Yesterday's edition of The Wall Street Journal has a lengthy story on the "look ahead" for real estate, with the summation that investors and developers will be a bit more cautious in 2007. Still, a national survey notes that 60 percent of investors say they will increase their stakes in U.S. real estate this year, even though they are becoming more selective -- which isn't a bad thing!
Retail will suffer somewhat, though rents at shopping centers are expected to rise. Office and industrial are coming on strong for 2007, with office sales staying high and rents increasing. An increasing number of foreign investors are pouring money into U.S. office projects. Multi-family (apartment) rents will continue to rise, but not as much as in 2006. With potential home buyers locked out because of inflated prices or what the Journal calls "a wait and see attitude" before making a home-buying decision, apartment investors have been the beneficiary. Vacancies have dropped and rents have been up the most quickly in several years. Further, particularly in Ohio, I am of the belief that apartment properties will continue their appreciation as home foreclosures increase due to adjustable rate mortgages (ARMs) adjusting upwards for subprime borrowers. As one of my colleagues in our Cincinnati office recently noted, the bar for home ownership in the subprime market will revert upwards as a result of Ohio Senate Bill 185, a recently passed mortgage bill that has caused most lenders to do away with "stated income" and "no documentation" mortgage products.
Translation? A number of home buyers who obtained an ARM in order to qualify for a loan are facing increasing interest rates, and likely will not be able to continue to make payments. Many will probably lose their homes and will need a place to live. Additionally, other subprime (i.e. - higher risk) borrowers will not be able to qualify for a loan at all and will continue to rely on apartment living. Both these factors will put more pressure on multi-family properties, helping drive property appreciation and increased rents.