This Week’s Topics
The Wall of Maturities Morphs into the Wave of Modifications
Navigating the Impact of Artificial Intelligence on Real Estate
Markets Wonder If There Will Be Only Two Rate Cuts This Year
Navigating Losses in Commercial Real Estate: A Multi-Sector Analysis
U.S. Office Vacancies Reach New All-Time Highs — Why Older Office Buildings Are Being Stranded
BlackRock CEO Sees Private Sector Funding More Energy Infrastructure
The Unraveling American Dream: Housing Costs Outpace Incomes, Affordability Plummets
Malls were a dirty word in commercial real estate. Now retail is a bright spot.
Blackstone To Buy Apartment REIT For $10B
Blackstone is betting big on multifamily with a $10 billion acquisition of Apartment Income REIT Corp. The deal announced Monday has Blackstone acquiring the firm which is also known as AIR Communities at $39.12 per share, a 25% premium on their Friday closing price. Blackstone would assume all of AIR Communities’ debt along with their 76 rental communities in 10 states and Washington D.C.
The private equity behemoth plans to take AIR Communities private and invest another $400 million to improve and maintain the portfolio according to the news release. “AIR Communities represents the highest quality, large scale apartment portfolio we have ever acquired, and is located in markets where multifamily fundamentals are strong,” said Nadeem Meghji, global co-head of Blackstone Real Estate.
The deal is slated to close in the third quarter of this year. News of the acquisition caused AIR Communities’ stock to rise more than 22% in early trading Monday. Multifamily has been resilient despite so much new supply coming online. RealPage has updated its forecast for the sector “to reflect strengthening economic markers that influence the multifamily industry.” They now anticipate 12% of the nation's 50 largest apartment markets to see 3% or above in rent growth with only 4% expected to see growth sub 1%.
Source: Bisnow
Interest Rate Drops Will Not Solve CRE Problems
As interest rates teeter on the brink of change, investors in commercial real estate (CRE) and multifamily housing find themselves with uncertainty. David Frosh, a prominent figure in the industry, has sounded a cautionary note, urging stakeholders to redirect their focus from the anticipated fluctuations in the Federal Funds rate to the broader issue of capital scarcity in the debt markets.
In his recent analysis, Frosh sheds light on the intricate dynamics shaping mortgage rates, challenging the prevailing notion that modest decreases in the Federal Funds rate will translate into commensurate reductions in mortgage rates. He emphasizes the multifaceted nature of interest rate determinants, citing factors such as Treasury bond yields, GDP growth, unemployment rates, housing demand, and inflation as pivotal influencers. Drawing attention to the Federal Reserve's strategy of deleveraging its balance sheet by curtailing purchases of mortgage-backed securities (MBS) and Treasury bonds, Frosh warns of potential repercussions on mortgage rates. The confluence of heightened Treasury issuance, capital constraints, and regulatory pressures on banks exacerbates concerns surrounding liquidity in the debt markets.
A looming specter hangs over the CRE sector as $930 billion in commercial real estate debt matures in 2024, necessitating refinancing at less favorable terms. Frosh underscores the dominance of bank-held debt, with regulatory mandates compelling institutions to mitigate exposure to CRE. Consequently, liquidity constraints and stringent lending conditions pose formidable challenges for investors seeking to refinance properties or secure new financing.
Despite the prevailing uncertainties, real estate equity remains relatively robust, offering a semblance of resilience amidst market volatility. However, the emergence of private credit funds poised to capitalize on distressed assets underscores the fragility of the current landscape. Investors grapple with the prospect of increased equity requirements or distressed sales, amplifying anxieties surrounding the impending "ticking time bomb" in commercial real estate.
In light of these developments, Frosh admonishes CRE and multifamily investors to recalibrate their strategies, urging proactive measures to navigate the evolving financial landscape. With the specter of capital scarcity looming large, the imperative for prudent decision-making and strategic refinancing initiatives becomes ever more pressing. As stakeholders brace for a tumultuous period ahead, the resilience of the real estate sector will be tested amidst a backdrop of shifting economic tides and regulatory imperatives.
Source: Globalest
The Wall of Maturities Morphs into the Wave of Modifications
Loan modifications on commercial real estate debt significantly increased during 2023 due to higher interest rates. A loan modification is an extension or other alteration to the loan covenants according to CRED iQ. This helps borrowers to avoid having to default and allows lenders to not take action on the property.
The amount of loan modifications in 2023 more than doubled compared to the year prior. “Of the $162 billion in securitized commercial mortgages which matured in 2023, 542 loans were modified with cumulative balances just over $20 billion, which is a 150% increase from the amount of modifications that occurred in 2022,” the report said. CRED iQ predicts that these modifications will continue to surge through 2024 as creditors “pretend and extend” to avoid having to take control of properties. This is evidenced by the fact that “Within the office sector only 26% of the $35.8 billion of office CMBS loans that matured in 2023 was actually paid off in full, as borrowers struggled to get refinancing or to sell their properties.”
It’s yet to be seen how these modifications will play out over the long run. However, many think that this is unsustainable and that the extensions and other modifications are just delaying an inevitable correction in the market. As 2024 awaits an estimated $210 billion worth of securitized maturities, the “pretend and extend” method may be on its last legs.
Source: Cred IQ
Data Center Asking Rents are Soaring
In the bustling world of real estate, a new player has taken center stage: data centers. In an era defined by digital expansion, businesses are racing to fortify their online presence, driving unprecedented demand for data infrastructure. This surge presents a compelling opportunity for investors to capitalize on the evolving technological landscape.
Recent reports from industry leaders like CBRE vividly illustrate the data center boom sweeping across North America. Occupiers are eagerly pre-leasing space months, even years, in advance, recognizing the urgency to secure their digital assets amidst fierce competition. Rental rates in key markets such as Silicon Valley and Northern Virginia are soaring, fueled by power constraints delaying new construction and intense leasing rivalries.
The construction frenzy is palpable, with an all-time high of 3,077.8 MW under construction in primary markets. Yet, despite the flurry of activity, vacancy rates are plummeting, reaching record lows in major hubs like the New York Tri-State area and Seattle. It's a market landscape where landlords hold the upper hand, with negotiating power firmly in their grasp.
Unlike traditional real estate assets facing challenges in a rapidly evolving landscape, data centers offer long-term demand visibility and high barriers to entry. It's a winning formula for investors seeking stable returns and strategic portfolio diversification.
Source: Globalest
Here's what tenants need to know about Biden's plan to cap rent hikes for some affordable housing units
In a significant move aimed at easing the burden of rising rents on low-income tenants, the Biden administration recently implemented a new rule limiting rent increases in certain affordable housing units across the nation. The regulation, announced on April 1st, imposes a cap of 10% on rent hikes, offering much-needed stability to over a million tenants.
Tara Raghuveer, Director of the National Tenant Union Federation, lauded the initiative, emphasizing its potential to help individuals maintain their residences. "The rent is still too damn high," Raghuveer remarked, "but this cap will provide stability to more than a million tenants."
The measure primarily targets units benefiting from the Low-Income Housing Tax Credit (LIHTC), the largest federal affordable housing program. Experts estimate that approximately 2.6 million rental homes in the United States fall under LIHTC rent and income restrictions.
However, not all voices are in favor of the rent cap. Bob Broeksmit, President and CEO of the Mortgage Bankers Association, criticized the measure, cautioning that it could exacerbate the housing affordability crisis. Broeksmit argued that rent control policies historically impede new construction, distort market dynamics, and compromise rental housing quality.
While the debate over the effectiveness of rent control persists, the Biden administration's intervention underscores the pressing need to address housing affordability issues affecting millions of Americans. As investors adapt to this rent control change in LIHTEC investments a 10% rent increase is very manageable for landlords, but the action is in government control. Typically the more government control in the real estate market the harder it is to finish projects at high returns.
Source: CNBC
Navigating the Impact of Artificial Intelligence on Real Estate
In the rapidly evolving landscape of real estate, artificial intelligence (AI) has transitioned from a distant possibility to a pivotal business strategy. From analyzing leases to managing warehouse space, AI has become an integral part of operations for many property companies. At a recent gathering of real estate professionals in New York, it was evident that AI, particularly generative AI, has become increasingly prevalent in the industry. Generative AI, popularized by OpenAI's ChatGPT, has emerged as a powerful tool for creating content such as text, images, and videos based on prompts. Most attendees at the event indicated that their firms have utilized generative AI in various capacities, highlighting its widespread adoption across the sector.
Despite the promising applications of AI, concerns about data vulnerability, liabilities arising from AI-generated analyses, and uncertainties regarding accuracy have led some companies to hesitate, with some even banning the use of AI tools altogether. Privacy, intellectual property, and data security require robust governance frameworks to mitigate risks associated with data breaches and unauthorized use. Furthermore, the emerging regulatory environment, characterized by landmark legislation such as the EU AI Act, underscores the importance of compliance and responsible AI development.
The adoption of AI in real estate presents a spectrum of risks, spanning privacy, data security, regulatory compliance, and operational effectiveness. While the technology may still be in its early stages, understanding the challenges and deploying AI in a manner that safeguards against potential pitfalls is crucial. Leading companies are already reaping the benefits of AI by leveraging it to extract insights on property performance and inform strategies for portfolio improvement.
Umar Riaz, from EY, emphasized that there is virtually no function within a real estate company that remains unaffected by generative AI, spanning from marketing to operations and research and development. Companies leverage AI to analyze leases, communicate with tenants through chatbots, and assess asset valuation. Additionally, AI is being used to streamline investor due diligence processes, as exemplified by real estate developer RXR's experimentation with generative AI to automate questionnaire responses.
Despite the inherent risks, the strategic management of AI complexities holds the promise of unlocking unprecedented productivity advancements for the real estate industry. To succeed in leveraging AI effectively, investors and developers must align AI applications with clear business objectives, foster a culture of responsible AI use, and invest in workforce upskilling and training. By adhering to these principles and embracing AI as a tool for innovation, real estate professionals can navigate the risks and reap the rewards of AI-driven transformation.
Source: CoStar
Apartment Deals Are Offering Risk Premiums Again
TruAmerica Multifamily has made a strategic move in the first quarter of 2024, signaling a return to business as usual after a challenging year. The Los Angeles-based multifamily investment firm has closed its first acquisition of the year, acquiring a 252-unit apartment community in Asheville, NC for nearly $50 million from an undisclosed off-market seller.
Named Westmont Commons, the property presents a prime opportunity for TruAmerica to implement its value-added asset improvement campaign. Built-in two phases in 2003 and 2008, the community is ripe for repositioning to enhance its value and appeal to tenants.
Matt Ferrari, co-chief Investment Officer and head of Acquisitions at TruAmerica expressed optimism about the market's trajectory in 2024. He noted that transactions are picking up, and the gap between buyers and sellers is narrowing, indicating a return to normalcy. Despite a quieter year in 2023, TruAmerica used the opportunity to focus on operational efficiency and cost control while navigating market challenges.
TruAmerica is renowned for its focus on acquiring Class B workforce housing, primarily in suburban submarkets. Over the years, the firm has employed a strategic investment approach, targeting 1980s and 1990s properties for their yield premium. However, Ferrari highlighted a shift in the market dynamics, noting that vintage is once again a factor influencing cap rates.
In the current market environment, properties built in the late 1990s to newly constructed developments command tighter cap rates, while older properties from the 1980s or earlier demand higher cap rates. This trend has presented TruAmerica with an opportunity to enhance the quality of its portfolio by focusing on newer acquisitions.
Source: Globalest
Greystar Takes Crown as Top US Apartment Owner
In a significant shift in the landscape of the U.S. multifamily housing market, Greystar has claimed the title of the largest apartment owner, surpassing longtime leader Mid-America Apartments (MAA). The latest rankings from the National Multifamily Housing Council (NMHC) reveal Greystar's dominance across multiple categories, cementing its position as a key player in the industry.
Based in Charleston, SC, Greystar has achieved a trifecta of top positions in NMHC's annual rankings, emerging as the largest owner, manager, and developer in the U.S. The company's strategic expansion efforts, particularly in the Sun Belt region, have bolstered its portfolio, with nearly 10,000 new units added in 2023 alone. Greystar now owns or manages more than one million units nationwide, consolidating its position as a market leader.
Greystar's growth trajectory has been further propelled by strategic partnerships, such as the recent collaboration with Wood Partners, which significantly expanded its property management portfolio. This partnership, along with other growth initiatives, has contributed to Greystar's impressive milestone of managing over 895,000 units and owning or operating more than one million units across the country.
Despite Greystar's success, the multifamily housing market faces formidable challenges in 2024. A surge in new supply, coupled with slowing rent growth and rising operating costs, presents a perfect storm for apartment owners and operators. The multifamily market witnessed a 40-year high in new unit additions in 2023, with another substantial wave of rental apartments expected to enter the market in the coming months.
Sharon Wilson Géno, NMHC's president, acknowledged the challenging conditions faced by rental housing providers, builders, and managers, citing economic uncertainty and escalating operational costs. As market conditions evolve, industry stakeholders must navigate the complexities of supply and demand dynamics while adapting to changing consumer preferences and regulatory landscapes.
Source: Globalest
Q1 2024 Preliminary Trend Announcement
As the first quarter of 2024 draws to a close, the commercial real estate (CRE) market finds itself navigating a landscape defined by familiar challenges and emerging trends. Against the backdrop of a healing macroeconomy, characterized by optimistic Real GDP forecasts and robust job growth, the CRE sector continues to evolve in response to shifting dynamics in the office, retail, multifamily, and industrial segments.
In the multifamily sector, the quarter saw a stabilization of vacancy rates at the national level, accompanied by a slight uptick in the absorption of new constructions. This trend was driven in part by the continued unattainability of homeownership for many due to high mortgage rates and soaring single-family housing prices. However, challenges persist, with delayed projects and economic uncertainties contributing to supply-side constraints.
Meanwhile, the office sector grappled with record-high vacancy rates, underscoring the enduring impact of hybrid work models on traditional office spaces. Despite positive economic indicators, effective rents experienced marginal declines as tenants capitalized on concessions amidst rising vacancies. The future outlook remains uncertain, with companies navigating lease rollovers and shifting interest rate expectations.
In the retail sector, the evolution towards e-commerce and in-person experiences continued to shape the landscape. While vacancy rates remained stable overall, big-box stores like Macy's and Bed Bath and Beyond faced challenges, highlighting the struggle for large-footprint outlets. However, smaller store openings and strategic shifts in retail strategies offer glimmers of hope amidst the financing obstacles posed by high interest rates.
Lastly, the industrial sector witnessed a slowdown in construction activity and a decrease in demand as consumer spending shifted and interest rates rose. Despite this, the sector remains resilient, with positive rent growth and a vacancy rate still below pre-pandemic levels.
Amidst these trends, regional disparities and metro-level nuances abound. While some metros experienced declines in vacancy rates and effective rents, others faced challenges exacerbated by factors such as inventory growth and shifting consumer preferences. Nevertheless, efforts on zoning reforms and local government support offer promising opportunities for adaptive strategies at the neighborhood and community levels.
Source: Moody’s Analytics
Markets Wonder If There Will Be Only Two Rate Cuts This Year
For the last few months, markets have been pricing in three rate cuts for 2024. However, despite the previous positive signaling from the Fed investors are now wondering if and when those cuts will come.
Commercial real estate lenders and investors who have lost significant value in assets like office
space are especially interested in these rate cuts. The term “extend and pretend” has been floating around in reference to lenders extending maturities on CRE loans coming due in hopes that a better interest rate environment is on the horizon. This has been cause for concern as many believe that if lenders don’t bite the bullet and let some distressed real estate hit the market, then all of the maturities that were kicked down the road are bound to build up and explode into a full-blown commercial real estate crisis. Borrowers and lenders have been extending maturities and renegotiating terms with the idea and hope that in a few short months interest rates would begin declining and refinancing would be possible for some borrowers underwater.
If the Fed were to only drop interest rates once or twice at the end of this year or even hold rates steady for the remainder of the year, it would undoubtedly force many of these renegotiated and extended loans into default causing a systematic spiral in commercial real estate. The next FOMC meeting along with inflation and jobs metrics will be telling how this commercial real estate story will play out over the next year.
Source: Globalest
Navigating Losses in Commercial Real Estate: A Multi-Sector Analysis
An analysis by Morningstar suggests that the challenges facing commercial real estate will unfold as a dragged-out, multi-year slump rather than a sudden "real estate apocalypse." The analysis assessed the risks across four main sectors: industrial, retail, multifamily, and office, to gauge the extent of potential losses.
According to the analysis, the industrial sector remains resilient due to high demand and relatively low vacancy rates. Retail, while slightly riskier, has demonstrated stability thanks to a rebound in demand and supply adjustments over the past decade. However, multifamily properties, particularly in the southeast, face challenges due to overbuilding and rising interest rates. Despite this, the impact is expected to be limited as demand shifts have not been significant.
In contrast, the office sector is raising red flags, signaling potential for increased pain in the foreseeable future. Morningstar anticipates a prolonged adjustment period of 6-7 years, with the demand shock from hybrid work arrangements contributing to deteriorating fundamentals such as vacancy rates, net absorption, and rental rates. The report highlights a significant decline in average quarterly office leasing volume, reflecting a shift in companies' long-term space needs.
Amidst the commercial real estate downturn, Don Peebles, chairman and CEO of Peebles Corporation, sees a unique buying opportunity in commercial office space, akin to the market conditions during the early 1990s S&L Crisis. Peebles Corporation capitalized on discounted real estate during that period, enabling expansion into other markets.
While office values have experienced substantial declines, Peebles believes that strategic acquisitions and asset stabilization present lucrative prospects for investors with patience and vision. He anticipates that the market will adapt to the new hybrid work era, with some properties surviving and others requiring redevelopment or conversion. Industry experts like KDM Financial CEO Holly MacDonald-Korth share this optimism, emphasizing that while the sector faces challenges in the short term, offices are unlikely to vanish permanently.
Investors equipped with capital, strategic foresight, and resilience may find substantial opportunities in the office sector if it stabilizes and rebounds in the coming years.
Source: Fortune, MorningStar
U.S. Office Vacancies Reach New All-Time Highs — Why Older Office Buildings Are Being Stranded
Since the onset of the pandemic, the office sector has experienced significant shifts, with older office buildings facing challenges in retaining tenants. According to Lauren Hochfelder, co-chief executive officer of Morgan Stanley Real Estate Investing, these older buildings lack long-term cash flow growth potential and fail to meet modern tenant demands for quality and amenities. In contrast, class-A office spaces with wellness-focused amenities in prime locations are seeing rents rise, indicating a changing preference among tenants.
Meanwhile, U.S. office vacancies have reached record highs, hitting 20% according to data from Moody's. Despite this, a crash in commercial real estate has not materialized. Michael Shvo, Founder and CEO of Shvo real estate, attributes this to the fact that much of the vacancy is driven by obsolete office spaces that may need to be redeveloped. Additionally, banks are hesitant to repossess these properties due to uncertainty about what to do with them, contributing to a delay in market correction.
Michael Shvo, Founder and CEO of Shvo real estate, highlights the importance of lowering interest rates to stimulate the real estate market, as high rates have slowed lending and refinancing activity. Many companies are unable to refinance their properties due to the substantial increase in rates, which requires significant capital investment. Lowering interest rates would provide a boost to the real estate market, facilitating lending and refinancing activities necessary for recovery.
Essentially, the office sector is undergoing significant transformation, with a growing divide between modern, amenity-rich office spaces and outdated buildings struggling to attract tenants. While challenges remain, addressing issues such as interest rates and property redevelopment could pave the way for the industry's recovery and future growth.
Source: Moody, Fortune
Made in the Midwest
The global manufacturing landscape is undergoing a profound transformation, spurred by the disruptions wrought by the COVID-19 pandemic. Traditionally, cost reduction through offshoring has been the primary driver for businesses seeking to maximize profits. However, the pandemic exposed the vulnerabilities inherent in this model, leading to a paradigm shift in priorities. In this new era, supply chain resilience and proximity to consumer markets have taken precedence over mere cost considerations. As a result, the United States is witnessing a resurgence in manufacturing activity, driven by a desire for a supply chain focus on domestic production.
Historically, offshoring to countries with lower labor costs, notably China, was the prevailing strategy for cost-conscious businesses. Yet, the pandemic laid bare the risks associated with such a reliance on distant suppliers, prompting a reassessment of traditional manufacturing practices. The narrative of cost efficiency has given way to one emphasizing supply chain resilience and adaptability. Consequently, businesses are increasingly favoring localized production to mitigate risks and ensure the uninterrupted flow of goods to consumers.
Amidst this shifting landscape, the United States has emerged as a key destination for restoring initiatives. Particularly noteworthy is the resurgence of manufacturing activity in the Midwest region. With 11 out of 12 states in the Midwest experiencing rising manufacturing GDP, the region is proving to be an attractive option for businesses looking to bring production back home. Factors such as ample land resources for development and a skilled workforce further bolster the region's appeal.
The resurgence of manufacturing in the United States presents compelling investment opportunities across various sectors. Firstly, there is a growing demand for industrial real estate in regions experiencing a manufacturing revival, such as the Midwest. Investors can capitalize on this trend by investing in land development projects and industrial facilities. Secondly, investments in technologies that enhance manufacturing efficiency, such as robotics and automation solutions, are poised for growth. Companies offering innovative solutions to streamline production processes stand to benefit from increased demand.
Source: CBRE
Movie Theaters Have Weird Real Estate. It’s Saving Them.
In the not-so-distant past, the fate of movie theaters seemed uncertain, with many hurtling towards obsolescence. However, an unexpected savior might be emerging from their unorthodox real estate characteristics.
Cinemas, characterized by their large, windowless rooms and sloped concrete floors for stadium seating, present unique challenges for landlords seeking to repurpose these spaces. The skyrocketing construction costs coupled with these oddball building features have led property owners to struggle to find viable alternatives, often resorting to cutting theater rents just to keep the spaces occupied.
Andy Graiser, co-president at A&G Real Estate Partners, emphasizes the difficulty and expense associated with repurposing theaters, indicating that demolishing them might be the only viable option. Despite these challenges, theater owners are not giving up without a fight.
Enterprising theater operators are investing in innovative strategies to revitalize their spaces and attract customers. From giant screens to adult cocktail lounges and children's playgrounds, cinemas are transforming to offer a more enticing alternative to the living room couch.
Interestingly, theaters find themselves in a unique position compared to other retail real estate sectors. While the retail sector has experienced a strong recovery post-pandemic, with rising rents and a resurgence in in-person shopping, movie theaters have seen rents decline overall. Chris Johnson, owner of Classic Cinemas, notes that rents have come down, providing some relief for theater operators.
However, the road to recovery is not without obstacles. Even with blockbuster releases and innovative experiences, total ticket sales remain significantly lower than pre-pandemic levels. Theater operators must continue to adapt and enhance the customer experience to remain competitive.
In this landscape of uncertainty, retail building owners need to consider the risks that come with implementing movie theaters into their shopping centers. In this space building owners succeed when their tenants succeed. Staying on top of market and business trends is important to develop a winning strategy in this sector of commercial real estate.
Source: Wall Street Journal
Challenges in Multifamily Housing
Fraud remains a persistent challenge in the multifamily housing sector, impacting companies' financial health and eroding trust among stakeholders. A recent study by RealPage highlights the prevalence of fraud in rental housing, with fake or manipulated identities and income misrepresentation being the most common forms. Despite the recognition of fraud as a top priority, many companies lack comprehensive fraud prevention measures, hindering their ability to combat this pervasive issue effectively. To address this, multifamily housing companies must adopt multifaceted verification methods leveraging advanced technologies such as AI and machine learning to mitigate fraud from multiple directions.
Meanwhile, the multifamily real estate sector is facing headwinds amidst declining prices and transaction volumes. Traditional lenders, including banks, have scaled back on CRE loans, leaving a financing gap for developers and investors. Private equity, insurance companies, and CMBS providers have stepped in, but their financing options often come with steep rates. Government-related financing options like FHA loans offer favorable terms, providing crucial support for multifamily construction projects. However, FHA loans come with challenges such as longer processing times and finding willing lenders. Despite these hurdles, navigating alternative financing options is essential for developers to meet their capital needs amidst the evolving market landscape.
Source: Globalist, National Apartment Association
BlackRock CEO Sees Private Sector Funding More Energy Infrastructure
Energy infrastructure investment is undergoing a significant shift, with private capital increasingly vital in funding major projects. Larry Fink of BlackRock highlights the urgent need for investment due to carbon emission reduction efforts and infrastructure maintenance backlogs.
Governments face fiscal constraints and mounting debt, necessitating private sector involvement in energy infrastructure funding. Public-private partnerships are emerging as the primary financing model to address the funding gap.
Investors can capitalize on the growing demand for energy infrastructure investment. With governments partnering with the private sector, opportunities abound in renewable energy, carbon capture, and grid upgrades.
BlackRock's $550 million investment in Occidental Petroleum's Stratos carbon-capture facility exemplifies private sector involvement in sustainable energy solutions, highlighting the transformative potential of private capital.
Source: CoStar
The Unraveling American Dream: Housing Costs Outpace Incomes, Affordability Plummets
The landscape of homeownership in the United States is undergoing significant changes, marked by a notable surge in housing costs that far outpaces the growth of median household incomes. Recent insights from Redfin reveal a concerning trend: the typical American household, with a median income of $84,072 per year, now faces considerable challenges in affording the average home, requiring an annual income of $113,520—a striking 35% disparity.
In the CNBC article “Housing affordability has just totally collapsed, economist says,” Ana Teresa Solá cites senior economist Chen Zhao at Redfin, who notes, “February 2021 was the last month when the typical household earned more money than it needed to afford the median home. There’s been a deficit ever since.” Zhao attributes this phenomenon in part to the enduring effects of the pandemic, exacerbating existing economic disparities. Since February 2021, households nationwide have struggled to match the rising costs of housing, facing a persistent deficit in affordability. This struggle intensified by October 2023, coinciding with a significant increase in mortgage rates, placing additional strain on prospective homebuyers' financial capacity. This escalation marked a critical point in the ongoing affordability crisis, underscoring the challenges faced by individuals seeking homeownership.
Compounding these challenges are the persistently high prices of homes, fueled by a shortage in available inventory. Redfin's data underscores this reality, with the median sale price reaching $412,778 in February 2024. Consequently, the concept of affordability, as defined by the U.S. Department of Housing and Urban Development—a standard of housing costs not exceeding 30% of household income—has become increasingly elusive for many American families.
