Investors are growing concerned that it may be more difficult to make money in flipping homes amid a frenzy of home buying activity lately that has sent home prices climbing.

Home flipping profit margins dropped in the first quarter. Only 2.7% of all single-family homes and condos in the first quarter were considered a house flip—transactions that occurred within 12 months of one another. That is down from 4.8% during the fourth quarter of 2020 and 7.5% a year earlier, according to a new report from ATTOM Data Solutions, a real estate research firm.

Gross profits are dropping, too. On the typical home flip—which reflects the difference between the median sales price and the median price paid by investors—gross profit declined nationwide in the first quarter to $63,500. That’s down from $71,000 in the fourth quarter of 2020. Profit margins for returns in the first quarter translated into a 37.8% return on investment compared to the original sales price.

Investors who are still jumping in do appear to be trying to speed up transactions to capitalize on the current market. Home flippers who sold homes in the first quarter took an average of 159 days to complete their transactions, the lowest level since the third quarter of 2013, according to the report.

“It’s too early to say for sure whether home flippers indeed have gone into an extended holding pattern,” says Todd Teta, chief product officer at ATTOM. “But the first quarter of 2021 certainly marked a notable downturn for the flipping industry, with the big drop in activity suggesting that investors may be worried that prices have simply gone up too high. After riding the housing boom along with others for years, they now might be having second thoughts. Whether this is the leading edge of a broader market downturn is little more than speculation.”

The following are additional highlights from ATTOM Data Solutions’ “First Quarter 2021 U.S. Home Flipping Report”:

• Home flipping rates fell in 70% of 108 local markets tracked. The largest quarterly decreases—down by nearly 70% or more— in home flipping occurred in Memphis, Tenn.; Lakeland, Fla.; San Francisco; Columbia, S.C.; and Palm Bay, Fla.
• The largest increases in quarterly home-flipping rates occurred in Springfield, Mass. (up 114%); Albuquerque, N.M. (up 103%); Springfield, Ill. (up 95%); South Bend, Ind. (up 86%); and Boston, Mass. (up 79%).
• Homes flipped in the first quarter were sold for a median price of $231,500, down 3.9% compared to the fourth quarter. This marked the first quarterly decrease in typical resale prices since the fourth quarter of 2018 and the largest quarterly decline since the first quarter of 2011, according to the report.
• The largest quarterly increases in profit margins during the first quarter were in Springfield, Mo. (ROI up 120%); Provo, Utah (up 118%); Omaha, Neb. (up 101%); Lynchburg, Va. (up 101%); and Pittsburgh, Pa. (up 88%).
• The biggest quarterly investment-return decreases in home flipping during the first quarter occurred in Memphis, Tenn. (ROI down 64%); Austin, Texas (down 54%); Houston (down 50%); New Orleans, La. (down 38%); and Louisville, Ky. (down 37%).
• The portion of flipped homes in the first quarter that were purchased with cash by investors rose to 59.2%. On the other hand, about 41% of homes flipped in the first quarter had been bought with financing.

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The demand for warehouse space is at record levels. Retailers are on the hunt for more warehouses to help meet their growing e-commerce needs and fulfill online orders at quicker speeds, according to a new report from JLL, a commercial real estate services firm.

Big box retailers like Walmart, Target, Big Lots, TJX, and Costco are aggressively competing for more warehouse space, trying to catch up to Amazon who has long been buying up warehouses across the country, JLL notes.

“We’ve been on a long-term journey of shifting consumer behavior from buying in stores to online,” Craig Meyer, president of JLL Industrial for the Americas, told CNBC. “That’s the existential driver for demand in the U.S.”

Warehouse demand is notably surging in places like Columbus, Ohio. Industrial real estate demand in Columbus is expected to jump 61% in 2021 compared to 2020, according to JLL. The firm notes that Columbus is an attractive market to retailers because nearly half of the nation’s population is within a one-day drive.

The demand for more warehouses is also reaching record levels in Savannah, Ga., where demand has increased by nearly 10 million square feet over the past year, JLL’s report notes.

