Category Archives: Real estate news

The Changing Investment Landscape for Rental Portfolios

The Changing Investment Landscape for Rental Portfolios

When making investments, people put a lot of thought into what enters and leaves their portfolios. Real estate is no different. Real estate investors analyze the market, what properties have the most profit potential, what to buy, and what to sell. As of late, investors have been investing in apartment complexes due to high rental occupancy rates and low homeowner rates. The owners selling their properties have noticed their own trends: that their rental portfolio seems to be worth more when broken up, compared to when the properties are sold together as a package.

The Sofia Apartment Complex

The Sofia Apartment Complex

The Sofia apartment complex in Los Angeles is one of the most recent examples of this. The Sofia is known for being “the second-biggest multifamily deal in the metropolitan area this year” based on its asking price. It was a part of a billion dollar rental portfolio that had trouble being sold, that is, before it was broken up.


The Sofia apartment complex, and the portfolio it is a part of, are not undesirable. The lack of attention the portfolio received was not due to any inherent flaws with the properties themselves. As a matter of fact, once the rental portfolio was broken up, five out of the six properties (including the Sofia) ended up being sold. If there are interested parties for these properties, why does the interest not translate when they are bundled together?

Changing Demand for Rental Portfolios

Changing Demand for Rental Portfolios

Blake Okland, the head of Newmark Knight Frank’s apartment platform, attempted to explain this discrepancy. He discussed how buyers in the market do want scale in their real estate investments, however every property in a portfolio may not be a perfect fit for each individual buyer.


“They absolutely want bulk. The problem is, what comes to market may not be what they want: the asset profile doesn’t fit, the geography might not fit,” he said. “The practical reality is that sometimes there’s just more value in breaking things up for separate buyers.”


Josh Goldfarb, a multifamily chief for Cushman & Wakefield, continued the conversation by adding his take on how portfolios typically sell successfully.


“As a general rule, nine-plus times out of 10, [a portfolio] gets cut up to get the best price. Rarely do we see the whole thing taken down by a single buyer.” 


These do certainly seem like valid explanations for why properties begin to sell once the bundle they were a part of is broken up, but not when originally bundled together. The multifamily market has been facilitating apartment and rental property investments in recent years, so prime real estate not being purchased most likely could not have been due to a lack of interest. If the market continues at its state, these investment practices may actually become more common.

Will the Multifamily Market Allow Rental Portfolio Changes to Persist

Will the Multifamily Market Allow Rental Portfolio Changes to Persist

CoStar analyzed the multifamily industry and determined that the typical symbols of a weakening multifamily economy do not seem to be true of the market at this point in time. Occupancy rates are high, and investors are expressing a great deal of interest in various rental properties. The vice president of CoStar Market Analytics, John Affleck, addressed what he sees in the future of the multifamily market, but first contrasted this with a seemingly opposing analysis.


“Slower job growth also means fewer new households, and less demand for housing. And that means the 660,000 apartment units currently under construction may be competing for a shrinking pool of renters.”


With this “shrinking pool of renters”, the market should suffer, however, Affleck found that the market also benefited from demographics changes that have been taking place over multiple years. Demand for apartments is higher with younger generations who are beginning to make some money, but are not settled down enough to consider buying a home. Affleck analyzes these contradictory effects on demand, and provides his conclusion on the future of the apartment market.


“Our models think vacancies are pretty low, see all the supply, and think that fundamentals have to weaken. I expect the market will hold up in the near term. And, in fact, we are adjusting our model a bit to produce stronger demand in the near term. This change will go into effect right after we release the third-quarter snapshot later this month. So, for viewers who wouldn’t mind a little more optimistic outlook, stay tuned.”

Going Forward

While investors have maintained a healthy interest in investing in apartment complexes, the desire to invest in rental portfolios has changed. Not every property in the portfolio will be attractive to an investor, so they prefer for the portfolio to be broken up. This way they can purchase the individual properties they have an interest in. 


While there are concerns on whether the multifamily market will continue to have this degree of interest in the future, experts believe that the interest will indeed persist. This will lead to the current trend of rental property demand continuing.

The Amazon of Housing

Amazon of Housing

Amazon is known for starting from a garage selling books, with Jeff Bezos and his team boxing up orders themselves. Amazon has since grown to be one of the largest companies in the world, and the king of online shopping. Ben Lane, a managing Editor of at HousingWire sums up Amazon’s impact by saying:


“Amazon reshaped the entire retail landscape, changing how people shop, what they expect of their retailers and what they expect of other companies they deal with. It came from nowhere and now it’s resting comfortably at the top of the mountain while everyone else scrambles for whatever is left over.


