Residential Real Estate Sector Sees Massive Spike in New Construction

The United States Department of Commerce and the Department of Housing and Urban Development recently announced that, for the first time since 2007, the annual rate of residential real estate starts surpassed 1.3 million units. Housing starts spiked by an incredible 25.5 percent in October 2016, driven by an increase in the production of both single-family homes and multifamily residential properties.

The surge marked a 68.8 percent month-on-month increase in multifamily production. The multifamily sector, which experienced uncharacteristically weak growth in September 2016, represented the highest number of single-family property starts since October 2008. The 10.7 percent jump in new single-family property construction brought the sector’s seasonally adjusted rate to 869,000 units, while multifamily production reached 454,000 units. This amounted to a double-digit increase in residential starts across all four of the United States’ regional real estate sectors. 

Ed Brady, an Illinois real estate developer and chairman of the National Association of Home Builders (NAHB), cited a healthy job market and economy as factors influencing growth in the housing sector. Positive economic markers have served to bolster optimism among builders, leading to a surge in new construction throughout the housing market. As noted by NAHB chief economist Robert Dietz, this massive spike in housing production is not sustainable. However, it appears to herald an upcoming period of growth and prosperity for America’s residential real estate sector.

Cash-On-Cash Returns in Commercial Multifamily Real Estate

Using a percentage to express the cash income received for the cash invested in a property, cash-on-cash (COC) return is one of several metrics that can be used to assess a property’s viability. Moreover, it is most commonly used to do so for properties that receive cash flow on a monthly, quarterly, or annual basis.

At the most basic level, COC return is equal to the income received divided by the total amount invested. For example, if someone invests $1,000 in a property and receives $300 in income, the COC return on that property is 30 percent. When calculating COC return, it is important to omit other types of returns, such as tax benefits and asset appreciation.

Of course, an accurate COC return value relies on the correct calculation of income from a property. To calculate income, investors typically start with the net operating income (NOI) from the property and subtract other expenses such as debt service and capital reserves.

Commercial Real Estate Projected to Continue Expansion following Q2

Commercial real estate experienced a slowdown in the first quarter of 2016, according to the latest "Commercial Real Estate Outlook," published by the National Association of Realtors in May 2016. Compared to 2015, the first quarter of 2016 saw a 20 percent decrease in commercial sales volume in large commercial real estate (LCRE) markets. However, sales volume in small commercial real estate (SCRE) markets increased by 8 percent over the same period.

Looking toward the second quarter of 2016 and beyond, commercial fundamentals continue to grow in three of the four core sectors. Vacancies are expected to decline in a number of key sectors, including commercial, retail, and industrial. Commercial multifamily may experience an increase in vacancies over the next two years, likely due to the appearance of new supply in the market.

In terms of investment, interest rate hikes will continue to slow down sales in LCRE markets. High interest rates and increased regulatory activity have also restricted access to capital in SCRE markets. Nevertheless, commercial real estate in the United States will remain an attractive alternative investment in 2016.

About Dan Chamberlain

Experienced real estate investor and operations manager Dan Chamberlain is the COO of 37th Parallel Properties, a real estate investment firm focused on commercial multifamily properties. With hundreds of domestic and international clients, 37th Parallel holds more than $100 million in performing assets under management. As the Chief Operating Officer of the organization, Dan Chamberlain oversees all aspects of operations, including market analysis, acquisitions, dispositions, and asset management.

Dan Chamberlain graduated cum laude with a BS in engineering from Bucknell University, where he participated in the Institute for Leadership, Technology, and Management program. This program allowed the highest ten-performing engineering and business students to learn to integrate technical and business skills in both the classroom and the real-world work environment. With this educational background, Mr. Chamberlain launched his career as a consultant with Arthur Andersen Business Consulting, where he led a number of projects on behalf of major client corporations.

Prior to assuming his current role, Mr. Chamberlain worked as a corporate technology and business solutions director for a multi-billion dollar company. He directed an organization with up to 50 internal and external staff spanning multiple states and supporting several major business lines. His responsibilities included client delivery, staff management, budget/forecast management, hiring, and more.