Investment update: The investment round for Sky Rock has been completed and the first investment went toward acquiring 2 buildings with four wings consisting of 62 apartments in Washington Heights, New York. The 5-year business plan includes internal constructions to raise rents and upgrade tenant agreements where possible. The first apartments went into rehab in August and during the last 3 months, over 10% of the agreements were renegotiated. Property photo below.
Opportunity Zones: Real Estate is dynamic and you have to be constantly alert to economic parameters and legislation. A good example is the Opportunity Zones program. The program is part of the Tax Cut and Jobs Act, included in the economic plan implemented by President Trump. Under the program, the US was divided into “Opportunity Zones” that can be viewed on a larger scale here. The Federal Government would like to promote low income areas and to do so, Washington is willing to pay with the currency governments like to use: Taxes! The program is too complicated to detail here, but in a nutshell, investors may use capital gains to invest in those zones through dedicated funds and then get a tax cut or exemption – depending on how long they keep the investment. It’s smart logic: on one hand the government gives private and institutional investors an incentive to invest in areas where the government doesn’t have the money to spend. On the other hand, unclaimed capital gains in the US are estimated in trillions. With this program, the government shifts some of the “locked” money to other structures that may aide the economy. The program is somewhat like the 1031 Exchange Code but it’s broader and more flexible. Without doubt, it will have an impact on the Real Estate Market. Recently, every week, I hear of a new Opportunity Zones REIT that would like to take advantage of the new program.
Mortgage rates: In August, I wrote that the rise in interest rates would inevitably affect the market. I’ve also noted that genuine demand for housing is still strong but that new home buyers are thinking twice before committing to mortgages. The graphs below indeed demonstrate that the Real Estate Market is at a “reset” stage. I’ve mentioned a few times in the past also about luxury apartments price reductions. These have spread now to less expensive apartments and in NYC there are concerns that the equilibrium resembles that of 2009. The rise in interest rates is already impacting the Single Homes Sector. Except for subsidized loans, the mortgage rate is nearing 5%. Truth to be told, in historical terms this isn’t so bad. But for borrowers that were used to very low rates, it’s a new and unnerving situation. So, what do you do if you’re not sure whether you want to get into a long-term commitment? Correct, you rent... The demand for rent is rising and fuels an increase in rent prices. It appears that new home constructions may slow down until prices adjust. Housing demand will find solutions using the current inventory. Contrary to classical economic theory, I personally think that rent increases won’t be followed by apartment price increases since current prices are high and reflect a low return compared to other safe alternatives. The multifamily market again proves that it’s a solid and stable sector where prices are based on rent income. The rise in rents balances the interest effect and that’s the reason that there are no price reductions in that sector. Professional management companies benefit from high occupancy and rising rents and therefore this section of the market continues to be an important part of large investment funds portfolio.
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