🏗️ Apartment Supply Surge Leads to Rent Relief in Major U.S. Cities

Plus: Logistics space won’t stay affordable for long—experts expect new construction will stop, increasing rental rates.

🏗️ Apartment Supply Surge Leads to Rent Relief in Major U.S. Cities

Plus: Logistics space won’t stay affordable for long—experts expect new construction will stop, increasing rental rates.

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Good morning. Renters in certain US cities are experiencing rent relief due to increased apartment construction. Converting office buildings into apartments is becoming increasingly challenging due to financing and stagnant rental markets. Meanwhile, companies should secure logistics space quickly before rents rise due to construction decline.

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Apartment Surge Cools Rents in Major Cities, Yet Outside the Sun Belt Supply Remains Muted

Rents Are Falling in Some US Cities, Thanks to New Apartment Construction

Photographer: Bing Guan/Bloomberg

Renters in some of the fast-growing US cities are enjoying some relief as the supply of new apartments increases, leading to a decline in rental prices.

It’s all about supply: The apartment narrative in 2023 is really about supply. Despite high demand for apartments, it has not been sufficient to match the rapid pace of construction, which is at its highest level in over 50+ years. This increase in supply, initially triggered by the steep rental growth and minimal vacancies of the previous two years, has led to a tale of two markets. More specifically, those saturated and those scarce. Rental rates are moderating quickest in areas where apartment construction is expanding rapidly.

Where supply is going: Of 21 markets with rent growth over 4%, nearly all had construction rates below the U.S. average, while the 10 markets with declining rents had high construction activity. For instance, Boise City experienced a 6.2% rent reduction alongside a 5.3% rise in apartment supply, with approximately 1,600 new units. Major cities such as Austin, Phoenix, and Atlanta each added over 16,000 units, leading to rent reductions in those areas.

Where supply isn’t going: In regions outside the Sun Belt, the apartment market is quite different due to restricted growth in new apartments, pushing rents upward. For example, Rochester, NY, with just 233 new units, saw a rent surge of 5%. Springfield, MA's rents increased by 9% amid no increase in housing supply. Contrastingly, Midland-Odessa, TX, tied to the fluctuating energy sector, faced a substantial 14% hike in rent prices.

On the plus side: Wages are rising faster than rents, a positive trend continuing for 11 months straight and expected to extend into the next year. This reversal of the previous trend, where rent increases outstripped wage growth, could expand rental affordability and demand. It may also enable renters with middle to higher incomes to upgrade to newer, more expensive apartments, which in turn frees up older, more affordable units for others.


Big picture: Apartment rent growth is at a standstill, with only a slight 0.1% uptick and a notable 0.56% month-to-month drop as of October 2023, the most since the financial crisis. This trend is set to continue with a steady supply of apartments until early 2025. However, a predicted construction slowdown could tighten supply, potentially nudging up occupancy and rent growth, albeit not to the extremes of the recent inflationary spike of 2021 and early 2022. All eyes are on the first half of 2024, which will be pivotal for the rental market.


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  • Cut in half: Commercial and multifamily mortgage loan originations in the US fell by 49% in 3Q23 compared to the previous year.

  • The Art of Growing Wealth: Former President Donald Trump's wealth rose $500M to $3.1B  after his presidency ended, per the latest Bloomberg Billionaires Index rankings.

  • Discount deluge: Assets from Signature Bank’s loan sale could sell at 15–40% below their original face value, potentially lowering CRE values.

  • High-stakes plunge: Austrian entrepreneur Rene Benko is losing control of Signa Holding, owner of the Chrysler Building, amidst the current real estate crisis.

  • Freddie Mac probe: Meridian Capital Group is suspended from working on Freddie Mac (FMCC) deals, impacting their large CRE mortgage brokerage business.

  • Pickleball paradise: PURE Pickleball plans to co-develop a world-class facility in Scottsdale, AZ, creating the largest pickleball facility in the state and one of the largest in the world.

  • Pointing north: Compass (COMP) is well-positioned with a luxury focus, cutting-edge technology, and modern agent training, but faces legal actions challenging broker commissions.

  • Teaming up: A Related Group JV will acquire a waterfront co-op in North Bay Village, with plans to build luxury units on the 3-acre site. The purchase price is $47.7M.

  • On the bright side: Hudson Pacific Properties (HPP) expects to lose $100M this year due to entertainment labor strikes, but predicts a significant upswing in activity when the strikes end.