Amazon didn’t invent online shopping, retail, video streaming, music streaming or any of the other business segments that the company is into now. What it did do is take what others had done, improve upon it by a dizzying degree, and market it brilliantly.”

Amazon reshaped the entire retail landscape

If Amazon was able to change the world of shopping to this degree, it must be possible for others to accomplish this in other industries, in particular, housing. There are currently several companies that are each racing to become the premiere one-stop shop for buying, selling, and renting.


Amazon has created expectations within customers that buying should be easy. If you want something, the entire search and purchase process should be simple and easy. Rarely is searching for housing simple and easy, yet it is what customers are becoming accustomed to. If a company could take advantage of this expectation in other industries, they could become the next Amazon.

What Companies Could Be the Amazon of Housing

What Companies Could Be the Amazon of Housing

Three of the companies Lane lists as currently competing for this role are Zillow, Opendoor, and LoanDepot.


Zillow began by denying its identity as a real estate company. The CEO of the company said in 2015, 


“We sell ads, not houses…We’re all about providing consumers with access to information and then connecting them with local professionals. And we do a great job of giving those local professional high-quality lead, they’ll convert those leads to at a high rate and then want more media impressions from us. So we’re not actually in the transaction, we’re in the media business.”


Zillow has since embraced real estate, with the goal of becoming that one-stop shop. It created the Zillow Offers program, in order to buy homes directly from homeowners, flip them, and then list them for sale on its own platform. Zillow also purchased the Mortgage Lenders of America in order to enter the mortgage industry. 


Opendoor had a similar expansion mission, but went in the opposite direction. It started out buying homes in select cities, and then grew to providing mortgages, and then to connecting homebuyers with homesellers. To accomplish this, Opendoor purchased Open Listings, a real estate site that provides a less expensive alternative to real estate agents. The company also acquired a title and escrow company called OS National. The co-founder and CEO of the company, Eric Wu, commented on the acquisition saying:


“Moving into a new home should be one of the most delightful and memorable moments in life, yet the closing process gets in the way…Our goal with this acquisition is to make title and escrow feel less like a barrier in the home purchase process and more of a welcome mat at the front door of your dream home.”


Opendoor has made it so that it can introduce people to homes, give them tours, let them buy, let them finance, and get them to closing. 


Lastly, LoanDepot also has plans to become a one-stop shop. The company connects borrowers with real estate agents and home improvement providers, but is attempting to support buying, financing, and improving homes, as well. In order to accomplish this, LoanDepot brought in the former CEO of Keller Williams, but he ended up leaving the company to work at OJO Labs, a real estate tech startup. The move may have worked in LoanDepot’s favor, though, because they were able to agree to a partnership with OJO Labs to share their AI technology and lending platforms.

Is Amazon the Amazon of Housing?

Is Amazon the Amazon of Housing

Ironically enough, Amazon has been looking to get into real estate. So the next Amazon of housing may be Amazon itself. The company has also struck a deal to partner with OJO Labs, but has also recently partnered with Realogy, and Guaranteed Rate. The company has also acquired businesses like SmartRent, another real estate tech startup.


Amazon’s partnerships allow for it to match homebuyers with real estate agents, get mortgages, and even get thousands of dollars in Amazon products to help stage their new homes.

Going Forward

Becoming the next Amazon of housing is not easy, but there are a handful of companies trying to accomplish this in the housing market, including the star in question (Amazon). Regardless of which company wins his race, the housing industry will be reshaped like never before.

High Mortgage Rates are Decreasing Mortgage Applications

High Mortgage Rates are Decreasing Mortgage Applications

For the majority of Americans, buying a home requires a mortgage loan. There are many factors that impact a person’s ability to purchase a home, but a mortgage will always be one of the most significant factors in determining whether a house is affordable or not. Given the impact they have on your monthly payments, mortgage rates are also relevant.

Mortgage Rates

Mortgage Rates

When mortgage rates are higher, less mortgage applications tend to be filed. What has been happening as of late, is a fluctuation of mortgage rates that has made home purchases difficult to predict. The Mortgage Bankers Association keeps track of changing mortgage rates, and publishes the numbers. In the last month, the country has seen mortgage rates plunge, and then recover, and then go back down again. The market is volatile right now because of the US’s relationship with China, and home buyers are making sure to only act when rates are low. 


Refinancing of homes is also impacted by mortgage rates. Generally homeowners will refinance their mortgages for the purposes of lowering their monthly payments. Due to this, applications for refinancing loans are extremely sensitive to changing mortgage rates. Mike Fratantoni, the Senior Vice President and Chief Economist of the Mortgage Bankers Association, commented on interest rates:


Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day…Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.

Home Sales Projections

Home Sales Projections

Mortgage applications to purchase a home have certainly been falling compared to weeks prior, but the good news is that the numbers are still better than a year prior. This is good news for the market. Additionally, there is hope that the market could be improving in the near future. Joel Kan, the Mortgage Bankers Associations’ Associate Vice President of Economic and Industry Forecasting, had his own comments on the state of mortgage rates.


U.S. Treasury yields trended downward over the course of last week, as the Federal Reserve meeting highlighted the elevated uncertainty in the economic outlook. However, despite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks…The increase in rates led to fewer refinances, and activity has now dropped 17% over the last two weeks…The recent data on increased existing-home sales and new residential construction points to the underlying strength in the purchase market this fall.


Kan believes that buyer demand was stronger than expected. If this trend continues, prices on homes will be higher, and the supply of homes for sale will lead to a stronger housing market. That would, of course, be the preferred outcome, however sales are not increasing as much as they should be given the lower mortgage rates as compared to those from one year ago. Home sales should be increasing, but due to home prices being too high, any savings made through lower mortgage rates is being negated. 


The National Association of Realtors reported the increase in September’s home prices, and experts point to a lack of supply for the unexpected falls in sales. Diana Olick, a real estate correspondent with CNBC explained:


The problem is low supply combined with high prices; prices jumped nearly 6% annually, according to the National Association of Realtors, the biggest gain since January 2018. Prices are being juiced in part by lower mortgage rates. Lower rates help with affordability, but they also give buyers more purchasing power, which in turn causes prices to rise.


Matthew Speakman, a Chief Economist at Zillow, agreed with Diana, and doubled down:


Much of the sales boost this summer can be chalked up to interest rates dragging along the bottom this year, which enticed more would-be buyers into the market…Now, sales are coming back to earth, largely because of an ongoing shortage of inventory. There simply are not enough lower-priced homes to keep the market humming. While builders are putting up more homes, their pace is not keeping up with what buyers demand.

rates dragging along the bottom this year

Going Forward

Mortgage rates have fluctuated quite a bit, and these rates have negatively impacted mortgage applications, refinancing, and home sales. The fluctuation can be attributed to many things, but the fact remains that at the moment, the housing market has seen dips in sales. When the mortgage rates are high, potential homebuyers don’t buy, and homeowners don’t refinance. When mortgage rates are low, demand ends up driving prices up, which keeps people from purchasing. The foreign influences on mortgage rates are also a factor in the fluctuation.


Going forward, the market needs to see an increase in construction, and the best way for this to take place is through competition. With new players breaking in to the industry, the burden of additional home development won’t be placed on the builders that are currently holding back on the number of production projects they take on.

Demographic Changes That Will Impact Real Estate

Demographic Changes That Will Impact Real Estate

As the years progress, audiences change, and this includes target audiences. When you work in residential real estate, your entire region serves as a target audience, so the best way to measure changes in that audience is to look at changes in the demographics.

While every region has its own unique shifts, the United States as a whole has its own trends. These nationwide demographic changes will impact local residential real estate over time. Richard Fry, a researcher at the Pew Research Center, decided to investigate these nationwide trends to determine how residential real estate will be affected. Specifically, he projected what the state of the industry would be by the year 2065.

Current Demographic Changes

Current Demographic Changes

Click to enlarge image

Through his research, Fry was able to find 5 demographic changes that will impact what housing units residents are willing to spend their money on, and why. In no particular order, here are his findings:


  1. If you are looking at demographics decades into the future, then present birth rates will naturally have a significant impact. Currently, young Americans are not having children at the same rate as the generations that came before them.

    In 1980, 43% of women 18 to 29 had at least one child. Today, that number has dropped to 30%.

    Millennials are waiting to have children, and this directly impacts the types of housing units that will be in demand in upcoming years. This also affects where those units will be purchased or rented.
    downtown assets
  2. Currently there is a trend that shows that Americans and many millennials are moving away from the suburbs to live in the city. This is also impacted by millennials waiting to have children. This focus on work will decrease demand for suburban housing, and increase the traffic towards city apartments.

