Photo credit goes to: https://commons.wikimedia.org/wiki/Special:Contributions/Shalev97
First the Contraction, Then the Snap Back
Is the market cooling off? Yes, like San Antonio cools from 103 degrees in August down to 90 degrees; still pretty warm, but not blazing hot. That’s how to look at our local economy.
Most people agree we are beginning a Recession with 3 down quarters in a row. Mortgage rates have spiked to nearly 7% and this is certainly cooling the housing market, and all of the areas associated with housing construction.
But employment is still strong. The FED will continue to raise rates until,
1) inflation comes down
2) the economy brakes down
or 3) there is an international crisis
So, things will get worse before better.
San Antonio Commercial Real Estate Market
Commercial Real Estate in San Antonio has not seen a correction yet, but it’s tottering. I have spoken with a number of folks and there are few deals falling out of escrow at this point. Home builders are divided, with the biggest companies going into semi-shelter mode, while others are picking up land positions that have dropped. Buyer activity is still good.
Impact on Commercial Capitalization Rates
The development pipeline is still strong for multifamily, but the increase in rates is making it more expensive, by a lot. Land prices have not come down, at this point, but lumber prices have dropped to pre-pandemic prices, offsetting some of the higher cost of money. But, for example, it takes a year to put an apartment deal together, and who can speculate on where the interest rates will be next week much less in 12 months? Commercial capitalization rates have risen about 7-10%, lowering the price of future sales, not necessarily present values.
Occupancy & Real Estate Returns
Retail vacancies are low and rents are still hitting all-time highs in San Antonio, occupancy levels are also very strong. While the average rent rate is $17.32 per sq. ft. NNN, rents in new properties are in the upper $30’s and higher, because of construction costs.
U.S. Apartment Construction will reach a 50-year high this year despite the headwinds of labor shortages, material costs and availability and supply chain issues, according to Doug Ressler, manager of business intelligence at Yardi Matrix. San Antonio apartment occupancies are strong. Construction may decline slightly. It may be good to remember that the best real estate returns come after recessions, according to the latest report from Cohen & Steers.
Home values are up 15% from last year, but days-on-market are up as well, while volume 10% slower.
Real Estate in the Face of Contraction
Yes, we are at the beginning of a contraction; no one knows how long or low we could go. But demand for real estate will remain strong and when interest rates turn back down, expect an explosion of development to catch up with the suppressed demand.
Allow me to end with a weather analogy: after Summer comes Fall, then Winter, and always Spring. Investing cycles are just the same, from hot to cold and then back to warm. While economies don’t flow smoothly, they do run in reliable, repetitive patterns so it’s best to invest for all seasons.