Freddie Mac’s Plan to Help Cap Rents

Freddie Mac is launching new lower-cost financing to apartment owners who agree to cap rent increases for the life of the loans. From an article in the Wall Street Journal:

The program, announced Tuesday, will begin immediately and be available all over the country. Mr. Brickman said he hopes hundreds of properties will take advantage of it.

The initiative comes at a potentially appealing time for real-estate investors who are facing a slowing rental market. Freddie Mac will provide mezzanine debt—which is more risky but pays a higher interest rate than senior debt—at below market cost.

While rent increases have naturally slowed over the past year or so, the initiative protects tenants from steep hikes when the market accelerates again. Operators who receive the low-cost loans must have at least 50% of the units affordable to households making the local median income or below. Borrowers must then agree to limit rent growth on 80% of units.

Stuck in Place

A lot has been written about the lingering effects of the Great Recession on the housing market – we’ve done our fair share of it in this space – but something we haven’t really covered is reduced mobility of Americans that has resulted. To put it simply, Americans just don’t move as much anymore. This article at Slate helps us understand what that means:

Americans are no longer the footloose strivers of popular imagination. It’s not just about moving between states, a long-running and well-documented phenomenon that has recently leveled off. Most of the current decline is from Americans not making local moves, either. Three million fewer local moves in 2016 vs. 2006, in fact, compared with just 200,000 fewer interstate moves. Eleven percent is the lowest mobility rate on record, and as the annual report from Harvard’s Joint Center for Housing Studies shows, it’s stuck in a feedback loop with several features of the housing market.

One reason for fewer moves is that older people tend to move less. Many own their own homes and have paid them off so they don’t want to leave them. Some live in high-cost areas with mechanisms like rent control that makes moving too expensive.

Another reason is something that the apartment industry has been impacted by for years:

It’s not just your parents’ fault. After the recession, nearly 4 million single-family homes, many purchased in foreclosure auctions, became rentals. (That’s about three percent of the total U.S. housing stock.) Big-time landlords who own dozens or even hundreds of properties are a rising force in U.S. cities, and their purchases have taken a big chunk of homes off of the market. There are fewer single-family homes for sale than at any time since 1982. Adjusted for the nation’s population gains in that time, the shortage is even more severe.
There’s scarcely more slack if you’re looking for an apartment.

As you might expect, this has driven home prices through the roof. Prepare for sticker shock when you Zillow that neighborhood you’ve been picturing yourself in. But those high prices haven’t produced the housing-construction boom that your Econ 101 professor would predict. On the contrary, fewer homes are being built per capita than at almost any time in history. The Harvard report cites a few reasons for this: fewer vacant lots, land use restrictions, building material costs, and a skilled worker shortage. What’s clear is that even as America’s (very bad) sprawl model continues its slow decline, nothing has emerged to replace it. New construction in most major cities remains vastly outpaced by demand.

The result of all this? Young people, those who are historically most likely to move, are staying put. Just 24% of 20-24 year-olds moved last year, which is down from 34% in 1996. This affects renters as much as homeowners:

This mobility drop holds for renters as well as would-be owners. Except at the very high end, tenants are still under historic levels of financial stress, which may discourage them from making expensive moves, even if a better neighborhood or apartment might be out there.

Winston-Salem Construction is Booming

Construction in Winston-Salem is booming, reaching heights last seen before the Great Recession, and planning officials expect the trend to continue. From a Fox8 story:

Winston-Salem/Forsyth County Planning & Development Services says in 2016, they saw $255 million in new residential construction and $359 million in nonresidential construction, new construction and redevelopment. The $359 million value set a second consecutive 10-year record, with an increase of $47 million from the previous 10-year record high set in 2015. The new residential construction permit value of $255 million was $86 million more than the $169 million residential permit value in 2015, which was an increase of 51 percent…

He highlighted projects such as the Indigo Hotel in the historic Pepper Building, which he says if one of the first modular stacked-type construction hotels anywhere. He also brought up the 757 North Apartments on Chestnut Street, the Link Apartments at Innovation Quarter and the Bailey Power Plant renovations, among others…

The county expects to grow in population by 100,000 people over the next 20 years.

“A lot of people from other parts of the country are discovering us and liking what they’re seeing,” said Paul Norby, Winston-Salem/Forsyth County planning director.

He added that the expected rise in population will result in a larger need for homes, apartments, offices and shopping areas.