    Demand could bolster the market’s already-frothy prices for downtown assets, and perhaps discourage some development in the suburbs.

    When more millennials do begin to start families, it is possible that this trend reverses. For now, however, urban growth is worth the investment for the years leading up to that potential family formation.
  3. Birth rates don’t just impact where people choose to live; they also impact household size. Around the country, household sizes are increasing. Not only are millennials not having children as easily, but with economic hardships increasing foreclosure rates, families find themselves living together under one roof. Students and graduates are continuing to live at home, and older parents are moving in with their adult children.

    An increase in average household size is much of the reason why demand for new housing has been so sluggish, even as the wider economy has recovered.

    With families coming together like this, demand for new homes naturally decreases. However, if you are in the homebuilding business, homes that can accommodate multiple generations will help facilitate these new family dynamics.
  4. While studying current Americans can provide insight into future changes to residential real estate, there are also benefits to looking outside the United States. Currently there are over 350 million Americans in the US, but Fry predicts that the population could grow to 441 million by 2065. Fry attributes this growth to immigration.

    Taking middling, reasonable assumptions about immigration – 1 million immigrants per year – the American population should grow to 441 million by 2065. Now let’s suppose we switch off immigration…By 2065, we would only have 338 million Americans. Without immigration, there’s very, very little population growth at all.

    The highs and lows of real estate demand will be determined by immigration, and how it grows or declines over the years. The policies that influence immigration will then have an indirect influence on real estate demand. It also follows that areas that typically have a high percentage of immigrants will see increases in demand, as immigration into the country increases.
  5. The final of these demographic changes connects everything together. Residential real estate will be impacted in multiple ways by racial and ethnic diversity moving forward. Currently the US population is made up of 60% non-Hispanic white residents. According to Fry, however, white Americans are not having children at the same rate as other races. This will have an impact on future household sizes.

    Only 16% of the white population in the U.S lives in a multigenerational household, compared to 29% of the Asian American population, 27% of the Latino population and 26% of the black population.

    When building residential housing in the future, it is necessary to consider the population and its racial/ethnic background, how that will impact household size, and where people with those household sizes tend to live (city vs. suburbs).

Look at changes in the demographics

Going Forward

The real estate industry needs accurate information to understand who is willing to spend money on what housing units. Knowing where people choose to live, and what they need out of their living quarters will provide the necessary insights for developing the right housing units, and selling them successfully.

An Interesting Take on Growing the Workforce

The shortage of skilled workers in construction has been a problem for several years and the impact on construction costs has reached the point where commercial real estate development is being slowed, according to NAIOP. There is a CoStar post about the issue that is very interesting in that it puts contractor groups on opposing sides of what you would think would be a unifying issue.20190422_174002

At issue is the Department of Labor rule, which resulted from an executive order in 2017 that expands apprenticeship programs to allow trade groups and employers to establish separate training from industry certifiers. The revised National Apprenticeship Act exempts construction from its rules for now, but developers are pressing for the rules to be expanded to include construction, and the nation’s largest contractors group is supporting them. Associated General Contractors of America (AGC) has been advocating for growing the construction workforce, including pressing for supportive legislation. AGC supports the revised rules, even though the rules allow apprentices to be paid minimum wage.

The last point is what has developers hoping that the rule change is extended to construction. It’s also what has union-affiliated contractor groups in opposition to the expansion of the rules. Union apprentices are typically paid two or three times minimum wage while working their way to journey-level. Opponents of extending the rules to construction also worry that independent apprenticeship programs won’t adhere to industry standards for certifications and will lead to poor work or unsafe conditions. The arguments are summarized in this excerpt:

Proponents of expanding construction apprenticeships argue the initiative will address the dearth of these kinds of workers and help close the job gap, adding to the workforce pool for contractors and reducing their costs as well as those of developers. The lack of construction workers such as pipe layers, sheet metal workers, carpenters, concrete workers and pipe fitters/welders, as well as logistics employees, has hurt the commercial real estate business.

That’s driving up development costs and hampering the expansion and profitability of warehouse and distribution centers, according to NAIOP, the national trade organization for the industry, which issued a report on the issue earlier this year.

But there is a debate on apprenticeship expansion, with opponents charging it would create a separate, and inadequate, certification system from existing programs, with poorly trained workers who could endanger themselves, others and do substandard work.

As the labor department proposal is written now, it excludes construction, an industry that has for decades had apprenticeship programs in place for trades such as plumbers and electricians. Those programs are registered with the labor department and are funded by unions and employers, as part of collective bargaining agreements.

