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1/6/2020

What’s Next for Multifamily & Rental Housing Markets Victor Calanog PhD CRE®

January 8, 2020 1

Agenda 1. Recent trends in the real and financial economies | Should we be worried? 2. How does that all map into how multifamily and other forms of rental housing units performed in the most recent quarter/period? 3. Not just short-term concerns | What are the longer term trends? 4. Hot topics | WeWork, America’s aging and Senior Housing, rent regulation, and evidence of late-stage credit cycle behaviors.

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Trends in the Real and Financial Economies

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Annual GDP Growth 2001 - 2023

Forecast

Source: Bureau of Economic Analysis; Moody’s Economy.com

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Rome, Venezia, and Past Empires An Historical Perspective

Roman Empire: $30-$60 billion, but about 25-30% of world economy (c. 14 AD)

Venetian Empire: $6 billion (but spread across the Mediterranean through the Black Sea (c. 1219 AD)

British Empire: $10-$13 trillion, but about 21% of the world economy (c. 1870)

Source: R. Crowe & J. Phoenix (2000); Maddison (2005); Milanovic (2006); Scheidel et al (2007); C. Foy (2016-2017); Calanog (2019)

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Past Empires: A Global Perspective Putting Things in Context Song Dynasty of China: $30$40 billion, but about 25% of total world GDP (c. 1200)

Mughal Empire of India: $90-$100 billion, but about 20-25% of total world GDP (c. 1700) Source: A. Maddison (2007), “Contours of the World Economy, 1-2030AD’; Thadani (2019)

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The World Economy 2018 GDP World’s Region        

North America Other Countries Africa Asia Australia Europe South America Middle East

Source: Worldbank

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Labor Market Dynamics Monthly, 2007 - 2019

Source: Bureau of Labor Statistics

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The Economic Outlook Key Takeaways for the Third Quarter of 2019 » Concerned, but not worried. » Consumer spending outweighing the drag from business investment, but it is because job growth has not yet turned negative. » Continuing uncertainties about the ‘variable policy environment’ and the increasingly ‘wait and see’ attitudes surrounding the upcoming 2020 elections are headwinds. » Some economists still haven’t moved their ‘recession timing’ to 2021. Heck, it’s January 2020 already! (What does this mean?)

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Updates for Multifamily & the Housing Markets

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National Apartment Market Quarterly & Annual Market Conditions » Vacancies flat for the first three quarters at 4.7%.

Annual

» Slight pullback in asking and effective rent growth relative to the second quarter – ‘just’ 1.0% for the third quarter.

Quarterly

» Expect a slight rise in vacancies in the fourth quarter given expected inventory growth and generally weaker seasonal demand.

Source: REIS, Real Estate Solutions by Moody’s Analytics; 79 of 275 Apartment Markets

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National Apartment Market Supply & Demand Trends

Source: REIS, Real Estate Solutions by Moody’s Analytics; Top 50 Primary Apartment Markets

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Portland Apartment Market Supply & Demand Trends

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Completions by Submarket (Portland Apt) 2013-2019, Yearly

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Los Angeles Apartment Market Supply & Demand Trends

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Completions by Submarket (Los Angeles) 2013-2019, Yearly

Source: REIS, Real Estate Solutions by Moody’s Analytics

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New York Apartment Market Supply & Demand Trends

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Completions by Submarket (New York) 2013-2019, Yearly

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Demographic Tailwinds

Source: U.S. Census Bureau, Population Division 19

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Co-Working and its Effects Is WeWork the Answer ?

A boon or a bane for nearby commercial properties?

Source: Moody’s Analytics Reis

WeWork location at 524 Broadway,New York, NY 10012 and four surrounding office properties 20

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Property Market Updates The WeWork Effect: Convergence in Rent Growth

Source: Moody’s Analytics Reis

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US Demographic Trends

Source: U.S. Census Bureau, Population Division 22

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Seniors Housing in the Third Quarter

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Student Housing in the Third Quarter » Tables present Fall 2018 to Fall 2019 actual changes in vacancy rates and rent growth for subtypes. » Divergence in performance across subtypes because of relative supply growth: Vacancies for properties that rent by the Bed are now more than double the vacancy rate for properties that rent by the Unit. » Rent growth was positive across all regions and subtypes, with properties in the West growing by 4% or more from Fall 2018 to Fall 2019.

Source: REIS, Real Estate Solutions by Moody’s Analytics

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LIHTC in the Third Quarter » The national vacancy rate for LIHTC properties remains flat at 2.3% in the third quarter. » In the markets shown on the right, rent growth for LIHTC properties exceeded rent growth for market rate properties. » White paper on rent regulation forthcoming, given that four states have enacted some form of it over the last few months.

Source: REIS, Real Estate Solutions by Moody’s Analytics

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Capital Markets

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Debt Originations by Year The Risk Allegedly Posed By Non-Bank Lenders

Other Life Co. FHA Freddie Fannie CMBS Bank

Source: Mortgage Bankers Association

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Negative Interest Rates? Lessons from the Vikings » Denmark has had negative interest rates since 2012 » This August, Jyske Bank offered mortgages at -0.5% (what does this really mean)? » Last September 20, banks announced a 0.75% annual penalty for deposits exceeding USD110,000. » What was the actual effect of negative interest rates (operative since 2012) on consumer behavior and market statistics? Source: Ragnar Lothbrok & Lagertha | Shieldmaiden (c. 793 AD); © via the History Channel

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Negative Interest Rates A Big Financial Deal Interest Rates NationalBanks official rates Certificates of deposit

Household Savings Rate Gross household saving divided by gross disposable income Source: Danmarks Nationalbank; Eurostat

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Negative Interest Rates: A Big Financial Deal Denmark is not the USA! » Denmark’s GDP is USD350 billion (2018); population of 5 million. » Denmark has a covered bond market with a unique structure (no defaults since 1787). » The Danish krone is not the world’s reserve currency: no one knows what might happen if the US dollar enters a negative interest rate regime. » The Federal Reserve still has arrows in its quiver to use in case circumstances require further loosening of monetary policy. Source: Calanog & Yeh (2016) – The Viking Center at Ribe, Denmark

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Closing Remarks

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Summary & Parting Thoughts » Expected slowdown in 2019 GDP versus 2018 is materializing. » ‘Concerned but not worried – yet.’ » Negative job growth is your canary in the coalmine given its effect on consumer spending. » Negative interest rates are a big financial deal. » Multifamily dealing with short-run oversupply. Industrial subsectors are diverging. Student and LIHTC positive and tight. Senior Housing shows much demographic promise but still elevated vacancies.

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Profile for HFO Investment Real Estate

HFO Investor Roundtable Event Handout - Victor Calanog, REIS  

HFO Investor Roundtable Event Handout - Victor Calanog, REIS  

Profile for hfore