Anyone who has squeezed a balloon at one end knows it immediately expands at the other end. It is an equal and opposite reaction – and a simple law of physics I learned at Georgia Tech many moons ago. For every force exerted there is an equal and opposite reaction.
The same law applies to economics and explains simple supply and demand equations, and also how inflation creeps into view.
Here’s what that means to us right now: As the pandemic freeze began to thaw, we saw a flood of new homebuyers rushing into the market. The origination point of the real estate flood was primarily apartment and condo dwellers in New York City moving to the suburbs after being locked up in their small living spaces during the lonely, isolated winter.
We now see the flood waters (trend) expanding, as many of these new emigrants are making their moves permanent by purchasing homes throughout the country, and especially in the southeastern Sun Belt states. Allen Morris Residential, our multi-family apartment development company, has experienced this firsthand in our markets in Florida and Georgia.
Realtor.com market data for the week ending March 6, 2021, shows that residential home prices of all listings nationwide increased by 14.3% over the previous year. That’s almost three times the average annual increase of 3.9 % per year. In a recent interview on CNBC, Glenn Kelman, CEO of Redfin (Zillow) said that, “owning a home is a luxury item.”
The rush to home ownership has driven home builders to ramp up production of entry-level homes for the first time in a while. In turn, the increased construction has driven up home prices. The combination of massive new home building construction and disrupted supply chains that still have not yet returned to normal has resulted in a spike in building materials. (See “Lumber prices top $1,000 for the first time as single-family housing starts drop 12%”, CNBC)
As we monitor the effects of rising lumber, concrete, and steel prices, we see the direct effect on increased new construction home prices. And as the new higher home prices hit the market, home buyers are getting the news that their contract prices may be going up 15-percent. The result is that many buyers are dropping their contracts. Even with low mortgage interest rates, the higher prices push their monthly payments above what they can afford. (See “US Housing Market Sales & Price Forecast 2021: Will it Crash?”)
This keeps some homebuyers out of the market and drives them back to rental apartments, which we are seeing in our new apartment projects in Orlando and Atlanta. Increased home prices and emigration across state lines have resulted in an increased demand for rental apartments, and correspondingly increased monthly rental rates in apartments.
We are also seeing demand for our rental apartments coming from residents moving from the northern states to our markets in Atlanta and Orlando. At Star Metals Residences in Atlanta, we see 20% of our new residents coming from New York, 10% from other Northeast areas, and 20% coming from Los Angeles and San Francisco. At Maitland City Centre and The Julian Apartments at Creative Village in Orlando, we have seen an influx of new renters from New York and New Jersey, plus 22 other states, moving into Florida!
So the equal and opposite reaction of increased home prices is resulting in increased apartment occupancy and monthly rentals in our Florida and Georgia markets. This in turn is increasing the value of well-positioned apartment buildings in Sun Belt markets.
My Simple Formula of a Supply & Demand in Commercial Real Estate:
⬆️ home demand; ➡️ leads to increased Construction;
➡️⬆️ increased cost of materials + reduced supply from disrupted supply chain;
➡️⬆️ increased new home prices;
➡️⬆️ increased higher mortgage payments; ➡️ homeowners dropping out of the market;
➡️⬆️ increased demand for rental apartments;
➡️⬆️ increase higher rent;
➡️⬆️ leads to increased value of apartment buildings.
Depending on the timing of new apartment building construction, this may also increase apartment building construction costs, which will increase necessary economic rents. We believe lumber prices may settle down later in the year because of new supplies as closed lumber mills are now opening up, and new lower tariffs (from 20% to 9%) on Canadian lumber are making lumber more affordable.
These are mixed signals, but they are our early indicators of inflation in the commercial real estate market.