Polaris Property Management Newsletter – February 2023

“I Got You Babe”

If you hear that song at 6:00 on February 2… It Might Be Groundhog Day
Thank you for letting us into your mailbox to share ideas and tips to maximize your experience as a landlord or REALTOR®.

Groundhog Day and Other Crazy Holidays

It is also time to bring you a round up of the latest news, ideas and tips to maximize your experience as a landlord or REALTOR®.

How Many Months of the Year have 28 Days?

Don’t fall for it – they all do. It’s just that February only has 28 days this year (I checked the calendar to make sure that this wasn’t a leap year)!  

It is a short month, but it is full of wild and crazy holidays – everything from Decorating With Candy Day on the 1st, to Tooth Fairy Day on the 28th. For Pete’s Sake Day (that is on the 26th) who comes up with all of these holidays, including the most famous, or infamous, one of all – Groundhog Day. Thank you Phil Connors (Bill Murray, naturally) for the unforgettable repetitive 6 a.m. Sonny and Cher wake-up (I Got You Babe) with the classic Panasonic RC-6025 radio alarm clock!

So, to have a little fun, we have included a list of holidays for February. Print it out, hang it up, and let’s all hope that the groundhog does not see his shadow and retreat to his den for 6 more weeks of winter!  

February 20

Family Day (Canada)
President’s Day (US)
Comfy Day
Love Your Pet Day
Northern Hemisphere Hoodie Hoo Day

February 21

Mardi Gras
International Pancake Day
International Mother Language Day
Travel Africa Day

February 22

Margarita Day
International Toast Day
Inconvenience Yourself Day
Pink Shirt Day
For the Love of Milk Day
World Thinking Day
Wildlife Day
Digital Learning Day

February 23

Curling is Cool Day
Chili Day
Diesel Engine Day
International Dog Biscuit Day
Tile Day
Tootsie Roll Day
International Introduce a Girl to Engineering Day

February 24

Bartender Day
Forget Me Not Day
Skip the Straw Day
Dance Day
Tartar Sauce Day

February 25

Open That Bottle Night
International Sword
Swallowers Day
Rubber Ducky Day

February 26

Carpe Diem Day
World Pistachio Day
Personal Chef’s Day
For Pete’s Sake Day
Levi Strauss Day

February 27

International Polar Bear Day
Cupcake Day
Play More Cards Day
Museum Advocacy Day
World NGO Day
Retro Day

February 28

Floral Design Day
Tooth Fairy Day

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Go Long…

There are 30 seconds left in the 4th quarter. Everybody wants to win the big game. But we’re not talking about sports here…

We’re a few weeks away from one of the biggest marketing moments of the year (oh, and I guess one of the biggest days in American sports too), the NFL Super Bowl. And, of course, most landlords want to be winners when it comes to real estate dollars.

Taking the Long View

The real estate industry is moving beyond what it perceives as cyclical headwinds — i.e., rising interest rates, declining gross domestic product (GDP), slowing deal flows — and taking a long-term approach to real estate assets. The mood among the real estate professionals interviewed recently for an article on the Emerging Trends website is cautious optimism. Their plan: Ride out the slowdown and reposition their firms for another period of sustained growth and strong returns.

The experienced people in the industry are able and willing to look beyond cyclical headwinds. As one professional said, “We’ll look back in 10 years, and the prices that seem astronomical today will seem like a bargain.”

This reconfirms two sometimes contradictory property market trends: Some aspects of the industry are “normalizing” (reverting to pre-COVID patterns), while others appear to have permanently changed as the pandemic has altered how and where we use different types of properties. These patterns are playing out in how real estate professionals (and especially landlords) view prospects in the top 80 markets that are being actively tracked according to Emerging Trends data. No matter the trends, survivors must be flexible and adapt quickly to market changes.

