationally, in 2018, iBuyers accounted for 0.2 percent market share. At this point, even in markets where iBuyers has been operating longer they are only accounting for 3 – 6% of the sales volume. As more home sellers become more familiar and comfortable with the iBuying process that percentage will undoubtably increase. While a few iBuyers work directly with home sellers many of the iBuyer’s business models include working with and paying commissions to local real estate partners. Additionally, local Realtors do have the advantage of local market knowledge and are able to spot emerging neighborhood trends. As an example, look at what happened to the travel industry when technology made travel booking information directly available to individuals. At the time some were saying that it would be the end of travel agents. In reality travel agents have survived, however the industry has consolidated, become more sophisticated and has changed the way it does business.

Should I use an iBuyer?, What is the cost?, What is the Value Proposition?

Sellers are looking for a faster, simpler, less stressful way to sell their home. They want the process to be more efficient. Not all iBuyers offer the same services, some are full service, they want to be able to offer a one stop experience. Their process works like buying a car where you can buy a car, trade in your car, obtain financing and insurance all in one place. Since the larger iBuyers are buying and selling homes all the time, their business model works well taking trade ins. There others in the market who offer varying levels of service including those at the other end of the service spectrum who will only buy your home.

Average commissions using an iBuyer are about 7%, additionally their offer is discounted below fair market value. They expect to make necessary repairs and make a profit when they sell the home. In contrast commissions are about 5% – 6% for traditional sale listings. Sellers need to consider the trade off between convenience and maximum offer price.

The following are situations where a seller may consider using an iBuyer;

  • If the purchase of your next home requires the sale of your current home, you may need access to the equity tied up in your current home. Many Americans can’t quality for two mortgages at the same time meaning they have to sell their current home before they buy the next one. In today’s tight housing market contingent on sale offers are rarely successful.
  • If you can’t or don’t want to do the work to repair or upgrade your property before you sell.
  • If you’re moving to a new city and need to be on the job ASAP, you may not have time to wait for your home to sell
  • You’ve inherited a home you don’t want to own or manage

iBuying can provide a quick cash option but this speed and convenience comes at a price. In many cases a local agent may be able to get you a higher price for your home if you have the time available. Is it worth it? That depends on your priorities and circumstances.

There is more to come

Look for more large iBuying companies to come to town. Much of recent iBuying activity is being driven by multi-billion dollar organizations. In addition to Opendoor, who entered the Twin Cities market last fall, there will be other new arrivals such as Knock, OfferPad and Redfin. With technology advancing at such a rapid rate there will be more concepts and companies entering the market like Ribbon and Eave that work on the other side of the transaction helping buyers compete with cash offers.

Affordable Housing, Appraisal, Economics, Home Prices, Housing, Housing Trends, Industry News, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

University of St. Thomas Housing Market Analysis for November 2018

Will A Computer Tell You How Much Your House Is Worth?

Lower Mortgage Rates for Energy Efficient Homes?

Market Update – Is the Twin Cities one of the top markets in the country where you should buy this winter?

 

Will A Computer Tell You How Much Your House Is Worth?

Federal regulators have proposed loosening real-estate appraisal requirements to enable a majority of U.S. homes to be bought and sold without being evaluated by a licensed human appraiser. That potentially opens the door for cheaper, faster, but largely untested property valuations based on computer algorithms.

Appraisals help lenders ensure that the estimated value of the property supports the purchase price and the mortgage amount. An appraisal that is off by a few percent could leave a homeowner owing more than their house is worth or lenders with insufficient collateral to cover defaulted loans.

Will this automated approach work? It is hard to see how an appraisal can be done without a human appraiser involved. There is so much variation in condition and functionally that cannot be assessed by a computer algorithm. There’s still no computer that can see, hear, taste, smell and touch the property. Until that happens appraisals with humans involved will continue be necessary to do accurate appraisals.

Lower Mortgage Rates for Energy-Efficient Homes?

Mortgage guarantors, insurers, underwriters, and security owners have recently observed that home buyers with lower monthly utility costs default less. Do these lower-risk home buyers deserve a lower interest rate? Lenders are starting to consider the idea of offering a lower interest rate for mortgages on energy efficient homes. Energy efficient mortgages (EEMs) encourage energy efficiency by giving buyers a better rate or more borrowing capacity to buy an energy efficient house or to cover the cost of new energy improvements.

There are several types of EEM products in use today; however, adoption remains limited. Developing programs in several states inject capital into traditional mortgage products to “buy down” the interest rate that is charged to borrowers as an incentive to finance energy retrofits. A third structure being tested assumes that the energy savings and reduced exposure to energy costs reduce the risk profile of the loan and on average should lead to better loan performance. The reduced risk justifies a lower interest rate, which in turn improves the loan pricing for borrowers, while leaving underwriting criteria unchanged.

