Marterra Market Monitor

Marterra Market Monitor
Welcome to the first Marterra Market Monitor - this is intended to be a monthly digest of what we see in the market.
I hope you enjoy it.
Marterra By The Numbers 2022


  • Single-Family Home Sales: 74 homes for+$98,000,000 of consideration (47% representing buyers and 53% representing sellers).
  • Leasing Activity: 5,628 tenant inquiries received, 720 properties shown, 521 applications received, and 92 homes leased.
  • Units Under Management as YE: 294
  • Property Maintenance & Construction Management: ~$4,200,000
  • Homes Under Development: 16
Single Family Transactional Market
During January, we have seen a significant increase in transactional activity. Our team had a sub $1M listing in South Orange County that received 12 offers over its first weekend and was under contract at +3% over the listing price. Our listings in the $1-2M range average 2-3 offers within the first week if priced appropriately.
The responses to the above tweet from around the country indicate that the increased buyer activity is not just a local phenomenon. Instead, the increase in buyer activity is driven by mortgage rates moderating. While this is happening in a lot of other markets, it's clear the increase is not universal. Nevertheless, the comments on the tweet are interesting, so I've included a link for you to refer to.
Residential Leasing Market
While Orange County has experienced approximately 28% rent growth from January 2020 through December 2022 (per Zillow Observed Rent Index), we saw a slight decline in asking rents towards YE 2022. Leasing activity in our property management portfolio has remained strong. However, it is weaker than during the COVID boom days. We have pulled forward several years of rental increases, and rental rates will likely remain flat for the foreseeable future. Investors underwriting market rent growth beware.
Mortgage Rates
Rates are much improved from 3-4 months ago, but the level of improvement is not the most welcomed change. Rather, it’s the stability we are seeing now, as rates haven’t seen a narrower, more stable range since late 2021. And with mortgage rates being the dominant factor driving home sales right now, the recent declines are helping to stabilize the housing market. If things were to continue to trend as they have in the past few weeks, we would likely see a significant bounce in the housing market. This combination of lower and more stable rates perfectly coincides with a noticeable shift in purchase mortgage applications. This past week saw purchase applications tick up to the highest levels since August 2022
- Amit Singh Neo Home Loans
Capital Market Commentary
Big problems occur in the economy when capital (debt and equity) markets and asset prices disconnect. There are some huge disconnects right now in the marketplace. The office market is the most dramatic example, and any owner of an office building who is forced to sell in the near term will get slaughtered, as buyers will not be able to use reasonable debt financing. Banks and other lenders have mostly stopped lending in the office space; it has become a 4-letter word. The absence of available (or attractive debt) for property owners will force many to contribute more capital (if they can) or become distressed property sellers.
Commercial Real Estate
A recent tweet from my good friend Adam Deermount (Chief Investment Officer of Ramser Development, Twitter Handle ) sums up the office market pretty well.

Just spoke w a friend who’s at a large debt fund.

Currently dealing with an office loan originated pre-Covid that was pitched as a “basis play.”

Lenders basis = $175/SF. Probably worth around $100/SF today. Some nasty stuff is coming.

If the buyer of this property has a $175/SF debt basis, the total basis (assuming 70% loan to value) is about $250/SF. If the building is 500K SF, BOTH the buyer and lender are losing approximately $37.5M EACH. There is still a lot of pain to come in the office sector, but with this pain, a lot of opportunity will come as well.
The last time Adam and I spoke, he joked "the office market is not overbuilt, it's under-demolished".
Macro Observations
One of my favorite sayings is that if your head is on fire and your feet are on ice, you are fine on average. That is how I feel about the economy going forward. It's going to be mostly fine. But specific markets and sectors will be on fire, while others will be on ice. Here is one example of how it plays out.
Tech layoffs have been brutal. Here is a quick summary of the most notable:
  • Twitter - nearly half of its workforce in November
  • Google - 12,000
  • Microsoft - 10,000
  • Amazon - 18,000
  • Meta (Facebook) - 11,000
Tech jobs are more likely to be high paying and have a higher propensity to be remote. If a tech worker gets laid off and lives in a Zoomtown (Boise, Nashville, or other towns that boomed in the wake of COVID), the tech worker is likely to return to either a) their network base (where they went to college or grew up) or b) centers of influence in their industry (Bay Area in this example). If initial searches for remote work prove to be fruitless, the tech workers will likely choose to change industries or move. I expect to see some mean reversion at municipalities that lost or gained population during peak COVID years.
Jared Giles, who you will meet later in this email, believes that the above will be moderated, as top tech talent will be absorbed by other industries and allowed to retain their remote work status. He noted his firm Green Street recently hired two former tech workers, who will remain remote.
Project Updates:
We have several projects on going, where is a quick update on a few of them.
Redlands Pl, Costa Mesa: We are in the process of doing a 2-unit small lot, a for-sale subdivision in Costa Mesa, and after almost nine months of work, we finally received a 7-0 approval from the City Planning Commission . We still have +12 months until we can put a shovel in the ground. To generate some yield in the meantime, we are doing short-term (+30 day) furnished rentals in one of the existing units and renting out some additional space for storage.
Placentia Ave, Costa Mesa: After almost 2.5 years of design, permitting and construction we are nearing completion of our first set of accessory dwelling units (ADUs) on a multifamily project. We have 6 more ADUs in various design, permitting, or construction stages. We like to classify these ADUs as NOAH or Naturally Occurring Affordable Housing, as the market rental rate will be naturally much lower than most new construction multifamily within the same local. While these projects provide much-needed housing for the "missing middle" the risk-adjusted returns they provide are very attractive as there is informational arbitrage, as most property sellers do not put much, if any value on the additional land. This particular property was acquired with no additional value attributed to the land, meaning the incremental basis for these units is limited to its construction cost, which was about $225K per unit. Each unit will rent for approximately $2,800 each month, which would generate a 15% annual return on investment.
What's The Good Word
The dramatic rise in home prices and rental rates across the country has been the talk of the town.
But who is to blame? Developers' and investor greed has often been the scapegoat of choice. The Atlantic article does an excellent job of dispelling the "greedy landlord" trope.
There are many factors, including, to some degree, greed, but some more impactful contributors include inflationary fiscal and monetary policy and increased supply constraints (exacerbated by COVID policy). We must progress toward a solution before we can honestly discuss the root causes of affordability issues.
Something Smart from Someone Smart
Interest rates have increased, and real estate in the public market has been repriced. Last year, REIT asset prices decreased by about 20%, with a wide range between sectors. The private real estate market hasn’t quite gotten the memo yet. NCREIF’s appraisal-based NPI index says that real estate values increased by 4% in 2022 and are only down slightly from the peak in 3Q22. History has shown that during periods of inflection, the large, liquid publicly traded REIT market provides a good betting line for the direction and magnitude of future price changes for privately held commercial real estate.
- Jared Giles, CFA
Senior Associate at Green Street
Book Rec 
Fooled By Randomness by Nassim Taleb and the books that followed (The Black Swan and Antifragile) have greatly impacted my approach to risk/investing. The author is one of the most intelligent & insufferable humans on the planet. However, if you can tolerate the author, you will come away better for it.
Thanks again for reading. I hope this post improves with time, and I would appreciate your feedback.
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