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Levine Capital – October Update

passive income real estate investing

As autumn comes in full swing, temperatures cool down across the U.S. However, the ongoing crisis continues to heat up due to a rise in COVID-19 cases, accompanied by continued market turbulence originating from the contentious presidential election outcome, the uncertain timing and size of stimulus packages, and other geopolitical elements.

Amid the persistent economic challenges facing the U.S., housing options of renting by necessity have continued to outperform “lifestyle rent” (i.e. renting as a choice), especially in suburbia deemed substantially tranquil and peaceful yet still easily accessible to urban environments. Additionally, in the wake of the COVID-19 pandemic, people value private indoor and outdoor spaces more than ever, which are the hallmarks of single-family homes.

Our co-investment with TCS Anika Homes in the single-family rental (SFR) homes is poised to fare well with this noticeable trend. The Fed’s commitment to buying $120 billion worth of bonds each month will help keep long-term interest rates low, which should serve as a tailwind when it comes to underwriting deals.  

WHAT’S DEVELOPING IN COMMERCIAL REAL ESTATE

While there is ongoing speculation regarding the impactful consequences of the U.S. presidential election, it’s worthwhile to note that long-term returns on commercial real estate investments have not been historically dictated by either party in the administration. Rather, such factors as the real estate cycle, the economy, interest rates, COVID-19, geopolitical events, and long-term growth drivers like demographics and technological change should be the focal points in determining leasing fundamentals and property values. Nevertheless, in the long term, administrations have different spending priorities that could determine the areas of growth across the nation and industries of focus with greater growth potential.

Prices on U.S. commercial real estate deals showed some positive signs of improvement in the third quarter, with the annual rate of U.S. commercial real estate prices climbing 1.4% on average. This growth is primarily driven by price gains in the industrial and multifamily sectors, which are more than offsetting declines in retail, hotel, and office prices. Moreover, with unemployment rates staying high as a result of continued economic uncertainty, many renters seem to look for cost-effective housing

According to data released by the USPS, almost 16 million people relocated between February and July this year. This could be a telltale sign that renters continue actively seeking housing options which can be more affordable and thus aligned with their financial budgets, backstopping the residential rental market overall.

Another silver lining is that the U.S. real estate economists predicted the current recession will be likely transient with the above-average GDP and job growth forecasts for the following two years, leading to more favorable market conditions and values compared to six months ago. Also, the real estate market sentiment has picked up, substantially encouraged by the two best performing asset classes – industrial and single-family housing.

We are optimistic about the long-term fundamentals of affordable single-family rentals (SFR) which can not only benefit those in need but also serve as an effective part of a defensive investment strategy for investors. Seeing a tremendous opportunity, institutional investors are also revisiting a successful strategy from the last financial crisis, investing in single-family homes to rent.

The SFR appears to be among the few asset classes to see constant demand growth in the aftermath of the pandemic and it is rapidly evolving into an institutional investment much as the multifamily sector did more than two decades ago. Institutional ownership remains a fraction of the overall single-family home market, with 200,000 homes of more than 90 million single-family units in the U.S.

Fund Highlights

We are very bullish on our co-investment with TCS Anika Homes investing in single-family rental (SFR) homes and small multifamily with a focus on affordable/workforce housing and believe that a recession could actually even improve conditions in the demographic we serve. When times get tough, people look to lower their payments but still need to live somewhere. Therefore, we are investing in quality affordable housing and believe that in tough times people will more likely move out of their ‘A’ class apartments and bump down to the market we serve. Additionally, a recession would likely allow us to buy and build for less while maintaining our +/- $1,200/month rent resulting in increased cap rates.

We are looking at a minimum of a 5-10 year hold so we are not concerned about exit cap rates that would be affected by a downturn. Currently, TCS Anika Homes is well on course to acquire a target of 50-plus single-family homes for its Fund III, along with planned renovations underway.

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Sincerely,

Adam Levine

Managing Partner

Mobile: (908) 202-3574

Office: (732) 858-1758

Emailadam@levinecapital.com