As demand surges, rents are rising fast. Industrial taking rents surged nearly 10% in the first five months of 2021 compared to the same period a year earlier, according to CBRE data.

“Momentum in the marketplace is really strong, and this is against a backdrop where there’s very high scarcity in our business,” Chris Caton, head of Prologis, one of the largest firms of logistics real estate, told CNBC. “Vacancy rates in the U.S. are four-and-half percent, basically 40-year lows. There has never been less available to lease, at a time when customers really, really need it.”

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Grocery stores were deemed an essential business and remained open during the pandemic. They also posted record sales volume. Meanwhile, many malls and other retail stores closed for months and saw plummeting sales.

That’s why more retailers want grocery stores near them to attract more foot traffic. Grocery-anchored shopping centers are drawing heightened investor interest—and higher prices, The Wall Street Journal reports.

Realizing this, BentallGreenOak, a real estate investment firm, has marketed a portfolio of 10 shopping centers in big cities like Atlanta, Chicago, Houston, and more. The price could be up to $450 million, which would be comparable to–or even more than—what the portfolio would have sold for prior to the pandemic, The Journal reports.

“Pricing is consistent as before the shutdown,” Barry Brown, senior managing director of capital markets for JLL, a commercial property services firm, told The Wall Street Journal.

E-commerce hasn’t fully bitten into the grocery sector. Consumers continue to shop in person in grocery stores, although curbside pickup options have grown in popularity.

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Vacant outlets in prime locations are gaining a new life, fueled by brisk housing markets. Here’s how you and your clients can use them wisely.

Key Takeaways:

• While hundreds of industrial warehouses and big box retail stories have been converted to self-storage spaces over the past three years, former department store sites are poised to have a much bigger role in these conversions.
• The latest driver of self-storage use is the red-hot housing market, creating demand from both buyers and sellers.
• Consumers are more likely to view self-storage as an extension of their home, which means a need for more frequent access.

Self-storage facilities are getting a design and function makeover. Once largely consigned to industrial zones, today’s new sites seek high-visibility locations in commercial retail centers adjacent to residential neighborhoods with new, tech-enabled amenities to meet consumer demand. Helping to advance this trend is the growing number of vacant large retail outlets available for adaptive reuse, including mall anchor stores like Sears and Macy’s. Self-storage is among the business types eyeing these properties for innovative uses, joining recreation centers, medical facilities, and libraries, among others.

While hundreds of industrial warehouses and big box retail stores have been converted to self-storage spaces over the past three years, former department store sites are poised to have a much more significant place in these conversions, compared to the dozen that have reportedly been transformed for self-storage since 2018, according to Yardi Matrix. Driving the change is the prediction that more than 50% of U.S. malls anchored by department stores could close permanently by the end of 2021, according to Green Street, a commercial real estate advisory firm.

Existing mall retail space is attractive for self-storage conversion, says Barry Johnson, CCIM, vice president of investments for Fairway America, a private equity and advisory firm specializing in commercial real estate asset-based investments. “Beyond the fact that retrofitting is less costly than building new space, mall anchor stores are often two-story and come with loading docks and freight elevators that allow operators to maximize their use of the space. Existing HVAC systems support a climate-controlled environment, which is an essential feature for many consumers and may allow for premium pricing by owners.”

Johnson warns, however, that retail-to-self-storage conversions often face pushback from municipalities, and zoning approvals can be hard to secure. While the payoff can be significant for developers, investors, and brokers who benefit from a high-visibility infill conversion, real estate professionals must overcome objections associated with a loss of retail tax revenue and outdated perceptions of what self-storage looks like.

Retail-to-self-storage conversions are a boon for consumers. Convenient locations and ease of access make them attractive. Among the demand drivers are downsizing baby boomers reluctant to part with their possessions and, more recently, remote workers needing to clear space for home offices. But perhaps the most enduring shift fueling growth pertains to consumer mindset: People are more likely to view self-storage as an extension of their home, which means a need for more frequent access. In the industry, this is referred to as “lifestyle storage.”

Beyond convenience, consumers value the clean, secure, climate-controlled environment retail conversions provide, even if their desire for storage isn’t related to a lack of space at home. Retired broker and developer Chet Snavely of Gulf Stream, Fla., uses his storage unit as a wine cellar, taking advantage of the climate control feature.

Housing Market Driver

The latest driver of self-storage use is the red-hot housing market, creating demand from both buyers and sellers. The high cost of housing means that many buyers—including millennials, who represent the largest share of home buyers according to NAR research—are opting for smaller homes. Add to this that younger generations prefer to spend their money on “experiences,” many of which require the storage of items such as bicycles, camping gear, and jet skis.

Alternatively, sellers may use self-storage to help manage a move that can’t be timed with the sale of their home. “Homes are selling quickly, with buyers wanting to close within 30 to 40 days, forcing sellers to vacate the space before their scheduled move into a new home,” says Bill Gassett, a real estate blogger and sales associate with RE/MAX Executive Realty in Hopkinton, Mass. “Most agents understand that making a ‘double move’ is one of the least desirable aspects of selling a home, but in a hot market, a layover between the sale and the permanent move can’t always be avoided.”

Existing mall retail space is attractive for self-storage conversion.

Self-storage costs vary, based on size, availability, and amenities. Prices for a standard-sized unit may range from $60 to $180 per month. Add 25% to 50% for climate-controlled units. As most self-storage contracts run month-to-month with automated electronic payments, “owners can increase rents by as much as 10% to 15%, often multiple times a year, and receive limited pushback from renters,” says Johnson. For those who plan to use a storage unit for an extended period, Gassett recommends asking for a discounted rate.

Aside from basics such as price and location when comparing local storage facilities, Gassett points out other important considerations including lighting (especially for nighttime access), electricity (to keep stored items charged), and access (drive-up versus loading carts). “Self-storage isn’t cheap, so it makes sense to perform some due diligence. A listing agent who can assist with this process provides a real value-add,” says Gassett.

Sellers also rent storage units to store excess furniture and clutter before having the home photographed and staged by a listing agent. “Even in a market where homes sell within just days of being listed, staging is still important to get the maximum price,” says Bette McTamney, associate broker with RE/MAX 440 in southeast Pennsylvania. “In my market, a clutter-free home can mean a difference of $20,000 to $30,000 on a $400,000 home.” In a 2021 NAR survey of buyer’s agents, 23% said staging a home increased the dollar value offered between 1% and 5%, compared with similar homes on the market that were not staged, and 18% said staging increased the dollar value between 6% and 10%.

McTamney advises leaving items in storage until all sale contingencies have been addressed—including the appraisal. “The house should look the same for the appraisal as it did when listed. Appraisers are like buyers. If there is a lot of junk lying around, it can affect your appraisal.” For sellers who ask about setting up a storage pod at a property, McTamney says “absolutely not” unless they plan to locate it elsewhere. “A pod detracts from the appearance of the home.”

Storage for Stagers

Self-storage units are a useful resource for real estate professionals who stage homes. Debra Grant, owner of Show To Sell Homes in Westport, Conn., consistently rented as many as 15 self-storage units to support her company’s home staging activities until leasing a warehouse proved to be more cost-effective. Multiple units allowed her to store staging supplies by category. “I’d use one unit for sofas, one unit for beds, and so forth,” says Grant.

Pods may have a helpful role when a listing is being staged, Grant offers them as a service to her clients as they prepare to move. “My team will put a pod at the property and load items removed from the house as part of the staging process. The pod is then sent to the new home or moved into storage until the owner is ready to accept it.” This is especially helpful in a market where storage options are limited and homes sell quickly. “I tell my sellers, ‘Locate your storage space in advance to make sure you have a unit, because you may get a cash buyer who wants to close in 30 days,’” Grant says. While clients pay for the cost of the pod and its transport or storage, Grant doesn’t charge for the labor and time spent packing and loading it.