Work from Home vs Return to Office

Most workers are still not back in the office nearly as often as they were before the pandemic. Various sources suggest that less than half of workers actually go into an office on a given day, at least in major markets. This has led some leading tech firms and investment banks, for example, to issue ultimatums for a return to the office.

It’s still too soon to know if such employer demands will translate to more in-office work, as previous requests have had little apparent impact. In the end, it may be hard for employers to put the toothpaste back in the tube, as there appears to be a shift in consumer behavior. Today, most people don’t want to commute to the office more than occasionally.

This sentiment is having an impact on the commercial real estate industry. Insiders that were recently interviewed suggest that somewhere between 10 and 20 percent of the office real estate stock needs to be removed or repurposed. In the remaining office space, landlords will need to do a better job of delivering what tenants want.

As employers and their workers settle on their work preferences, many firms will continue to hold onto their offices either as a precaution in case they need the space in the future or because they could not break their lease. However, more firms are downsizing or not renewing their expiring leases. As a result, vacancy rates are still rising slowly, in contrast to every other major property sector. Many tenants have even started subletting their office space until their leases expire.

No one knows for certain the amount of office space that will be needed for workers in the years to come. However, we do not expect a mass departure from office buildings going forward — even under the most pessimistic scenarios.

Can Your Tenants Work from Home?

This creates an interesting demand in the residential sector. Do the homes that you are using for residential leasing lend themselves toward the stay at home/work from home change that is taking place? Is there at least one space that is designated as a “home office” that can be used by one or more family members? Does that 4-bedroom home now become a 3-bedroom with office space?

Do you need to change the way you market the properties under your control? If you have a multi-family property, and part of it is not rented, would it be wise to re-structure that part of it as shared office space for the home worker? What would the short term and long term benefits and liabilities be in that scenario?

What Has Happened to Housing Costs?

Housing affordability has fallen to its lowest level in over 30 years. Prices and rents have soared relative to incomes. Spiraling mortgage rates have pushed the homeownership bar further out of reach for a growing share of households. This will result in an increase demand for lease and rental. But even rental rates have soared as prices have gone up.

Housing is too expensive. It has been that way for too long—for too many people neither for-sale nor rental housing is affordable—but prices and rents have soared even further out of reach over the course of the past year. And even if we experience an economic downturn, as many economists expect, it is not projected to provide significant relief.

It starts with record home prices.

The U.S. median existing home price jumped by over 18 percent in 2021 alone—the largest increase on record going back to the early 1950s— and then tacked on a further 15 percent through mid-2022. Combined with rapidly rising mortgage rates, housing affordability has fallen to its lowest level in over 30 years relative to incomes, according to the National Association of Realtors.

Renters Priced Out of the Homebuying Market

With a growing share of households priced out of the for-sale market, demand for rental units is far outstripping new supply. Though population growth slowed sharply during the pandemic, demand is also rising from the many young adults eager to start their own households after moving back in with their parents during COVID-19. Further boosting demand is the increasing number of younger adults choosing to live alone, according to a report from economists at the Fed, perhaps a reaction to lockdown claustrophobia. 

The multifamily sector has responded with an unprecedented increase in new supply. “We’ve built more multifamily housing units over the last 10 years than we had in any other time since 1980,” notes an adviser to institutional investors. But it is still far less than needed. Vacancies have fallen to their lowest levels ever while rents are rising faster than ever—even faster than home prices. And though not a formal part of the affordability calculations, other housing-related costs like utilities and maintenance are also rising faster than incomes, further constraining the ability of households to afford basic shelter.

Where do we go from here?

Real estate capital markets are still open for business. Investors are still buying, lenders are still lending, and no one seems to be panicking just yet. But everyone is being more careful about which deals they do until there is more market clarity. So, for now, Go Long.

If you want advice about the markets and the status of your leasing property – or want to talk about converting your home into lease – contact Dan Baldini today.

And don’t forget that you can access our Free Rental Analysis available on our website: PolarisManagementIndianapolis.com.