This report was developed and summarized based on extensive research by, National Association of Realtors and Deloitte LLP.
RESIDENTIAL The emergence of the rental segment has provided much needed support to the housing market. Institutional investors continue to increase their appetite for purchasing and renting homes. One of the most positive changes is that average home prices are back to spring 2004 levels. First time home buyers have also stepped up purchases. Entry level buyers account for 39% of purchases. Another bright spot of the single family market is a modest improvement in the residential mortgage market. The bottom line, most parameters point to a recovery, however, the overall housing market still lags the stable market during 1990’s.
MULTIFAMILY The apartment sector continues to post a strong performance, vacancy and rent growth are near historical levels. The following provides insight as to strong and weak performing employment markets also vacancy rates both high and low. Finally, High Yield Markets with five year average Capitalization rates, demonstrating the rate of turn in markets where there is additional risk.
Markets with the Highest Expected 2014 Employment Growth
Austin 4.5%, Houston 4%, Denver 3.9%, Salt Lake City 3.8%, Dallas 3.7%, Orlando 3.6%, Louisville 3.4%, Palm Beach 3%, Fort Lauderdale 3%, Portland 3%, U.S. 3%.
Markets with the Lowest Expected 2014 Employment Growth
Cleveland 1%, St. Louis 1.4%, New Haven 1.4%, Detroit 1.6%, Boston 1.7%, Philadelphia 1.7%, Kansas City 1.8%, Chicago 1.8%, Washington DC 1.9%, Milwaukee 1.9%, US 2%
Markets with the Lowest Expected 2014 Vacancy Rates
New York 2.4%, Oakland 2.6%, Miami 3.2%, Minneapolis 3.4%, Portland 3.6%, San Diego 3.6%, San Jose 3.7%, Chicago 3.8%, N. New Jersey 3.8%, Pittsburgh 3.8%, U.S. 4.8%
Markets with the Highest Expected 2014 Vacancy Rates
Indianapolis 9%, St. Louis 7.8%, Las Vegas 7.7%, Atlanta 7.6%, Houston 7.6%, Jacksonville 6.9%, Phoenix 6.8%, San Antonio 6.2%, Tampa 6.2%, Palm Beach 6.1%, U.S. 4.8%
High Yield Markets
The following are Five-year Average Cap Rates, representing returns for investors based on net income.
Detroit 10%, Cleveland 9.3%, Cincinnati 9.2%, Pittsburgh 8.8%, Jacksonville 8.5%, Indianapolis 8.4%, Columbus 8.3%, Louisville 8.3%, Dallas 8.2%, Atlanta 8%
New development activity is insignificant. Focus is on a desire to reduce rental expenses through efficient space utilization which will likely result in lower demand for physical space. Vacancy Rate 2014 15.7% forecast 2015 15.5%
Rent growth inched up 2.6%. Vacancy also improved attributed to e-retailers and their shippers leasing more warehouse space with the increase in online shopping. Evidence of this is the announcement Staples will close 225 stores reflecting 50% of their business is done on line today. Vacancy Rate 2014 8.9% forecast 2015 8.7%
Effective rents declined .3 percent. As retailers’ store sales and margins continue to be impacted by the rise in internet sales, they remain cautious about expanding brick and mortar stores. Retail real estate development activity is at a record low. Consumer spending is likely to support overall retail sales. Vacancy Rates 2014 10.0% forecast 2015 9.8%
Financial institutors continue to support this market with competitive interest rates and loan programs. Typically the most competitive commercial programs are in metropolitan areas while the more remote locations with fewer financial institutions competing for business offer higher rates usually anywhere from 1/2% to 2% and with amortizations for 20 years as opposed to 30 years in metropolitan areas. Commercial lending has been able to perform well in this economy due to the fact that the underwriting of loans never suffered the issues facing the residential market. Residential lending today is mostly FNMA/FHLMC and FHA, few banks have a portfolio product to offer. The regulatory Dodd/Frank legislation is having some impact with minimum qualifying standards. The bells and whistle products of the past such as, stated income for self employed (for financially strong borrowers who can write off tax deductions not available to salary workers) and other bank portfolio programs left the market, in the past they represented as much as 40% of new loans. No doubt today’s housing market is far from where it was years ago, where borrowers had more financial programs to choose from and the market was vibrant.