🤔 What's driving the rent concession boom?

👋 Hello, Best Ever Community! An assistant property manager in St. Louis was allegedly tied up by a tenant during a final walkthrough. Be careful out there.

In this week’s newsletter, rent concessions rise, an airport gets a $22B makeover, and real estate stocks rally.

Today’s edition is brought to you by BAM Capital, a leader in innovative investment solutions aimed at maximizing returns and building wealth for accredited investors. Learn more about BAM Capital here.

🎧 Speaking of rent concessions … let’s throw it back to June when Levi Allen, founder of Wealth Creation Asset Management, joined us on the Best Ever Show to share his strategies for maintaining high occupancy. Listen on Apple or Spotify.

Let’s go!

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CRE HEADLINES

🏅 Inflation Milestone: The Consumer Price Index (CPI) slowed below 3% in July for the first time in more than three years, signifying cooling inflation and paving the way for a possible September rate cut.

⏪ Retail Reversal: Retail store closings surpassed openings for the first time this year earlier this month. As of August, there have been 4,548 store closures, outpacing the 4,426 openings. The net loss of 122 stores is a stark contrast to the net gain of 295 stores in 2023 and 1,575 in 2022.

😵‍💫 Fractional Fiasco: Landa, a VC-backed startup that turned houses into stocks with its fractional real estate model, faces trouble as more than half its properties aren’t paying dividends and lenders move to foreclose on dozens in default. Some investors fear a total loss.

🏦 Ready, Set … Refi!: Falling mortgage rates in July 2024 boosted refinance demand to its highest since September 2022, with refinances reaching 17% of the market. The average 30-year conventional rate hit 6.72%, a 2024 low and significantly below May's 7.58% peak.

🌊 Industrial Tides Turning: Industrial vacancy hit 6.1% in June 2024 after six quarters of increases, with 629 million SF of new space delivered since late 2022. Despite this 3.5% inventory growth, Q2 saw the first drop in average asking rent since 2011, following a 44% surge over five years.

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RENT CONCESSIONS ARE ON THE RISE

As the rental market cools, property managers are increasingly offering concessions to attract tenants, according to Zillow’s July Rental Market Report. Despite only a 0.1% dip in annual rent growth, there's been a notable rise in short-term incentives, highlighting a shifting rental landscape where landlords are working harder to fill vacancies.

• The Trend: 33.2% of rentals on Zillow offered at least one concession in July. This represents a 0.2 percentage point increase month-over-month and a significant 7.8 percentage point jump from last year.

• Regional Variations: While 24 major metro areas saw a decrease in concessions on a monthly basis, with St. Louis leading the pack (-3.1%), 25 other metros experienced increases. Birmingham saw the most substantial monthly rise at 7.2%, followed by Louisville at 5.3%.

• Zooming Out: Rental concessions are up in 45 of the 50 largest metro areas from a year ago. Jacksonville leads this trend with a staggering 17.8% increase, followed closely by Charlotte (15.7%) and Raleigh (14.7%), highlighting them as some of the nation’s most competitive rental markets.

Supply and Demand: The Zillow Observed Renter Demand Index, a measure of rental market tightness, has fallen by 23.3% since last July. But this is likely due to an influx of supply, not lessening demand. The fact is that demand is being spread across more units than ever, leading to increased competition for renters and a rise in concessions.

Other Takeaways from Zillow’s report:

• Rents: The typical U.S. asking rent is $2,070 as of July ($1,916 for multifamily), up 0.4% month over month and a staggering 33.4% since the onset of the pandemic.

• Affordability: The income needed to comfortably afford the typical U.S. rent — meaning spending no more than 30% of income — is $82,795.

• Vacancy: The vacancy rate held steady at 6.6% in Q2, up 0.3% from last year and matching the pre-pandemic average for this time of year.

WHAT IT ALL MEANS

As renters have more options, landlords must get creative with their concessions. A free month of rent or free parking won’t cut it anymore. In a culture of downsizing, some landlords who are going the extra mile include on-site (or even off-site) self-storage. Others trying to attract younger renters include smart appliances, high-tech door locks and security features, smart-home automation devices, and other tech perks — anything to stand out in an increasingly competitive apartment market.

