Limon Net Lease Group

Marcus & Millichap Research Services

Is the U.S. Housing Shortage Poised to Get Worse?

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What Is Driving Record Home Price Growth?

  • Median single-family home price grew an astronomical 24.4% nationally over the last 12 months
  • Even the slowest metro price growth was still 13.3% Y-O-Y
  • COVID-19 had an impact, but served more as a catalyst to the underlying demographic and supply trends

Demographic Trends Will Sustain Housing Demand

  • Over next 5 years, nearly 5 million Millennials will turn 33 each year, the median age of first-time home buyers
  • Some young adults forced back home due to the pandemic will move out and create new households
  • Housing construction is elevated, but rising costs and material shortages likely to keep supply short of demand

Strong Apartment Outlook Drawing Investor Interest

  • Looming wave of demand is motivating investors to engage in aggressive bidding for Apartments
  • Bid climate is driving up prices and may put downward pressure on cap rates

* Through June
Sources: Marcus & Millichap Research Services, National Association of Realtors

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Is Rising Inflation a Growing Concern for CRE Investors?

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Headline inflation reached 5.4% in June, its highest level since 2008; well above Fed target of 2%

  • Fed believes inflation is transitory, driven up by short-term logistical bottlenecks and surge in consumption
  • Likely trying to keep interest rates low and money flowing

What are the Factors Driving Inflation?

  • Some inflation drivers are transitory, like commodity prices
  • But other strong drivers, such as rising wages and housing costs, tend to remain in place longer
  • If the inflation risks remain, Fed may be forced to take action earlier than expected and raise interest rates

Why Commercial Real Estate Investors are Well Positioned

  • Apartment, Industrial and Self-Storage saw strong Y-O-Y rent growth in 2Q, underscoring CRE’s inflation resistance
  • Low interest rates and high liquidity create great buying conditions, but future rise in rates may limit this window
  • High buyer demand also provides a prime opportunity for sellers that want to cash out or switch property types

* Through June
Sources: Marcus & Millichap Research Services, BLS

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Return to the Office Could have Major Implications for CRE

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One of the Most Significant Factors Affecting CRE in 2021

  • As COVID-19 cases decline and vaccinations rise, restrictions against working in office are being lifted
  • Disconnect exists; many companies are pushing for full return to the office, many employees want more flexibility
  • Outcome will shape where people work, live and shop

Ramifications Likely to Play Out Over Multiple Years

  • As company procedures take effect, some workers may return to offices in major urban hubs, full- or part-time
  • Others may either work remotely or quit, and relocate
  • First signs of the decisions should start to appear in next few months; full impact could take years to unfold

How the Return to Work Could Play Out for CRE

  • If workers return to offices, hard-hit urban Office and other downtown properties would begin path to recovery
  • Even partial work in office could aid the recovery
  • Sustained work-from home would boost Apartment, Retail, and Industrial demand in smaller cities and suburbs

*As of April 2021
Sources: Marcus & Millichap Research Services, Digital.com

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Will a Surge in Summer Travel Bolster Commercial Real Estate Performance?

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Summer Travel Might Provide Additional Economic Boost

  • Vaccination rates and lifted restrictions could bring a wave of pent-up summer travel and spending
  • Daily air travel in June is already 3 times higher than it was in the same period last year; only 24% below 2019 peak
  • Increased travel would benefit hard-hit cities and property types that rely on tourism

Travel and Tourism are Major Economic Drivers

  • Nearly 16 million jobs were supported by travel industry in 2019; pandemic layoffs severely impacted travel industry
  • Employers are aggressively hiring to meet summer demand, will boost household formation and spending

Hotels and Retail Biggest Winners, But All Sectors Benefit

  • Hotel occupancy levels in June were only 10% below same period in 2019, summer could further narrow gap
  • Increased summer spending not only supports travel and entertainment, but also Retail and Industrial properties
  • The job recovery will support the creation of new households, benefiting Apartment demand

*Through June 29, Trailing 7-day Average
Sources: Marcus & Millichap Research Services, Transportation Security Administration

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Housing Research Brief: July 2021 | Do High Home Costs Strengthen Apartment Outlook?