There are now quantitative standards available to measure a home’s efficiency. The HERS Index is the industry standard by which a home’s energy efficiency is measured. The HERS or Home Energy Rating System was developed by RESNET and is the nationally recognized system for inspecting and calculating a home’s energy performance. Certified RESNET Home Energy Raters conduct inspections to verify a home’s energy performance and determine what improvements can be made to increase it. Home buyers will be attracted to buy homes that are not only more efficient, saving utility costs, but also being able to qualify for lower mortgage rates.

November Market Update

According to a recent Zillow report the Twin Cities was one of the top ten markets in the country where it makes the most sense to buy this winter. This ranking is based on an index they developed using the factors below. For potential buyers looking to make a move before rents and mortgage payments rise further, the report indicates our market compares favorably to most other markets in the country.

Here are the three factors that went into the index:

  • The share of price cuts compared to a year ago: (In the Twin Cities the year over year over year actual selling price compared to the asking price has been declining since June indicating that sellers are beginning to cut prices.)
  • Rent appreciation forecast: Metros where rents are expected to rise more over the next year are ranked higher on the index, because they offer the greatest opportunity for buyers to save money by picking up a mortgage rather than continuing to pay rising rents. (Year over year rents in the Twin Cities continue to increase modestly and are expected to continue to do so, although the rate of increase is expected to moderate.)                      
  • Mortgage affordability: Metros that already have bad mortgage affordability will become harder for buyers as mortgage rates rise, so they are prioritized on this index. (Relative to other markets in the country the Twin Cities does not already have “bad” mortgage affordability. In our market mortgage rates have increased and median sale prices continue increase faster than income making mortgage affordability more difficult.)

The median sale price increased .4% between October and November, however the median sale price of homes sold in the Twin Cities has increased by 8.6% in the past year to $266,000. In comparison, the average annual increase for the previous 12 months has been 7.8%.

The number of closed sales decreased .2% between November of 2017 and November of 2018, continuing a trend of decreasing year over year sales that has been observed for 10 of the last 12 months. The combination of the low number of homes available for sale and higher interest rates continues to take its toll on the number of homes sold. The number of pending sales decreased by 5.7% however the number of new listings increased 11.8% compared to the same period last year. The increase in new listings is a hopeful sign that will be more homes available for sale in the coming few months and that the slide in the year over year sales volume will begin to reverse itself.

For more information, visit the Shenehon Center’s complete report for November 2018 at http://www.stthomas.edu/business/centers/shenehon/research/. The report is also available for free via email from Tousley at hwtousley1@stthomas.edu

 

   

 

 

 

 

 

Home Prices, Housing, Housing Trends, Residential Real Estate Index

UST Housing Index – Housing shortages continue

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 invested Continue Reading

Minneapolis / St. Paul Housing, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate

UST Housing Index: “It’s Not Your Father’s Housing Market Anymore”

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

Affordable Housing, Development, Housing, Housing Trends, Minneapolis / St. Paul Housing

Affordable Housing (Part 2)

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

Development, Economics, Home Prices, Housing, Housing Trends, Industry News, Minneapolis / St. Paul Housing, Real Estate Trends, Twin Cities Real Estate

Latest Survey of Twin Cities Home Builders Finds Them Optimistic for 2018, but with Some Concerns

St. Thomas’ fourth semiannual survey of 35 industry leaders measures sentiment and is designed to be a forecasting tool.

 Leaders in the Twin Cities single-family home-construction industry are generally optimistic about market conditions for the coming year although they have concerns about increasing mortgage rates and higher costs of land and building materials. That’s according to a new survey conducted by the University of St. Thomas Shenehon Center for Real Estate in partnership with the Builders Association of the Twin Cities.

The Twin Cities Home Builders Survey is patterned after St. Thomas’ Minnesota Commercial Real Estate Survey that began in 2010. The Home Builders Survey polls the same panel of 35 industry leaders annually in June and again in December about their expectations for the upcoming year in six key areas of the housing market. These experts are asked to assign a number of zero to 100 for each of the six questions. A midpoint score of 50 is neutral; scores higher than 50 indicate a more favorable outlook and scores lower than 50 indicate a more pessimistic outlook.

“The industry leaders we poll every six months are actively engaged in studying both the demand and supply side of the housing market,” said Herb Tousley, director of real estate programs at the university. “Since they are involved in creating new housing units and adjusting supply-to-demand conditions, these individuals are close to the actual changes taking place in the market.” “These results align closely with what we are hearing from the market and our members.” Said David Siegel, Executive Director of the Builders Association of the Twin Cities. “While there is a great need for residential construction in the Twin Cities, there are still several factors holding it back including land prices, the regulatory burden and a shortage of labor.”

Here are the scores for each of the six questions that were asked in August 2017:

Housing Starts: 65

This score increased increased from 61 in December 2016 to 65, it indicates a high expectation that the number of single-family housing starts will show a marked increase in 2018. Last year was one of the best in recent years with about 5,300 permits issued.

Sale Price per S F: 74

This score is even more optimistic than last December’s score of 72. It reinforces the panel’s continued expectations that home prices will continue to increase. The net result is the belief that sale prices will increase at a rate that will more than offset the expected increases in project costs.

Land prices: 23

At 23 this index has decreased sharply from last December’s score of 31 moving even deeper into the pessimistic range. Indications are that the rate of increased land prices will accelerate in 2018. While there may be enough finished lots available, the higher land prices will squeeze profitability.

Availability of finished lots: 60

This index increased from 51 last December to 60 in June reflecting builders increased optimism that there will be an increase in the availability of finished lots in 2018. An adequate supply of well-located finished lots is crucial to the health of the home building industry.

Cost of building materials: 24

The outlook for the expected increases in the costs of building materials continues to persist. This index moved from 29 in December 2016 to an even more pessimistic score of 24 in June 2016. This score is an indication of increased concern by our panelists that much of the gain from increased sale prices and more building starts will be offset by higher costs. These expected increases in costs could depress profitability and could reduce the number of new homes built.

Mortgage rates: 28

This index remains unchanged at 28. It is an indication that the panel continues to expect mortgage rates to increase in the next 12 months. Although mortgage rates increased during the fourth quarter of 2016, most panelists are expecting an additional increase of ¼% to ½% half a percent within the next year. The affordability issues created by higher rates could put a damper on home-building activity.

More Information

Additional details can be found on the Shenehon Center’s website: http://www.stthomas.edu/business/centers/shenehon/research/default.html

 

Economics, Housing, Housing Trends, Minneapolis / St. Paul Housing, Real Estate Trends, Residential Real Estate, Residential Real Estate Index, Twin Cities Real Estate, Uncategorized

Sight-Unseen Home Buying: Trend or Consequence

Twenty years ago, virtual tours and 3D graphics were mainly science fiction in movies like The Fifth Element, and a “sight-unseen” purchase literally meant a buyer had no experience of the property other than static photographs. Buyers were in essence blindfolded. Today, 3D and virtual technologies have become a reality. They are able to bring a property experience to the “sight-unseen” purchase. Local Minneapolis real estate broker Aleksa Montpetit of Downtown Resource Group noted this ingress of technology into the real estate industry, and how it has given realtors a new tool to present properties. Montpetit, who has personally sold 3 properties sight-unseen in the last year, said the Minneapolis market has recently seen buyers more willing to at least offer sight-unseen.

An article posted in the Wall Street Journal by Katy McLaughlin cites increases in sight-unseen purchases are nationally becoming more common. The annual Redfin survey showed 33 percent of those surveyed said they had made at least an offer on a house “sight-unseen” in the last year. However, this survey did not include the Minneapolis market.

Both Scott Parkin of Verve realty and Scott Stabeck of Sotheby International agreed with Montpetit that potential buyers are more willing to make offers “sight-unseen,” and they added Continue Reading

Business Valuation, Development, Investment Real Estate

Do you need some leisure time?

Last week the Minnesota Business Journal reported, Lutsen Resort, a staple of Minnesota tourism for over 125 years, went on the market for just under 10 million dollars. However, it is not the first resort in the Great North to go on the market recently. The Star Tribune reports Gunflint Lodge sold for over 6 million dollars and Superior Shores and Resort, just south of Lutsen, in Two Harbors is also currently on the market.

Is this a trend? Why are resorts going on the market? Should consumers be worried about their options for North Shore leisure?

Herb Tousley, of the University of St. Thomas’ Shenehon Center for Real Estate, commented that these resorts often times require a “hands-on”  approach to management of the site. He also noted, “due to this approach, many owners see the opportunity to sell, in what they perceive to be, a high value market in order to exit the business.”

Statistics from the U.S. Travel Association show that domestic leisure travel is up from 2 billion trips in 2007 to 2.28 billion trips reported in 2016. More specifically, the Minnesota average household income has returned to pre-recession levels at $79,893. The private sector employment numbers (FRED) also seem to indicate the economy is in relatively good health. These indicators are great for resorts and the hospitality industry in general. Even with the ominous question of, “are we due for an economic adjustment?” It is not a predictable event. From general market signs, a resort may be an investment for some leisure.

 

Shenehon Center for Real Estate has been enabled Graduate level Business and an Undergraduate Major program in real estate for more than 15 years. The University of St. Thomas is dedicated to creating leaders who are morally responsible, think critically, act wisely, and work skillfully to advance the common good.