Below, David Jangro, Axia Director of Investment, shares some noteworthy CRE news stories and provides insights on these topics. You can review the high-level takeaways or full commentary below.
Among the many substantial changes catalyzed by the Covid pandemic, one of the most significant shifts within the commercial real estate industry was the inversion of demand dynamics between urban and suburban markets. As major cities locked down and effectively torpedoed the arts, entertainment, offices, and nightlife that enabled these markets to draw inhabitants and justify large rent premiums, many renters voted with their feet and moved to areas with lower cost of living, higher quality of life, and less pandemic insanity. This abrupt demographic shift quickly translated to rapidly rising rents in smaller markets as demand for multifamily units greatly outstripped supply. On the flip side, apartment owners in major cities, faced with the prospect of rampant vacancy, cut rental rates in hopes of holding onto what tenants they could. This rent growth inversion between urban and more suburban markets has now found some degree of equilibrium as renters return to major cities and large amounts of new apartment units bring down rent growth in smaller markets. From a commercial real estate investor’s perspective, the million-dollar question now is when and where we will see rent growth dislocation reemerge.
High Level Take-Away: Rent growth among multifamily properties in suburban markets far outpaced that witnessed in urban markets throughout the pandemic. As of late, rent growth has stabilized and is now nearly equivalent between urban and suburban markets. The two major factors contributing are: a) demand increasing in major cities as renters return for employment or lifestyle reasons and b) supply constraints evaporating in suburban markets as nearly 70% of new multifamily construction is concentrated in these markets.
On the surface, it is easy to dismiss the subject of this article as wishful thinking among commercial real estate brokerage firms starving for transaction volume to pick back up. However, focusing in on some supporting details lends credence to the assertion we should see deal activity pick up towards the end of 2023 and beyond. Citing the narrowing of the buyer/seller gap is a flimsy pillar on which to base one’s thesis volume will pick up. This bid/ask spread between what Sellers are willing to accept and Buyers are willing to pay varies greatly across property types and classes, markets, deal sizes, and scenarios. That being said, it is reasonable to believe given enough time this spread in pricing expectations should reach a natural equilibrium thus minimizing the friction inhibiting transaction activity. The detail that really caught my eye, and that I feel genuinely supports the thesis around a Q4 increase in sales activity, relates to the observation by Marcus & Millichap that BOV (Broker Opinion of Value) volume has seen a substantial uptick. The increase in BOV activity is important for two reasons: 1) more BOV’s mean more opportunities for Sellers to gain insight into actual market pricing of their asset(s), which should help narrow the bid/ask spread and 2) an increase in BOV’s is a good indication more Sellers and Buyers are finally coming off the sidelines and testing the waters.
High Level Take-Away: “Dry powder” has been building among CRE buyers as transaction activity has ground to a halt and investors wait for clarity and potential discounts to emerge. This can’t last forever, and there are signs supporting a resumption in deal activity and the narrowing of Buyer/Seller bid/ask spreads towards the end of 2023.
Portfolio Manager - Director of Investment
After receiving his undergraduate degree from Dartmouth College, David structured and traded Mortgage Backed Securities and other financial instruments in EverBank’s Portfolio Management and Capital Market’s groups. David went on to receive an MBA from Vanderbilt University after which he worked as an Advisor for Credit Suisse and then Goldman Sachs. Wanting to work with larger institutional clients, David transitioned into a key role on Goldman’s Hedge Fund Strategies team. Prior to joining Axia, David sought to enhance his commercial real estate exposure by partnering with one of Colliers International’s top Investment Sales teams in the Utah market. As Axia’s Director of Investment and Portfolio Manager, David spearheads the group’s efforts around acquisitions and dispositions, portfolio construction and management, investment strategy, market/industry research, capital markets activities, and thought leadership.