Source: CNBC
Malls were a dirty word in commercial real estate. Now retail is a bright spot.
In the thick of the pandemic, malls and other physical retail centers were declared all but dead by most. When the world was shut down, consumers had no choice but to do all their shopping online, and many analysts thought that when the world opened again consumers would stick to that habit. They were wrong.
Foot traffic at U.S. shopping centers last year was just 2.3% below 2019 levels, according to Placer.ai. Open-air shopping centers have seen the most dramatic rebound, followed by the broader shopping center industry.
In a study by Placer.ai of over 3,000 shopping centers across America, they tried to find which amenities were bringing consumers to the more popular malls. The report found that things like gyms, pop-ups, new restaurants, and exciting entertainment offerings like Ferris wheels and aquariums all helped to draw in the crowds. This new emphasis on amenities has left some malls behind, however. “The high-quality and market-dominant malls are in good shape, but the rest is still working its way through the rationalization process,” commented Rich Hill, head of real-estate strategy and research at Cohen & Steers.
Data from CoStar suggests that delinquency rates in retail are down to near historic lows while the rate of past-due mall loans remains stuck at around 9% - a nearly 15-year high. This is most likely because, in the words of Rich Hill, “It takes a long time for malls to ‘die.’” Newer, high-quality malls with relevant tenants and attractive amenities will surely see foot traffic continue to increase. It may not be the same story for their older, worn-down counterparts though.
Source: Placer.AI, CoStar
Senior Housing Rebounds as Boomers Move In
Investors eyeing the senior housing market are witnessing a promising trend shift after a tumultuous period induced by the pandemic. Despite initial setbacks, the sector is recovering because of pent-up demand and demographic shifts. While challenges persist, such as staffing shortages and high-interest rates, the overarching demographic wave of aging baby boomers presents a compelling investment landscape.
Once overshadowed by the challenges posed by the pandemic, the senior housing market is experiencing a resurgence, signaling a favorable environment for investors. After elevated vacancies and subdued demand, occupancy rates are steadily rebounding, nearing pre-pandemic levels. Furthermore, rent increases have outpaced inflation, reflecting growing demand for senior housing options.
According to the National Investment Center for Seniors Housing & Care (NIC), occupancy rates in private-pay senior housing communities have risen to 85.1% in the fourth quarter of 2023, a significant improvement from the pandemic low of 77.8% in the first half of 2021. Rent hikes, particularly in independent and assisted living units, underscore the strengthening market dynamics. Higher interest rates are also creating opportunities for cheaper acquisitions due to certain investments choosing to sell instead of refinance.
During the pandemic, higher death rates due to the virus combined with families having the time and capacity to take care of older loved ones sent vacancy rates at senior housing communities soaring. Now, a couple of years removed from the lockdowns and virus, occupancy rates are back on the rise, and investors that banked on the baby boomer generation are seeing the returns. In Q4 of 2023, occupancy rates stood at 85.1% in 31 of the largest markets, according to the National Investment Center for Seniors Housing & Care (NIC). That’s 2% below highs in Q1 of 2020 and up significantly from the 77.8% low in H1 of 2021.
Rent increases, meanwhile, have been outpacing inflation, with independent living costing an average initial rate of $4,126 a month in December and the more intensive assisted-living units costing $6,422. However, the sector is not immune to challenges. Senior housing, like many sectors, is being affected by higher interest rates and declining property values. Labor constraints due to the tight labor market have also posed challenges for investors.
Despite senior housing’s volatile ride, the sector is poised to see massive demand in the coming years. According to the U.S. Census Bureau, by 2030 around 21% of the U.S. population will be Americans 65 and older. That’s an increase from about 15% of the population in 2016. With only 10,000 new units being delivered last year, the lowest level since 2014 according to NIC, we could see a huge imbalance in supply and demand. This would create huge potential for higher rents and outsized returns which has recently attracted more investors to the sector, especially amidst the drag in office.
Source: Wall Street Journal