Waiting to Launch

Every generation of human beings has taken a look at the generation that’s following them, their own children, and shaken their collective heads. They wonder, “What are these young folks thinking?” while conveniently forgetting that their decision-making was questioned as much, or more, by their parent’s generation. So it’s not surprising that the young adults of today are different from their parents, but what is shocking is how differently young adults today – the oft written about millennials – view the world than their parents – the oft written about Baby Boomers and oft-forgotten Gen Xers.

Those differences are explored in a report from the US Census Bureau titled The Changing Economics and Demographics of Young Adulthood from 1975 to 2016. Here are some highlights:

  • Most of today’s Americans believe that educational and economic accomplishments are extremely important milestones of adulthood. In contrast, marriage and parenthood rank low: over half of Americans believe that marrying and having children are not very important in order to become an adult.
  • Young people are delaying marriage, but most still eventually tie the knot. In the 1970s, 8 in 10 people married by the time they turned 30. Today, not until the age of 45 have 8 in 10 people married.
  • More young people today live in their parents’ home than in any other arrangement: 1 in 3 young people, or about 24 million 18- to 34-year olds, lived in their parents’ home in 2015.
  • In 2005, the majority of young adults lived independently in their own household, which was the predominant living arrangement in 35 states. A decade later, by 2015, the number of states where the majority of young people lived independently fell to just six. Of the top five states where the most young adults lived independently in 2015, all were in Midwest and Plains states.
  • More young men are falling to the bottom of the income ladder. In 1975, 25 percent of young men ages 25 to 34 had incomes of less than $30,000 per year. By 2016, that share rose to 41 percent of young men (incomes for both years are in 2015 dollars).
  • Between 1975 and 2016, the share of young women who were homemakers fell from 43 percent to 14 percent of all women ages 25 to 34.
  • Of young people living in their parents’ home, 1 in 4 are idle, that is they neither go to school nor work. This figure represents about 2.2 million 25- to 34-year-olds. Among other characteristics, these young adults are more likely to have a child, so they may be caring for family, and over one quarter have a disability of some kind.

Obviously, these trends are having a tremendous impact on the apartment industry. More young adults living at home means fewer living in apartments now, but since they are marrying later they might still be apartment renters until they start families. It’s a mixed-bag in terms of figuring out what it means for apartment providers, but one thing is certain: since this is the largest generation our country has ever seen how they live WILL have a significant impact on the industry.

Economy Particularly Tough for Women Heads of Households

There’s a sobering post at APTly Spoken on the outsized impact that rising housing costs and stagnant wages are having on women:

Between 2009 and 2014, the U.S. Census Bureau reports that more than a million unmarried female-headed households were started in rental units, representing 25% of all new renter family households over that time. The Census defines “family” as at least one member of the household who is related to the head of household by birth, marriage- or adoption; “single” includes those never married, divorced, separated or widowed. In 2014 (most recent data available), nearly 70% of total female-headed rental units housed children…

The largest growing age cohort in this demographic are in the 65-plus- category. These are women who are caring for other family members, including their grandchildren, some of whom must rely on fixed incomes.

Looking further into income levels, an astounding 41% of all families that live below the poverty level are headed by single females who rent; and 61% of renter households living below the poverty line are led by women.  

One of the reasons these women are experiencing a particularly hard time is explained in this paragraph:

While the rate of inflation (Consumer Price Index) has been just about non-existent post-Recession, when broken down into various components, the increased costs are troubling. Since 2012, rent, education- and healthcare costs are all rising faster than the sum of all the components of the CPI; precisely how these working mothers with 6-17 year-olds are spending their hard-earned incomes. Triple whammy?

Two Large SFH Rental Home Providers Considering Merger

Two large single-family rental home providers are considering merging, yet another indication that the rental market isn’t cooling off any time soon:

Two big owners of single-family rental homes said Monday they have agreed to merge, a bet that rents will keep rising and homes will remain difficult for many Americans to buy.