History has shown that government making rules to solve temporary market conditions rarely solves the problem, and usually creates unintended negative consequences. If you are developing a commercial project right now, the costs of construction – and the schedule – are becoming unfavorable. The pro forma rents aren’t going up as fast as construction costs. Investors will have to accept less of a return or the project won’t pencil out. That’s not a great thing but that is an inevitable consequence of economic prosperity that lasts as long as the current expansion. In truth, wage gains have been held off for much longer than in any previous business cycle; and the magnitude of wage growth is much lower than the typical 4-5% that accompanies a recovery. During the recovery stage of this business cycle, wages barely grew and only moved above 2% since early 2018. Business cycles run from imbalance to imbalance, from lean conditions to fat. It’s not fun to be the development that builds during fat times but, then again, it’s also not fun to try to lease up during lean times. It’s the nature of business cycles. At some point, things will slow down and costs will fall back. New development will follow.

Note: In the Sept. 26 BreakingNews email blast, PJ Dick was omitted from the list of contractors proposing on the $15 million Flats on Forward in error. The list of contractors should have read PJ Dick, A. Martini & Co, Mosites and Rycon.

Amazon At Last

July 30th brought the governor and a cast of dignitaries to Findlay Township to announce what had been whispered about for three years (see our July 2016 post), that Amazon was building a million-square-foot fulfillment center at Chapman Westport. Highwoods Construction will be bidding packages for the massive warehouse ASAP. Amazon’s commitment is just one of a number of large-scale industrial deals being done or pursued in Western PA. Komatsu is in the process of selecting a developer for its 250,000 square foot warehouse and office at Alta Vista Business Park in Washington County. Developers Suncap Properties and Al. Neyer have been competing.

The Federal Reserve Bank cut its Fed Funds rate .25% on July 31 at its Open Markets Committee meeting. The stock market plunged a bit after the announcement, likely in reaction to sentiment that the cut would be larger. Expect a rebound shortly. The Fed’s language suggests that another 25 basis point cut is likely later this year. For the U.S. economy, such stimulus is unnecessary at the moment, but economic data globally shows slowing and the bond markets have been trading at interest rates that are lower than the Fed Funds rate for longer maturity bonds. That’s what an inverted yield curve is and investors don’t like inverted yield curves. (You can read about the yield curve in the July/August BreakingGround.)

July’s building permits show that Hunter Buildings started work on a $6.5 million control room building for Eastman Chemical in Jefferson Hills. Rycon Construction pulled a permit for $2.2 million renovation of the AHN Wexford Medical Mall. Uhl Construction is working on a $1.6 million addition/renovation to Baierl Acura in Pine Township and $2.7 million project at Baierl Toyota in Mars, PA.

FMS Construction was awarded the $1.9 million restoration/conversion of the Lohr Building in Wilkinsburg. FMS is also doing general and mechanical/refrigeration construction on Giant Eagle’s $6 million Hempfield Square store renovation. Penn State selected PJ Dick for its $25 million Erie Hall replacement at the Behrend College. PJ Dick started work on the $17.5 million combined power/heating/cooling plant at the Wexford Medical Mall.

Regional Scorecard Points to Regional Construction

Today’s release of the Pittsburgh Regional Alliance’s annual Business Investment Scorecard shined a light on how the regional economy’s strengths are driving construction in Western PA. The PRA noted that there were more deals – 340 – in 2018 than in any year since the scorecard started in 2007. In those deals was $1.2 billion in capital investment in development. Drilling into the major business sectors, you find that the top job creating areas were IT/robotics, energy and manufacturing. It’s not a coincidence that these sectors are the ones filling up the new buildings in the Strip District, Bakery Square, Robotics Row, etc. The new economy in Pittsburgh is driving commercial construction.

From the news, it appears these sectors are still driving construction in 2019. Al. Neyer Inc. announced it had landed Victory Packaging as a lead tenant and was starting the 220,000 square foot Jackson Distribution Center (rendering above) north of Zelienople. RDC Star took its $50 million District 15 Version Beta through the city’s planning process this week. RDC Design + Build hopes to start construction on the building in August.

PA Turnpike Commission awarded contracts for the $20.3 million Southern Beltway maintenance buildings. Nello Construction is the general construction contractor. Mascaro was selected for the $40-45 million UPMC Mercy 3rd floor renovation. Dick Building Co. started work on the $2.3 million new quest cottages at Laurel Valley Golf Club.