Category Archives: Real estate news

Suburban Office Growth

Suburban Office Growth

That morning commute from the suburbs into downtown might be getting a little easier in the coming years. Suburban office growth has taken off for investors and for businesses in recent years, and this trend appears to be strengthening over time. Yet some more conservative estimates warn that short term, overbuilding may lead to greater supply than current market demand. As is the case with many things, the truth likely resides somewhere in the middle.


Projected Value of Suburban Commercial Real Estate

Projected Value of Suburban Commercial Real Estate

Urban commercial real estate has become increasingly volatile in recent years. High cap rates and pricing in traditionally urban areas has driven many investors to the suburbs. Consider America’s biggest urban market: New York, which as recently experienced a 37 percent decrease in urban sales volume. This may be influenced by a lack of available real estate for sale, but a significant downturn also indicates a real lack of interest in high priced urban commercial real estate.


Instead, the projected value of the suburban commercial real estate market looks positive. This is particularly true for high value markets such as New York and San Francisco, where foreign buyers are effectively pricing out the competition in the urban space. The majority of Americans do live in suburban areas, which offers yet another unique advantage to employers looking to find their next commercial real estate rental or purchase.


A key factor in the value of suburban markets lies in their location and convenience. Commercial real estate within walking distance of retail amenities is projected to hold a higher value that suburban real estate that is more isolated. These mini-pockets of urban lifestyles allow for businesses to pay suburban prices with the convenience of an urban location.


The bottom line is that suburban commercial real estate is less expensive, has potentially high upside, and is becoming increasingly appealing to investors and businesses alike. The key is finding the suburban location and amenities which can sustain a commercial investment long term.


Suburban Offices vs. CBD

Suburban Offices vs. CBD

To a certain extent, urban sprawl has blurred the lines between urban and suburban real estate. Yet there remains a premium when it comes to traditional downtown work spaces that many companies and real estate investors are no longer willing to pay. The differences between suburban and central business district workspaces may be diminishing over time, but here are a few key factors which keep the distinction relevant:


Access to transportation: public transportation access is a huge driver of commercial property desirability and therefore it is a huge driver of commercial property value. While a massive amount of Americans enjoy access to public transportation including subway systems and city buses, nearly half have no access to public transportation. The value add of CBD is that properties are all but guaranteed the convenience of a nearby transportation option.


Walkability: along these lines, being within walking distance of retail amenities, restaurants, and other conveniences drives value. CBD again comes out ahead here, but modern suburban planning is catching up quickly. 


Price points: no matter how much we talk about how trendy and desirable suburban office space has become, central business district real estate pricing remains nearly double the cost of their suburban counterparts per square foot. This difference simply cannot be overlooked. The biggest difference between these two real estate options is, and will likely remain, the price.


The Advantages and Benefits of Suburban Office Growth

The Advantages and Benefits of Suburban Office Growth

As referenced above, the largest benefit of suburban office growth is undoubtedly the cost savings. Yet there are so many advantages that come with expanding beyond city limits. Here are just a few:


  • Commuting is easier for employees. Besides the issue of public transportation, suburban offices will reduce commute time for the vast majority of employees. Whether that comes via going against the flow of rush hour traffic or avoiding long commutes altogether, this is a huge plus.
  • Parking is cheaper, easier, and more accessible. Along those lines, suburbia comes with more space, and with more space comes more parking options. Employees will likely no longer have to shell out an hour’s pay just to find a spot to park.
  • Curb appeal is improved and often more prominent. Unless you are looking for a specific urban vibe to your workspace, properties in the suburbs generally afford greater curb appeal to visitors. Signage is more prominent and the options for landscaping and other exterior features are far greater.
  • Suburban offices tend to have a campus feel. The hustle and bustle of downtown life is appealing for many, but can certainly wear on already frayed nerves. Suburban office space offers a more serene, campus-like atmosphere which appeals to workers and employers alike.


Going Forward

The market is strong for suburban office growth. With lower barrier to entry and an increasing public interest in moving away from central business districts, the future of commercial real estate seems to be turning suburban. The key to smart investing is picking locations which are convenient with high quality amenities. If employers can offer the convenience of a downtown work environment without the hassle, all for a lower price? What is there to lose?

The Impact of Climate Change on Real Estate

The Impact of Climate Change on Real Estate

Climate change, also referred to as global warming, has accelerated in the past century. The normal ebbs and flows of our planetary climate have jumped off course beginning in the mid 20th century. Political opinion, root causes, and other debates aside, this trend is set to continue or even accelerate in the near future. The impact of climate change has been felt in many industries, and the real estate market is certainly no exception. 


It may be a tempting thought to envision ourselves as being untouchable if we leave in a temperate area, far away from the coastline. The fact of the matter is that all real estate values may be touched by climate change in the coming years. It isn’t just hurricanes that change real estate values. New laws, regulations, and economic realities which may result from climate change will likely lead to a volatile real estate landscape.


How Climate Change Devalues Real Estate

How Climate Change Devalues Real Estate

To understand the reality of how climate change impacts real estate, let’s look at some of the more well known examples of real change already being experienced today.


A recent study performed by the First Street Foundation concluded that amongst Mid-Atlantic states, nearly $16 billion was lost from residential real estate values alone between the years of 2005 and 2017. The reasons for these real estate devaluations? Rising sea levels, tidal flooding, and the associated fallout. Florida was found to have the largest financial loss. While this study focused on residences, the commercial real estate market was hit equally hard.


Another less obvious reason why commercial real estate properties lose their value due to climate change is the influx of stronger, more frequent storms. Many of us have heard that climate change has caused warmer waters and stronger hurricanes. Climate change has also been potentially linked to worsening tornado seasons in the midwest and across the globe. All of this can destroy real estate, raise insurance rates, and devalue properties overall.


Using Climate Change Projections to Make Wise Real Estate Investments 

Using Climate Change Projections to Make Wise Real Estate Investments

Of course it isn’t all doom and gloom. There are ways for savvy real estate investors to educate themselves on climate change and its impact on future decisions. While it may take time to develop a deep understanding of this relationship, even a cursory understanding of how climate change will impact your region’s real estate market can be a start.


Immediate risks include some of what we discussed in the previous sections: namely flooding, hurricanes, tornadoes, droughts, and so forth. Some regions have always been subject to these considerations while some regions may find themselves in the crosshairs for the first time. These types of risks are potentially catastrophic including total loss of investment and/or lengthy closures.


Less immediate risks might include an area being depressed over time due to climate change. The relationship between climate change, population growth, industry regulations, and everything in between can be the difference between a highly profitable investment in commercial real estate and a financial failure. 


Last but not least, insurance costs are expected to increase due to climate change. This may impact your region more or less depending on the volatility of the climate and by extension the likelihood of property damage due to climate-related events. As with all real estate (and business) decisions, the decisions stems from weighing the potential benefits vs. the possible risks.


Coastal Property Values are Taking a Major Hit

How Climate Change Devalues Real Estate

With the melodrama of the 24 hour news cycle, it can be hard to separate fact from fiction. Are sea levels truly rising causing massive property damage or is this yet another Y2K? We already referenced the massive financial losses which have been incurred all along the eastern seaboard. Unfortunately, those losses are just the tip of the proverbial iceberg.


Records for real estate damage resulting from natural disasters are being broken all the time. In 2017, the total costs in real estate damage caused by floods, wildfires, and other natural disasters topped $300 billion in the US. And yes, rising sea levels will continue to be a very real threat to any real estate close to our shorelines. 


If you have an interest in real estate in a city like Miami, New York or New Orleans, this might come as old news. If you live inland, the potential ripple effect might cause shifts in real estate valuation in either direction. As Mark Twain once quipped, “buy land, they’re not making it anymore”.


Going Forward

When it comes to projections on climate change, the future is murky. What we do know is that the real estate market has already seen a material impact as both a direct and indirect result of rising temperatures, stronger storms, and everything in between. Moving forward, businesses and real estate investors should keep climate change on their checklist for any potential real estate transaction. Even the most seemingly isolated locations are not isolated from the shifting climate.


The trickle down impact of stricter environmental regulations might also influence real estate value as well as local, state, and national economies. As with all economic shifts, staying ahead of the curve might well lead to the greatest possible outcome.

Is Industrial Real Estate Dying in Major Cities?

Is Industrial Real Estate Dying in Major Cities

There has been a lot of speculation over what aspects of real estate are growing, and which are not. Some experts say that the number of homebuyers will increase, and others say that renting will continue going strong. One trend that has been observed in commercial real estate, is a decline in a specific type of CRE, industrial real estate. 

The Current Industrial Real Estate Landscape

The Current Industrial Real Estate Landscape

Nashville, Dallas, and Boston each rank within the top 6 for real estate investment potential in a report published by the Urban Land Institute. These fast growing cities have a lot of ongoing real estate development, but despite their thriving commercial real estate market, they are each beginning to run out of space for industrial real estate. 


Holladay Properties is currently working in Nashville to construct a warehouse and distribution park. The five industrial buildings that make up this park will be located near the Nashville International Airport, and are currently being described as one of the last industrial projects of its size. 


Many developers prefer to use available land for the development of office space, retail space, or residential space. This is because the potential rental fees are higher with these types of tenants. Steve Horrell, an industrial broker and development consultant in Nashville, referred to the rent earned through industrial properties as “the lowest rung on the totem pole”. With the profit incentive for non-industrial development outperforming industrial properties to this degree, the majority of available land ends up being taken for alternate commercial purposes.

Declining Industrial Space

Declining Industrial Space

With land being bought up for smaller, non-industrial projects, the warehouse and distribution park is considered to be one of the final industrial projects of its size. It is not just Nashville that is experiencing this, but Dallas and Boston as well. Not only is industrial real estate growth stalled in these cities, but over the last decade, Dallas has actually been demolishing or converting industrial properties. In Boston, there have been even larger losses in industrial space. Richard Lawson, a writer for CoStar, reported on this, saying that:


The east Dallas area, which includes the popular Deep Ellum neighborhood that once was the main industrial area, has had a “net reduction of about 500,000 square feet of industrial space since 2008,” according to CoStar’s Dallas market report.


Reporting on the situation in Boston’s major industrial areas, Lawson stated: 


More than 20 million square feet has been dropped from that area’s industrial inventory in a decade, according to CoStar’s Boston market report. Now the trend is spreading to the more popular warmer climates across the United States.


Though they were once considered to be industrial powerhouses, the industrial space in these fast growing cities is projected to continue falling. Steve Horrell analyzed the current state of industrial real estate in Nashville by saying, “We’re pretty well out of dirt to build anything 5 to 7 miles’ from the county courthouse in downtown Nashville…We’re chewing up industrial buildings in our own neighborhoods for other uses.”


Horrell also added that it is “difficult for companies wanting 5,000 to 15,000 square feet to find space, particularly as older, existing buildings disappear”. CoStar analyzed the gains and losses in the industrial market, and found that Davidson County (the county that Nashville belongs to) has seen a net loss of industrial real estate in the last decade. There were approximately 3 million square feet of industrial projects developed in the county across that decade, while about 3.36 million square feet of industrial space was demolished or converted.

The Future of Industrial Real Estate

The Future of Industrial Real Estate

While the presence of industrial projects in cities is beginning to disappear, that does not mean that these projects will cease to exist in the coming future. With the growth of Amazon and other online shopping companies, warehouses have become even more of a necessity. The locations of these warehouses end up being pushed just outside of major cities. This is done so that the valuable city land can be used for more profitable (higher rent) properties like the aforementioned offices and residential spaces. 


Looking at the areas outside of Davidson county, there is a lot more available space for industrial development. This means that the future of industrial real estate will most likely involve moving out of big, fast growing cities, and settling down in the surrounding counties. The need for industrial development isn’t going to disappear, it is just moving to a location that allows its profitability to compete with other forms of commercial real estate.

Going Forward

Large industrial development projects will not be frequently seen in big cities moving forward. It is more valuable to the development companies to build that space into one that provides higher rental fees from future tenants. However, while the available land for industrial real estate declines in fast growing cities, it will not disappear completely. The demand for industrial real estate still exists, so instead of dying out, industrial development projects will simply move outside of major cities where industrial space still exists. This is likely to be the trend moving forward.

Completing the WeWork Takeover

Completing the WeWork Takeover

The collapse of WeWork has made headlines around the country, and outside of it. Everyone has heard of what happened, and now it is time to look to the future of the We Company subsidiary. With less than a month before the company was set to run out of money, a WeWork takeover seemed inevitable. There were two options on the board to avoid going out of business. The first offer was a bailout from JP Morgan Chase and several of WeWork’s other lenders, while the second offer was to be taken over by SoftBank.

WeWork Takeover Options

WeWork Takeover Options

WeWork had connections to both JP Morgan and SoftBank. SoftBank was a big investor in The We Company, while JP Morgan Chase was former CEO Adam Neumann’s personal bank. JP Morgan had underwritten some of WeWork’s loans, but SoftBank’s offer included paying off some of Neumann’s debts. 


Choosing one of these deals was necessary to avoid going out of business. If WeWork was to go bankrupt, it would have a significant impact on the commercial real estate industry. CNBC broke down why it would be bad for real estate if WeWork was to go bankrupt. Since WeWork deals in long-term leases, any landlord that has rented space out to them would suffer. The number of landlords is not small seeing as how the company leases tens of millions of square feet of office space across New York, San Francisco, and London.

WeWork Takeover Moving Forward

WeWork Takeover Moving Forward

With bankruptcy off the table, WeWork decided to accept SoftBank’s offer. With this, the WeWork takeover was finally underway. While he did maintain some voting power, Neumann was removed as CEO. SoftBank now owns 80% of WeWork, and plans on advising the new CEOs moving forward.


SoftBank already controls two seats on The We Company’s board, and has tapped Bolivian-born executive and billionaire Marcelo Claure to lead 20 of its staffers in managing WeWork’s turnaround, the WSJ reports. Claure will advise co-CEOs Artie Minson and Sebastian Gunningham in deciding how to best cut costs to shorten the company’s path to profitability.


Now that the WeWork takeover is being implemented, does this save the company? WeWork had multiple deals that were still being negotiated that have now been halted. There are also business relationships that have presumably ended due to a new level of caution. A frustrated landlord, who wished to remain anonymous, had been in talks with WeWork, and commented on the current situation:


Now, the latest thing they told us after the SoftBank bailout was announced, [was] ‘we are still on hold, and we could be back to you in two days, two weeks — or never.

What’s Next

What’s Next

To some of WeWork’s business partners, they see its collapse as a new opportunity. WeWork served as a middleman to connect them with tenants, but with those relationships already formed, they can cut WeWork out of the process and deal directly with the businesses. This idea was mirrored by Steven Durels, the Director of Leasing for SL Green. He looked at one of his company’s properties, that WeWork rents out and leases to Amazon, and explained that a lease would be made directly with Amazon in a scenario where WeWork was no longer a factor.


So, if there were no WeWork, Amazon would simply be our tenant, they step into that lease next day, there would be interruption of services and no break in our income.


The coworking industry has also been thriving outside of WeWork. The Real Estate Board of New York reported on the flexible office space available in the region, and WeWork makes up 28% of it. This is a big enough percentage to cause problems by going out of business, but small enough where there are alternative options post-takeover. 


Vornado Realty Trust, for example, plans to start offering flexible office space for tenants in the coming future. The president of Vornado, Michael Franco, commented on WeWork, and the Trust’s upcoming plans.


While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years…We will brand this space under the Vornado name and, importantly, retain the bulk of the upside.

Going Forward

After its brush with bankruptcy, WeWork is going to have some difficulty getting back on its feet. It had a lot of relationships and partnerships with landlords around the world, but those landlords have either begun to doubt WeWork, or are enacting backup plans so that they do not have to be reliant on it. This puts WeWork in the position of having to prove itself all over again, and regain the trust of those it did business with.


SoftBank’s takeover and cash infusions may have saved WeWork for now, but there’s no telling whether its new leadership will be able to right the ship moving forward.

The Impact of the 2020 Election on Housing

The Impact of the 2020 Election on Housing

With 2020 approaching soon, so too does the 2020 presidential election. The administration in charge of the Executive Branch has a significant impact on housing development and construction. The Republican nominee for president is clear, and if Donald Trump wins reelection, then the current system would stay in place. There are many Democrats who are in the running to challenge Trump, and with them come numerous plans to change the housing market. 

Housing Issues to Be Addressed in the 2020 Election

Housing Issues to Be Addressed in the 2020 Election

Before focusing on what goals individual candidates want to achieve, it is important to look at the current issues that they want to address. CNN analyzed a report by Harvard’s Joint Center for Housing Studies, and came to several conclusions about what currently ails the housing market:


  • Despite gains in 2016 and 2017, construction slowed in 2018.
  • In previous years, the number of renters declined due to increases in homebuyers, but going forward there will be approximately 400,000 new renters.
  • The percentage of people who spend more than 30% of their income on housing has decreased due to homeowners receiving lower mortgage interest rates. On the other hand, almost half of all renters are paying more than 30% of their income on housing.
  • Millennials are starting families, but the housing market isn’t providing homes that they can afford with their income/student debt. Construction of homes under 1800 square feet made up 22% of new housing (down by 10 percentage points from less than 2 decades ago).
  • Homelessness did decrease between 2008 and 2018 thanks to policies that ignored past substance abuse issues or job training. The rate started to go up again in 2018, especially on the West Coast.


While there did seem to be improvement post-recession, prices are beginning to go up, and this makes it difficult for people to afford to buy homes. Rent is also high, so finding affordable apartments is also difficult. Some local governments have attempted to provide rent controlled housing, but Chris Herbert, Managing Director of Harvard’s Joint Center for Housing Studies, disagrees with this approach.


“The fact that we’re turning to rent control is a sign that we’ve failed at other direct ways of addressing these issues,” Herbert said. “We’re not providing enough direct subsidy to people who need it.”


If rent control is not a viable solution, then how should homelessness and affordable housing be addressed? This is where the presidential candidates come in. Many solutions have been put forward, including: tax credits, federal programs, regulatory changes, and legal protections.

Housing Solutions by 2020 Candidates

Housing Solutions by 2020 Candidates

A Renters Tax Credit has been endorsed by Cory Booker, Kamala Harris, and Julian Castro. It would give taxpayers a credit based on the difference between how much they pay in rent, and what 30% of their income is. Curbed explains that “if you paid $15,000 in rent in a year and 30 percent of your income was $10,000, you’d get $5,000 from the federal government in the form of a tax credit.”


Cory Booker has also reintroduced the idea of Baby Bonds. Under this plan, “each new baby born in the U.S. would be given a $1,000 bond, with up to $2,000 in annual additions depending on the income of the child’s family. The money would be invested in a low-risk fund managed by the Department of Treasury, and the child could have access to the money at age 18. This seed money could later be used for a downpayment on a house.”


Beto O’Rourke has proposed a policy that allows prospective homeowners to deposit money into a savings account, and have that money doubled by the U.S Postal Service. There are limitations to it, but if a person qualifies, they can (for example) deposit $2,000 into the account, and receive an additional $4,000 for a total of $6,000. This would be saved over the course of a few years, and used for downpayments on a home.

How the 2020 Election Could Impact Federal Programs

How the 2020 Election Could Impact Federal Programs

Bernie Sanders wants to guarantee housing for all Americans. “Sanders would invest $70 billion to rehabilitate the nation’s existing public housing stock. build 2 million mixed-income units, and expand the National Housing Trust Fund to help construct, rehabilitate, and preserve 7.4 million housing units for seniors and those with low-income or disabilities.”


Elizabeth Warren wants to build 3.2 million new housing units with 500 billion in federal housing funds. She believes that this will lead to rent decreasing for low and middle class families. Most of the money would fund the Housing Trust Fund, but other programs would be funded as well.


Julian Castro and Beto O’Rourke agree with approach. O’Rourke, Castro, and Amy Klobuchar also want to expand the Low Income Housing Tax Credit Program, with the latter two wanting to expand Housing Choice Vouchers as well. In addition, Klobuchar intends to expand the role of Fannie Mae and Freddie Mac in providing mortgages to potential homeowners.


Booker, O’Rourke and Castro want to fund HUD specifically to target the issue of homelessness. In addition, O’Rourke wants to triple the funding of Projects for Assistance in Transition from Homelessness to 194 million, as well as provide additional counseling options for children, veterans, and members of the LGBT community who have experienced homelessness.


Sanders, Warren, and Booker all have plans for combatting housing discrimination and promoting fair housing and strengthening legal protections. O’Rourke would reinstate the Affirmatively Further Fair Housing rule, and update credit score parameters as to benefit communities that are typically discriminated against in this way. Harris and Klobuchar plan to change credit requirements as well. 


All three, together with Booker, plan to ban discrimination based on people who use housing vouchers to pay for their rent. Harris also wants to add 100 billion to a HUD grant program to assist with down payments and closing costs. Warren would provide grants for down payments, as well as reform the Community Reinvestment Act that requires banks to invest in communities they have branches in. Something Klobuchar agrees with.


Many candidates also have platforms to reform zoning laws. The federal government cannot dictate local zoning laws, however, so all the candidates can do is try to incentivize local governments through various grants and funding. 

Going Forward

There are many details to these policies, and many candidates who have put thought into the housing issues currently plaguing the country. The visions they have for the country will certainly impact the housing market if one of them wins the White House in 2020.

Housingwire provides links to every candidate’s housing plan who has released one.

The Next Wave in the Strip District

Pittsburgh’s Strip District has seen a commercial real estate transformation that is nearly the equivalent of the changes in East Liberty. Once a wasteland of very profitable parking lots, the Strip has become a tech office hub. Thanks to two major master plan developments, Buncher’s Riverfront and Oxford’s 3 Crossings, more than one million square feet of office space and almost 2,000 units of new residential space will be occupied between the Convention Center and 31st Street Bridge. Other developers, including Jack Benoff, RDC/Orangestar, Chuck Hammel, and McCaffrey Investments, have also contributed major projects to the neighborhood.

Next week, Oxford Development is bringing an updated plan for 3 Crossings next phase to the planning commission. It includes 450,000 square feet of new offices (in addition to the 110,000 square foot Stacks under construction now), 300 apartment units, and a 606-space parking garage. Mascaro Cnostruction is the construction manager for the garage. Rycon Construction is CM for the remaining buildings. There will also be a presentation for 23rd & Railroad Apartments, a 220-unit apartment that Oxford is helping to develop on behalf of Steel Street Capital. That project, which Rycon is also building, will include 33 units of co-living apace. This is a relatively new concept to Pittsburgh, in which occupants share multi-bedroom apartments much like dormitories.

At least three other developers, including RDC/Orangestar and JMC Holdings, have proposed additional spec office buildings of between 150,000 square feet and 350,000 square feet.

Work is about to start on two other new condominium projects, both being built by Franjo Construction. Penn 23 is a $12 million, 21-unit condo being developed by Francois Bitz. Solara Ventures is developing a $17 Million, 50-unit condo three blocks further east at 26th and Smallman. Franjo is also expecting to get underway on the $50 million+ second phase of the Arsenal apartments near the 40th Street Bridge.

In other construction news, the Turner/Mosites Construction team was awarded the $100 million+ central utility plant at the University of Pittsburgh. PA Department of General Services has advertised the first major public project of the bidding season, the $21 million Greensburg DNA Lab, due Jan. 8. Massaro Construction Management Services was selected as CM for the $12 million Plum Town Center municipal complex. Franjo started construction on the first 20,000 square foot office building at the Rocks Multimodal Terminal being developed by Trinity Development in McKees Rocks.

An update on the construction news: Patriot Construction has started work on the $3.7 million buildout of Spaces, a 38,000 square foot Regus co-working office on the 2nd and 3rd floors of One Oxford Centre. Sota Construction is bidding the $5 million John Jay Center at Robert Morris University. Rycon Construction is building a new 6,200 square foot GetGo superstation in the Wexford Flats in McCandless. Walbridge is the construction manager for Elliott Company’s major new facility in Jeannette.

Incoming Risk for Apartment Demand

Effect on Apartment Demand

After taking a breather in 2018, developers are building more apartments in Pittsburgh this year and the pipeline is robust (for Pittsburgh anyway) for 2020. Permits for multi-family units are up 32.8% year over year for the first three quarters in Pittsburgh and the surrounding six counties. Investors are still bullish on the Pittsburgh apartment market, but there are signals to watch about the demand for apartments in the next few years.


It is no secret that the housing market has been in decline compared to years prior. Many have spoken on why this may be the case, and just as many have questioned whether progress is being made in reviving the market. Galina Alexeenko, a Managing Director and Senior Economist at CoStar Group, believes that the market is turning around and has the potential to grow relatively soon. This growth would involve homeownership, specifically, and if homeownership increases, that would lead to a natural decrease in apartment demand. 


There has always been a balance between residential demand and apartment demand. Holding the homeless population constant, people either own their homes or they do not. Therefore, when one increases, the other must decrease. Thanks to lower homeownership, rental rates have increased, but that trend may not persist. Alexeenko believes that will not be the case for long, but first establishes what the current state of residential construction is.

The Current State of Residential Construction

The Current State of Residential Construction

She sites John Doherty, a senior reporter for CoStar, who explains in his own piece that the percentage of Americans who own a home decreased slightly from the previous quarter.

As of the second quarter, only about 64.1% of U.S. households are owned by their occupants, according to new census data. That’s down from almost 70% in 2007 before the housing market crashed, and it’s a dip from 64.2% in the first quarter. The drop is noteworthy in that homeownership rates had begun to tick up in 2018, sparking discussion about whether the rental boom might be ebbing.


Alexeenko adds to the conversation by acknowledging residential construction’s impact on the economy at large:


Residential construction has been a drag on U.S. economic growth for six consecutive quarters, as the costs associated with labor, land and business materials increased, along with a scarcity of available lots and delays in building approvals in some major cities.

What Will Drive Homeownership Ratesv

Clearly residential construction’s lack of growth has negatively impacted the economy, yet Alexeenko still supports the idea of the market changing for the better. If homeownership rates have not increased, however, then there must be other metrics that lead to the conclusion that the housing market will soon be on the rise. Alexeenko states that while overall homeownership rates have decreased, new and existing home sales have been increasing for several months, as has construction of single-family homes. 

What Will Drive Homeownership Rates

There are consistent numbers showing that sales have increased for new and existing homes, and that homebuilders have been building more as well. These increases imply that something changed; something that lead to consumers directing their spending towards owning a home. Alexeenko believes this change is with affordability.

The recent pick-up in single-family construction could, in part, be explained by homebuilders’ expectations that rising consumer confidence and incomes, as well as increased housing affordability, will boost sales. 


CoreLogic (a provider of financial, property, and consumer data) backed up Alexeenko’s stance by highlighting the facts that price growth and mortgage rates have both decreased. These two factors have a clear effect on whether a home is considered affordable, and lend credence to Alexeenko’s theory of why home sales have recently increased.


In one last attempt to flesh out her theory, Alexeenko invokes the Federal Reserve. 


The change in Fed’s policy over the past year has already resulted in lower rates on consumer loans and residential mortgages, boosting consumer spending and home refinancing activity. Cost of capital for companies has also declined, as both risk-free and corporate bond rates have moved lower.


Effect on Apartment Demand

Effect on Apartment Demand

The data that reports on homeownership rates typically lags by several months, so the effects may not make themselves clear right away. Despite this, Alexeenko is confident that the current data shows that: construction of new single-family homes has increased, sales of new and existing homes to single families has increased, and the affordability of homes has potentially improved (thanks to changes in income, price, and mortgage rates). This leads her to conclude that homeownership rates will be increasing in the near future. 

Apartment demand has been consistently high due to the homeownership trends, however, if these predictions are true, they serve as a warning that apartment demand may soon decrease to compensate for the potential increase in homeownership. 

Going Forward

Downside risk for apartment complexes may end up being a concern for residential real estate investors moving forward. If renters are beginning to test the waters of owning a home, which the data shows is possible, then apartment demand will logically go down proportionally. As always with investments, one cannot be 100% sure of anything, but the data shows that this is at least a feasible conclusion. This means that investors should be on the lookout for all of the latest data on homeownership to confirm whether or not the theory crafted by Alexeenko comes to pass.