Grant offers valuable lessons about the need for climate control and strong security when using self-storage. “When you’re storing furnishings—especially rugs—you don’t want to attract moths or other insects,” says Grant. “A good HVAC system will minimize the chance of mold or dryness, which can damage furnishings.” Real estate agents can’t always control when they will need to access storage, so a facility that is open seven days a week with evening hours is essential, but you want to feel safe, Grant advises checking for lighting, cameras, and other security features—particularly with contact-free storage.

A less obvious consideration is the layout of the facility. “If you’re storing large furniture for staging, look at the hallway design and ask yourself how easy it will be to move, especially if you’re on your own,” advises Grant. “Maze-like layouts can be challenging.” Insurance is another factor many agents overlook. “One of my first leased units was next to a creek,” says Grant. “I didn’t know the facility didn’t have flood insurance or that I needed my own coverage.” An overflowing creek left Grant with 20 sopping wet Asian-style rugs. “Check your business policy to see what’s covered.”

An App for That

Like other industries, modern self-storage is tech-based. Industry group Inside Self Storage advises that to stay competitive, self-storage operators need to embrace the technology that consumers demand. This means using an app to enable contact-free rental, access, and payment. While these features were available before the pandemic, they’ve become much more popular over the past year.

Remote monitoring and biometric security are among the newest features available in self-storage facilities. Remote monitoring allows users to monitor and track unit temperature and humidity to protect environmentally sensitive items such as antiques or documents. The system also detects water or motion, triggering a text, email, or voice alert. Biometric technology uses the owner’s unique characteristics, such as voice patterns, fingerprints, or retinas for top-level security. Companies such as Innuvo, which offers audio/video, security, and networking services for residential and commercial estate, use facial recognition technology that gauges unique facial measurements and characteristics. The data is then scanned and matched with customer records.

Whether using self-storage to support home staging activities or guiding clients on choosing a storage facility to meet their needs, real estate professionals have significantly more and better options than in the past—thanks in part to retail conversions. These modern self-storage facilities provide easy-access locations with technology-supported amenities that offer secure and proper storage of items, over the short or long terms.

Self-Storage: A Draw for Investors

Inside Self Storage, a self-storage industry group, reports continuing acquisitions and strong investor interest. Despite last year’s economic disruptions, self-storage sales totaled $7.7 billion in 2020, up by a third from 2019 levels, according to Real Capital Analytics. Large self-storage REITs, such as Public Storage and CubeSmart, account for only about 20% of the market. The other 80% of facilities are owned and operated by individual investors, including mom-and-pop owners.

A space conversion project may make the most sense for local buyers. For brokers willing to work with an owner to address zoning challenges, conversions can deliver high returns because the properties can often be converted for a fraction of new from-the-ground-up construction costs. “Once there is a clear path for redevelopment, you’ll see that reflected in the price,” says Fairway America’s Barry Johnson. Regardless, projects already zoned for self-storage are attractive to buyers. Such was the case with the Bon-Ton department store conversion in York, Pa., that Blaze Cambruzzi, with TRUE Commercial Real Estate in Lancaster, Pa., settled in April. “Once the zoning text amendment was in place, we received seven letters of intent within 60 days, adding to a buyer already at the table,” he says.

For the investor-owner, the self-storage sector is strong. Yardi Matrix reports positive street-rate rental performance in 87% of the markets tracked. Top markets include San Francisco and East Bay; the Inland Empire (Calif.); Washington, D.C.; San Jose, Calif.; Phoenix; and Miami. Some of the 2021 growth is attributed to the pandemic—such as college students returning home and needing to clear out dorms, workers carving out space for home offices, and restaurants storing unused furniture to accommodate social distancing—but the American appetite for acquiring “stuff,” combined with smaller homes, suggests this sector will continue to perform well.

Adding to the strength of the self-storage sector is consumers’ tolerance for rent increases. “Rates will be comparable elsewhere, so there’s no incentive to move, especially given the time and effort involved,” Cambruzzi says. “Self-storage provides a level of inflation protection other commercial real estate investments lack.”

©National Association of REALTORS®
Reprinted with permission

The meticulous work of drafting a new ethics rule will pay off in clarity for our profession and the public.

Nothing matters more to a service profession than public trust. REALTORS®, whether specializing in sales, appraisals, property management or other disciplines, need to be trusted by members of the public in order for our services to be valued and considered beneficial to society.  

In recent times, no topic has tested the public trust more than the issue of appraisal bias, and specifically appraisal bias against people of color.  

It is deeply troubling to me, and to appraisers in general, to hear stories in which families are affected in such a way that they feel they must hide who they are in order to obtain a fair valuation. No one should ever have to go to such lengths.  

The Appraisal Standards Board takes the issue of appraisal bias very seriously. An independent board of the Appraisal Foundation, ASB is tasked with writing and updating the professional appraisal standards used in every state and territory of the United States. The Appraisal Foundation is a nonprofit entity that was granted the authority by Congress to be the keeper of these standards, known as the Uniform Standards of Professional Appraisal Practice.  

Over the last several years, the ASB has been working on clarifying standards regarding discrimination that go beyond the existing requirement of simply not performing an assignment with bias. The ASB is getting closer to adopting these enhanced ethical obligations, with the goal of maintaining public trust in the profession.  

As a third-generation member of the National Association of REALTORS®, I understand the need for strong ethical standards to govern our profession, as well as the need for REALTORS® to understand and uphold them. Furthermore, in order to maintain the public’s trust, we must allow the public to see our standards and understand them as well. The work the ASB is doing will result in clear and enforceable standards that everyone, both within our profession and outside of our profession, will be able to understand.  

When making changes to USPAP, the ASB releases a document known as an exposure draft to the public. The draft shows what the ASB proposes to change within USPAP, as well as ASB’s rationale for proposing the change. The ASB solicits feedback on exposure drafts from various stakeholders including appraisers, regulators, federal agencies, lenders, educators, professional organizations and consumers. Based on that feedback, the ASB may decide to adopt the changes or may make additional revisions and issue a subsequent exposure draft. No change to USPAP may be made without exposure and public comment.  

At our public meeting last month, the ASB announced that, in response to feedback from the public, we are continuing to work on the proposed edits to the USPAP ethics rule. This rule specifies the personal obligations and responsibility of the individual appraiser. The ASB will continue this engagement so that the revised rule and accompanying guidance will clearly convey the prohibition against illegal discrimination.  

Four exposure drafts have been released to date, and a fifth one will be released soon, most likely within the next few weeks. (Watch The Appraisal Foundation’s website(link is external) for updates.) Making revisions to USPAP is an intense and exacting process, because it is imperative that the ethical and performance standards for the valuation profession be clear and enforceable. This process demonstrates the ASB’s commitment to drafting precise, clear and direct language.  

There’s a light at the end of the tunnel. When our work is finished, USPAP will include language in the ethical standards that will enhance public trust and allow for those both within the profession and outside the profession to understand the obligation for equal treatment under the law.

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A shortage of homes for sale has forced more prospective buyers to rent. That is driving up prices in the rental market.

The U.S. median rental price in June jumped 8.1% compared to a year ago, reaching $1,575, realtor.com® reports. Also, two-bedroom units saw the largest increase in rents at 10.2%, as the demand for more space continued to remain high.

Rental prices in 44 of the largest 55 metros broke records last month. The largest gains were recorded in Riverside, Calif.; Tampa; and Phoenix, which all posted increases above 20% year-over-year, realtor.com® reports.

“The surge we’re seeing in rental prices is likely to exacerbate the K-shaped, or uneven, nature of the pandemic recovery in the U.S.,” says Danielle Hale, realtor.com®’s chief economist. “Rents are rising at a faster pace than income, which is adding to the challenges faced by lower-income Americans as they struggle to recover from job losses and other hardships brought about by COVID.”

Rental prices aren’t likely to ease unless there is a shift with a higher number of homes for sale and rent, Hale adds.

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Reprinted with permission