REAL ESTATE OUTLOOK MAY 2018
Recently, we have seen a cyclone of economic and political news and developments that has affected the real estate industry. Overall, these developments have created somewhat higher downside risks. Growth and inflation data over the last month have not come up to our forecasts. In our view, the mixed data suggests a temporary pause in growth. Lower inflation data could indeed imply slightly higher labor costs and perhaps the continuation of a Pollyanna outcome. The Federal Government is moving ahead with monetary tightening. Several risks are rising, in our view. First, the risk of an escalation in trade tensions, with the investigation into Chinese intellectual property practices. Second, risks in the Middle East are rising again. Third, rising tensions with European countries could hinder an already-difficult reform process. In addition, there is a flattening in the US Treasury yields.
Currently, we do not think that these developments have a major significance for the real estate markets. However, if there is a return to a situation of rising risk in the US dollar, this upset could cause prices to become volatile again. Although Treasury yields have flattened again, they are close to the recent lows. At this point, we think there is no major cause for concern yet. In the US, the downward revision of the first quarter 2018 is partly offset by some upward revision for fourth quarter 2017, and employment remained strong. . Overall, growth in the first quarter still appears to be at a 3% pace, and is expected to pick up later in the year, because of the effects of the US fiscal stimulus. Because of robust growth and subdued inflation, we believe that this has supported valuations of the industry over the last few years. Keep in mind, there are questions during the period of moderate financial market volatility. The most recent data suggest that the Pollyanna effect may persist for a little longer. Therefore, we are staying with our belief of economic growth. However, it is still too early to jump to a conclusion as to the end of the current upswing, despite ongoing trade tensions. The Los Angeles Times recently reported that institutional investors bought more single-family rental homes in 2017 than in previous years, the first increase since 2013, according to data compiled by Amherst Holdings. Wall Street firms such as Blackstone Group and Tom Barrack’s Colony Capital Inc. rushed into the single-family rental business when U.S. housing markets were reeling from the foreclosure crisis and homes were available and cheap. The feeding frenzy was short-lived. By 2014, big landlords were already paring back their purchases as foreclosures dried up and they tackled the challenge of managing widespread homes. Now they’re buying again, at a time when single-family landlords are raising rents faster than apartment owners are. While multifamily landlords face pricing pressure from new supply, very few single-family homes are built specifically for leasing. Demand for rental houses “feels like it’s insatiable,” Gary Berman, chief executive of Tricon Capital Group Inc., said in an interview. Tricon, the third-largest publicly traded owner of U.S. rental houses behind Invitation Homes Inc. and American Homes 4 Rent, bought about 850 homes last year, said Amherst, which analyzed data from CoreLogic Inc. The biggest purchaser was Cerberus Capital Management, with an estimated 5,100 houses. Amherst itself bought almost 4,900 homes through its Main Street Renewal subsidiary. There’s another factor driving Wall Street’s renewed acquisitiveness. Now with their businesses well established, the large landlords are having an easier time financing purchases, said Greg Rand, CEO of OwnAmerica, an online platform for buying and selling rental houses.
Rental properties should remain well ahead of other major property types because they are generally more stable. Three important factors account for this stability: 1.They are less dependent on business cycles for occupancy than any other types of real estate investments. It does not matter if interest rates and home prices are high or low, rental properties are generally more affordable. 2.Rental properties have shorter leases; thereby offering greater protection from inflation than the long-term leases associated with other properties. That is, rents can be negotiated more frequently. 3.The pool of tenants is much greater for rental properties than other types of properties. This ensures a more consistent occupancy than industrial and commercial properties, which usually have only a few tenants from which to choose. ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation.