2015 proved to be a year of stability for real estate, a welcome change from previous years of volatility and uncertainty. A strong economy provided the backdrop for the industry to meet, and in some cases exceed expectations for the year. We’ve had the opportunity to participate in both residential and commercial markets through a variety of cycles over the years, and can affirm that 2015 quelled many of the shocks that plagued the industry during previous quarters. But there’s no such thing as a market without headwinds. Firmly rooted in the fundamentals of an overall economic recovery, our industry continued to perform despite factors that would have hampered growth in previous cycles. Here’s our brief overview of market indicators for 2015, and our forecast on their influence on consumers, investors, and developers for 2016.
Balance Returns to Residential Markets
The absence of new buyers, along with lackluster equity in existing homes that plagued previous years, gave way to a more optimistic outlook in 2015 thanks to the economy. The following key benchmarks are just a few of the positive indicators impacting our industry:
• GDP up 2.4% in 2015
• Unemployment rolls dropped from 5.6% in 2014 to 5.0% in 2015 (7.1% to 5.8% for California)
• Inflation rates holding steady under 1%
• Falling oil prices creating more disposable income for consumers
Monetary policy shifts implemented during the last quarter of 2014 and throughout 2015 are arguably the strongest signals of a resilient residential market. The end of Quantitative Easing, the Federal Reserve’s initiative incorporating the purchase of mortgage securities from the market in order to lower interest rates and increase the money supply, combined with the first increase in interest rates above 0% since 2008, reflected the government’s confidence in the economy that it was stable enough to grow without interference.
These benchmarks contributed to a stronger housing market as seen on numerous fronts. First, 32% of home purchases in 2015 were generated by first-time homebuyers, up over 21% compared to 2014 according to the NAR. A new wave of first-time homeowners driven by new millennial household formation entering the market played a major role in creating demand for homes. Additional NAR data supports the resilience of the housing sector in spite of the uptick in mortgage rates at the end of 2015, including:
• 2015 existing median home prices up nationally 7.6% over the previous year
• Existing home sales exceeding 5 million units
• Total inventory of available homes diminishing 3.8%
An increase in home sales and median home values, diminishing inventory and shorter days on market for listings translated to increased equity for existing homeowners in 2015 as well rising consumer confidence.
Peak expects residential markets to continue to yield positive results, albeit at a slower pace than in 2015. It is likely that some overheated markets may actually stay flat for the year. We’ve positioned ourselves to better serve our market and take advantage of residential opportunities by creating the CENTURY 21 Peak brokerage to expand our reach and the acquisition of an additional franchise in the San Fernando Valley boosting our coverage to 150 agents. We are also in advanced negotiations for other strategic acquisitions. Additionally, our residential loan origination unit generated an impressive 40% increase in production in 2015 compared to the previous year. We’re anticipating continued growth in loan volume this year as a result of expanded capital sources and the ability to compete with the lowest competitive rates.
Commercial Markets Stay the Course
2015 proved to be a very good year for commercial real estate. A healthy economy benefitted residential and commercial real estate. A stronger GDP in 2015 meant more confidence in the business sector to expand and acquire more space. Increased household formation by consumers not yet ready for home ownership drove the needed demand for apartments in the supply-demand equation. Investors holding positions in both multifamily and office properties saw strong returns, especially those holding A-class assets. Key findings from industry analysts confirm the resilience of the commercial sector in 2015, including:
• $115 billion in national sales volume for major asset classes, up 3% from 2014
• Los Angeles ranked second in behind Manhattan in most active capital markets for 2015
• Retail vacancies in Los Angeles area down 0.6% in 2015
• Cap rate average for all commercial asset types averaged 7.9% nationally down slightly from 2014
The elephant in the room is a growing multifamily inventory and compressed cap rate sales. While there was still a strong market for apartment units in 2014, in 2015 national multifamily vacancy rates showed a slight uptick to 4.3% at the end of the third quarter—without factoring into the equation multifamily developments still under construction.
While we’re still confident that the commercial sector will continue to perform for investors, we’re closely watching multifamily performance, as 2016 could be the year that the supply / demand ratio reaches an inflection point causing a significant rise in vacancy rates. Cap rates are hovering at dangerously low levels for A and B asset class types. Any uptick in vacancy, interest rates, on any unexpected economic shocks could squeeze the cash flow out of these investments. On a more positive note, there shouldn’t be a significant drop in in property values in this sector due to the flight to safety that multifamily provides, and other opportunities will be available in office and retail markets. As part of our CENTURY 21 franchise agreement, CENTURY 21 Peak Commercial opened its doors for business in the 4th quarter of 2015 to take advantage of new opportunities. Our entities providing brokerage, qualified intermediary, and financing services to the investor community reported that 2015 was one of their most profitable years, thanks to a near record number of commercial transactions handled.
Peak’s investment strategies in multifamily markets yielded very stable and improving returns. We are focused on a “de-malling” project of our Myrtle Beach Mall in South Carolina, a senior living community in Moorpark as well as several home developments in Southern California. The retail sector requires close scrutiny, as the challenge for brick and mortar shopping centers attracting shoppers is increasing as they compete with online alternatives. We believe that food and entertainment concepts hold the key to revitalizing that sector.
What’s next for 2016?
While we’re waiting to evaluate activity for the first quarter of this year, we anticipate home values appreciating much slower this year resulting from rising interest rates and a cooling-off of the GDP, but still generating equity needed for existing homeowners. The first two quarters of the year could see the pendulum swing back to a buyers’ market as the scarcity of single-family residence inventory restores balance. Investors will continue to find opportunities in new markets. However, the direction of interest rates and rising vacancy rates in the multifamily arena could impact this momentum. We will continue to monitor rising interest rates and a potential surplus of multifamily units as two key factors potentially contributing to a slowdown in commercial transactions. Market fundamentals demonstrated in 2015 will provide a strong base for continued momentum in 2016 to withstand any potential headwinds on the horizon.