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Hot Housing Market Spills Over Into Multifamily Rentals

Pandemic heightens changes in lifestyle. 

The leading edge of the 2 million millennial cohort began to age into the home buying stage of life during the global financial crisis. Deterred by the housing crisis that followed, many delayed purchasing. Although millennial homebuying had picked up before the health crisis began, it was sped up dramatically as companies sent employees home to work. No longer tethered to the office and confronted with economic uncertainty, priorities and lifestyles shifted and homeownership became more important. Buyers, however, were confronted with an already-low supply of for-sale options throughout the nation, which pushed prices higher.

Construction hasn’t kept up with household formation. Housing completions have been subdued since 2011 and have fallen well below household formation over the past several years. The for-sale inventory is tightened further by baby boomers living to an older age and remaining in their homes longer, and more homeowners locked in at a modest interest rate. The low rate provides less incentive for owners to move, especially if another house is hard to find. During 2021, the high cost of building materials and labor, along with supply-chain disruptions for housing supplies, will restrict the pace of home construction, exacerbating the shortage. This disconnect is expected to last through 2022, after which household formation is forecast to taper from a peak of 2.1 million in 2022 and many of these temporary issues are resolved.

Pace of sales loses steam as fewer residences available. Existing home sales fell 44.5 percent during May, translating to a year-over- year decline of 22.8 percent. Meanwhile, the number of new homes sold dropped 9.2 percent over the past 12 months. The modest supply of existing residences on the market contributed to the decrease. Home prices are also rising, restricting the number of houses that are affordable for renters seeking to transition to homeownership. As a result, more households will stay in the renter pool longer, which should generate interest in the 335,000 apartments due in the nation’s major markets this year. The growing demand for apartments will push rents higher. The average effective rent in the U.S. is expected to jump 2.8 percent in 2021 to $1,451 per month.

Developing Trends

Price of lumber retreats. The cost of 1,000 board feet of lumber fell to $600 in the third week of June, down roughly 50 percent from a record high in May. The drop may allow more developers to stockpile inventory, stabilizing one aspect of the rising cost of home construction. As a result, builders could break ground on more homes as the summer progresses.

Tight supply pushes prices higher. Although more existing homes were listed for sale in May compared with the prior month, the limited availability amid robust demand is keeping prices elevated. The median sales price of an existing home soared 24 percent since May of last year to $344,000. The median price of a new home jumped 18 percent annually, setting a high of $383,100 in May. Rising prices are allowing fewer renters to qualify for a home purchase.

$344,000

2.3
Median Price of Existing Homes in May 2021 Months Supply of Existing Homes for Sale in May 2021

*Forecast
Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics;
Mortgage Bankers Association; National Association of Realtors; National Association of Home Builders;
RealPage, Inc.; U.S. Census Bureau; Wells Fargo

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The Winners and Losers of the Fragmented CRE Recovery: A Tale of Two Cities

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National Recovery is Just One Piece of the Story

  • The move towards a full national reopening will bode well for the economy and commercial real estate
  • But the pandemic has impacted every market differently, with some seeing rapid recoveries and others lagging

Fragmentation Occurring in Commercial Real Estate

  • Nationwide, Apartment and Retail rents are down slightly, Office is down moderately, and Industrial rents rose
  • However, Inland Empire and Sacramento Apartment rents rose 11% and 7%, while San Jose rents dropped 16%
  • This bifurcation is found across all property types and metros, creating drastic variance in the local level

Investors Must Pay Attention to Local Nuances

  • The situation can differ greatly from market to market, even within the same state
  • Investors should understand national trends, but also be aware of the variance between individual markets
  • Leveraging experts on particular property types and markets will be crucial for crafting an investment strategy
* As of 1Q 2021
Sources: Marcus & Millichap Research Services, RealPage, Inc., CoStar Group, Inc.,

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