Starwood Waypoint Residential Trust, a publicly traded real-estate investment trust run by Barry Sternlicht, the longtime real-estate investor who is Starwood Capital Group’s chief executive, will combine with closely held Colony American Homes Inc. in a deal that values Colony at about $1.5 billion based on Starwood Waypoint’s closing share price Friday. The Wall Street Journal had reported the deal earlier Monday, citing people familiar with the talks…

The two companies own a combined total of more than 30,000 homes valued at nearly $8 billion. Messrs. Sternlicht and Barrack were part of the rush by big investors to buy foreclosed homes in bulk, often sight unseen and at steep discounts, after the U.S. housing market collapsed…

The proposed merger of Starwood Waypoint and Colony is a bet that the percentage of Americans who own homes will remain unusually low. While the foreclosure crisis has receded, toughened lending standards have pushed millions of Americans out of the homebuying market…

The U.S. homeownership rate is at its lowest level in nearly 50 years, falling to 63.5% in the second quarter, according to the Commerce Department.

In contrast, single-family rentals now add up to 13% of overall housing stock, up from 9% in 2005, according to a report by Moody’s Analytics.

Homeownership Rate Lowest Since 1967, US Rental Vacancy Rate at 6.8%

In 2Q15 the US homeownership rate fell to 63.4%, down from 63.7% in the first quarter of the year, the lowest it’s been since 1967.  The result has been an increase of about 2 million renter-occupied units in the last year, resulting in a vacancy rate of just 6.8% which is down from 7.1% in the first quarter. From BloombergBusiness:

Would-be homebuyers have been held back by stringent mortgage standards and wage growth that hasn’t kept up with surging home prices. The average household income in June was 4 percent below a record high set in early 2008, even as unemployment dropped to its pre-recession rate, according to Sentier Research LLC.

 “We’re still suffering the effects of the housing collapse and the financial crisis,” said Mark Vitner, senior economist with Wells Fargo Securities in Charlotte, North Carolina. “We may have another percentage point to go before we see a bottom” in the homeownership rate, he said.

Home values have jumped 34 percent since reaching a bottom in early 2012, making purchases more expensive for entry-level buyers. Prices in 20 U.S. cities climbed 4.9 percent in May from a year earlier, the S&P/Case-Shiller Index showed Tuesday.

Where Are the Young Home Buyers?

It’s no secret that there’s a dearth of younger home buyers these days, but why are young adults still slow to move from renting to buying even though the economy is finally growing? Shane Squires of MPF Research wrote about some of the challenges faced by millennials:

For starters, income levels for those between 25 and 34 are down. Median household income for that demographic has declined between roughly 5% and 15% in real terms from 2000 to 2012 for every education level of the head of household, according to the National Center for Education Statistics. And in 2013, the real median net worth of households under 35 years old was just $10,400. That was approximately 32% below the level estimated in 2001, according to the Federal Reserve Survey of Consumer Finances…

He then cites some data showing that the combination of an increasing population and anemic job growth coming out of the past two recessions led to a highly competitive job market that prompted many students to continue on to grad school. That demand allowed universities to jack up tuition which led to more debt:

That brings us to the most commonly cited economic constraint for Gen Y – student debt. Over the decade from 2002-2003 to 2012-2013, the number of full-time undergraduate students rose from 9.1 million to 11.6 million people, according to College Board. That increased demand enabled higher education institutions to raise tuition prices 51% past the rate of inflation in the past 10 years,…

Add to that the increase in health care costs, which he cites as being 31% greater than the reported rate of inflation, and the increase in cost of staples and you can see that young adults face some serious obstacles to home ownership. Even the accelerated job growth of 2014 is recognized with a caveat:

Given that job growth has accelerated notably in 2014, with a much higher share being created in higher-paying sectors, these trends in income and net worth are bound to start improving to some degree. Though, considering that the appreciation of median home prices has vastly outpaced wage growth over the past decade, many in the Millennial generation will likely continue to find it more difficult to qualify for a mortgage than Generation X did 10 years ago.

It would be easy to point to the Great Recession as the primary cause for the struggle young adults will have in moving from renting to buying, but some of the contributing factors are the result of societal shifts that began a generation ago. For instance, the decoupling of income from worker productivity:

The “decoupling” is the divergence between labor productivity and employment/wages that happened in the US in the 1980s and has become quite pronounced over the past thirty years. During the great postwar boom, productivity and wages grew in lockstep in the US. Of course, we don’t see any data from the 19th century and the first half of the 20th century so it’s not clear that labor and wages have always grown in lockstep. But something certainly changed in the 1980s and the result has not been good for median family income which has been stagnant in the US for almost thirty years now.

This is the kind of shift that does not happen overnight, and if that trend is to reverse it will not happen in a matter of years but in decades. What that means for rental housing providers in particular is that the falling rate of home ownership could be the new normal for a generation to come, which is good news for their businesses. On the other hand, if real median household income continues to decline then the demand for market rate units could stall and the demand for affordable housing units could skyrocket.

Obviously some policy changes could change this outlook. For instance if lending standards are relaxed again and if more affordable single family homes are constructed, then rental demand would obviously be impacted. Considering the lessons we learned when the housing bubble popped that first if is pretty big, and given the persistent problem of slow income growth any growth in home construction we do see probably won’t come close to what we saw in the late 90s through mid 00s.

Long story short – rental housing should continue to grow for the foreseeable future.

Apartments a Significant Part of $1.2 Billion Spent on Downtown Winston-Salem Since 2000

At its annual meeting on February 24 the Downtown Winston-Salem Partnership outlined how Winston-Salem’s downtown has been revitalized over the last 15+ years:

The nonprofit group listed 88 downtown investment projects since 2000 that have either been completed, are under way or for which a firm commitment has been made.

The combined capital investment value is $1.23 billion, topped by the $106 million spent on Wake Forest BioTech Place and the $100 million commitment by Wake Forest Baptist Medical Center toward a major medical education facility. Both buildings are in Wake Forest Innovation Quarter.

The investment is divided into eight categories: health and technology (eight projects, total $445.4 million); infrastructure (10 projects, total $188.4 million); institutional and public development (15 projects, total $181.6 million); residential (15 projects, total $140 million); multiple use (eight projects, total $95.1 million); office (five projects, total $88.4 million); arts and entertainment (five projects, total $50.3 million); and commercial (22 projects, total $42.2 million).

The Nissen Building, a PTAA member, was the largest residential project at $32 million, although far from the only project downtown – Winston Factory Lofts, Plant 64, Hilltop House, The Gallery Lofts, and Link Apartments Brookstown to name just a few. The transformation of the former Reynolds HQ building into a Kimpton Hotel and apartments has recently captured the city’s imagination as well as the soon-to-open Mast General Store project that will add another marquee destination for the downtown. In other words the revitalization shows no signs of slowing down.

Meanwhile over in Greensboro the entity charged with leading its downtown revitalization, Downtown Greensboro Inc, is going through a transitional phase and is looking for a new leader. That’s important because there are several projects in the works that will alter downtown Greensboro significantly over the next few years and it’s essential that there be someone at the wheel who can bring together the various constituencies – city government, elected leaders, industry, educational institutions, etc. – and provide a strategic direction for downtown redevelopment. If Greensboro can manage to bring some strategic direction to the downtown then we’re sure to see even more apartments developed in the downtown area in addition to those like Greenway at Fisher Park, CityView and the Southeastern Building.

As for High Point, well they have a new mayor, lots of new city council members and a new city manager and one of their primary tasks is figuring out how, and where, to revitalize their city. With the furniture market they do have a unique challenge so it will be interesting to see how things evolve there.

These are indeed interesting and (finally) dynamic times in the Piedmont Triad.

Are Apartment REITs Ready to Bust?

Apartment REITs enjoyed a booming 2014, but according to this Wall Street Journal article they may be set for a bust:

But in the last month, investors and analysts have cooled to the sector. REIT total returns are a negative-1.7% so far in February, with apartments stocks returning a negative-1.1%. A handful of analysts have downgraded the apartment sector on fears it is overvalued and won’t generate the growth in revenue it posted last year.

“The problem is that the stocks are a bit more expensive, and you’re getting slower growth,” said Haendel St. Juste, a REIT analyst with Morgan Stanley. A year ago, Mr. St. Juste says, most REIT stocks were trading at a discount of between 10% and 15% of the value of their assets. After last year’s rally, most are now trading at a premium of 10% to 15%.

And there’s concern that too many units are being built:

Builders in the past six months have started construction on new multifamily apartments at an average pace of 357,000 units a year, 26% more than the 30-year average, according to Evercore ISI. The investment bank predicts negative demand, or a rise in vacancy rates, for apartments over the next year for Houston, Washington, Charlotte and Austin, Texas. “Overbuilding concerns will remain a focal point for REIT investors over the next few years given the current pace of permit activity and new starts,” says Steve Sakwa, an Evercore REIT analyst.

But not everyone is bearish on the apartment market:

Industry association NAREIT estimates that there is enough pent-up demand to fill roughly 3 million units, which is more than the development pipeline.

“People are living with parents, living with roommates,” said Calvin Schnure, NAREIT’s vice president for research. “It’s uncomfortable.”