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THE $22B PLAN TO CONVERT A DEFUNCT AIRPORT

You’ve never seen a conversion or a development project quite like this one. Northcrest Developments has embarked on a 30-year, $22 billion project to convert the defunct Downsview Airport in Toronto into a small city, and the plan is to preserve as much of the existing airport as possible as part of the community.

• Old airplane hangars will anchor the project’s first neighborhood, a 50-acre residential district with 2,850 homes, mostly mid-rise apartment buildings, creating a total of more than 28 million SF of residential space. All told, the project will house 10 districts that can accommodate 83,500 residents.

• The airport’s runway will be preserved as a “pedestrian corridor” that connects residential communities. It will be lined with shops, restaurants, schools, and a library. The project will include 3.6 million SF of employment space supporting approximately 41,500 new jobs across varying industries.

• Some hangars span 600 to 750 feet in length and 150 feet in width and have 40-foot ceilings without internal columns, making them perfectly suited for film production, light manufacturing, and clean tech industries. A state-of-the-art film production studio is part of the master plan.

• The development will feature nearly 100 acres of parks and public spaces and family-oriented and affordable housing components to ensure a diverse and mixed-income community.

Redevelop vs. Rebuild: Isn’t it easier (and cheaper) to just bulldoze and start anew? Yes. However, the site was used as an air base for the Royal Canadian Air Force in World War II and later served as a testing facility for aircraft maker Bombardier. Locals didn’t want to see that history disappear, and the developers saw the opportunity in using the historic buildings to bring character to the otherwise “new” development, enhancing the community’s appeal.

The project is expected to take 30 years and about $22 billion to complete, making it one of Canada’s largest-ever real-estate projects. You can check out the full project details and renderings here.

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REAL ESTATE STOCKS RALLY

Real estate stocks have shown signs of recovery, driven by expectations of potential Fed rate cuts that have boosted market confidence. 

• Publicly traded REITs have risen 10% to 15% in recent months, while private market values have dropped about 20% from peak levels.

• The S&P 500 real estate sector was up 10% over the past three months, outperforming the tech sector, which rose 7% in the same period, as shown in the graph above.

Challenges: Though Wall Street’s financing for borrowers has reopened, debt remains costly and scarce for some landlords. The 10-year Treasury yield’s stability at around 4% is crucial for the market's recovery, evidenced by what we saw in early 2022 to late October 2023 when the Dow Jones Equity REIT index fell 30% as the 10-year Treasury yield spiked to 5%, a 16-year high.

WHAT IT ALL MEANS

Commercial property prices may be nearing a bottom, and with real estate stocks rallying amid this price stabilization, we could see improvements in the private real estate market, suggesting potential opportunities for investors. Experts caution, however, that the recovery could be a multi-year trend rather than a short-term spike.

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TURNING 32 CLASS D UNITS INTO 170 CLASS A UNITS

Nick Stageberg and the team at Black Swan Real Estate are already cash-flowing on a 32-unit Class D property they plan to redevelop into 170 Class A units. Here's how they’re doing it👇

🏢 Property Details: The Class D property, located in Rochester, Minnesota, was purchased in April of 2023. It consists of a 32-unit apartment building, two single-family homes, and three vacant lots.

💸 Finances: The total purchase price was $2.4 million, and the team raised $2.7 million in capital. The property was purchased with all cash, and Black Swan secured financing in February 2024 for $1.9 million: 36-month term, six months IO, 25-year amortization, variable rate at prime minus 0.75%, $6,500 in total origination charges, and no prepayment penalty.

💼 Business Plan: The plan is to fully knock down the existing structures and build 170 Class A units. Architectural plans are in hand, and redevelopment is targeted for some time in the next three years, as soon as costs come down. The team vacated more than half of the tenants within 30 days of purchase due to drugs, petty crime, delinquent payments, etc. They are doing light value-add on over 50% of the units and fixing roof leaks and bed bug infestations.

🍾 Projected Results: The property recently appraised for $3.7 million after just nine months of ownership. It currently delivers 10%+ cash-on-cash with the current financing. Upon a full cash-out refinance (within the next year), the property should produce infinite cash flow for investors.

If you have a deal you'd like us to feature, share it with us!

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FREE DOCUMENT DOWNLOAD

Two Main Types of Debt Financing

Figuring out the appropriate financing for a deal can be overwhelming, to say the least. This document provides a high-level overview of both long-term (permanent) debt and short-term debt (bridge loans) to learn the ideal situations for each.