  • Moving the needle: The highest-priced apartment property in LA County, Chatsworth, just sold during a slow period for CRE deals to IMT Residential.

  • Ransomware rampage: Major US mortgage lender Mr. Cooper suffered a cyberattack on Oct. 31, leading to the temporary shutdown of key systems, including mortgage payments.


Turning Empty Offices Into Apartments Is Getting Even Harder

Turning Empty Offices Into Apartments Is Getting Even Harder

‘It’s like building a ship inside of a bottle,’ says a developer whose company is converting Minnesota office buildings into apartments. (WSJ)

Cities aiming to transform vacant office spaces into apartments face tough financial headwinds, stagnant rental demand, and other conversion challenges.

Easier said than done: Last year, only 3,575 apartment units were created through office conversions, less than 1% of all new apartments built. However, there’s hope for increased conversions this year as office vacancies continue to rise and government support is provided. The process is difficult, with slowing rent growth making conversions less attractive to investors even as construction loans get pricier.

Apartment conversions from offices

Costly conversions: The financial landscape for developers looking to convert office spaces to residential apartments has become increasingly hostile. Rising construction loan costs and high-interest rates make funding harder to secure and more expensive to repay. Even with approved plans, the prolonged permitting process and hefty renovation demands, including demolition and environmental compliance, add to the cost and risk, leading to project delays.

Case in point: Examples like One Camelback in Phoenix and a Dallas office tower conversion attempt illustrate the precarious nature of these endeavors, with some facing the threat of foreclosure due to financial difficulties. These cases highlight that, while potentially profitable under certain conditions, office-to-apartment conversions are not a guaranteed solution to housing shortages.


Zoom out: Converting offices to apartments reveals a nuanced challenge in urban redevelopment: not all space is equally adaptable. Experts suggest repurposing other types of real estate, like strip retail spaces, may offer more practical and impactful results in addressing housing needs. Converting 10% of existing strip retail in the US would yield over 700K housing units, reports Enterprise Community Partners.


📖 READ: Prospective residents of multifamily evaluate properties before even seeing their units and expect expert management, innovative spaces and services, and a strong sense of community.

🎧 LISTEN: CRE investors expose how they're creatively financing and stress-testing deals to profit in today's market in this Best Ever CRE Roundtable session.

💼 TALENT: We are sourcing candidates for an Apartment Manager position based in the Wilmington, Delaware metro area (in-person). Early career is fine, but some multifamily property management experience is preferred.


Prologis Forecasts Shrinking Industrial Spaces and Rising Rents in Upcoming Year

Prologis reports that most U.S. markets are experiencing a squeeze in logistics real estate, forecasting substantial hikes in lease renewals in the near term.

Demand dynamics: Despite a rise in the national vacancy rate to 4.8% in Q3 2023 due to new spaces entering the market, this figure remains lower than the historical average of 6.1%. Prologis attributes this tight market to consistent consumer demand and the steady flow of goods, which keeps the need for warehouse space robust. The situation is set to tighten further, signaling tough times ahead for tenants facing lease renewals amid climbing rents.

Rental rate trends: The past four years have seen a dramatic 85% increase in rental rates, and while the growth rate is stabilizing, it's still substantial. Prologis anticipates around 7% growth in rent for 2023, with certain markets potentially seeing increases of 10% or more. Yet, some areas, like Southern California and Houston, have seen stabilization or even a decrease in rental rates.

Leasing slowdown: The leasing landscape has become cautious due to higher interest rates affecting customers' capital expenditure and inventory decisions, leading to slower leasing activities. This cautious approach resulted in a decrease in net absorption of logistics space, even though the market's demand remains historically high. Prologis' Industrial Business Indicator points to a significant annual demand for logistics space, despite the slowdown.


Act now: Prologis cautions that the current bump in logistics space availability is temporary and urges clients to secure spaces quickly. With speculative construction slowing down, an upcoming shortage and rental rate spikes are anticipated. Despite the addition of new space in Q3 2023, tighter conditions are expected by the end of the year, with a slight uptick in vacancies providing only brief relief before the market contracts again in 2024.


The DC area has seen a sharp drop in new apartment construction. Construction starts in Q3 were at their slowest since 2010, with only 891 units starting compared to 2,712 units last year. Only one project totaling 112 units began construction.

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