📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

Cash Crunch Threatens Apartment Landlords’ $47B Loans

Multifamily landlords, once benefiting from pandemic rent growth, now face soaring costs and profit challenges. Texas, known for affordability, grapples with a housing crisis, attracting attention from neighboring states. Amid economic uncertainty, real estate investment firms proceed cautiously.

Cash Crunch Threatens Apartment Landlords' $47B Loans

Multifamily landlords, once benefiting from pandemic rent growth, now face soaring costs and profit challenges. Texas, known for affordability, grapples with a housing crisis, attracting attention from neighboring states. Amid economic uncertainty, real estate investment firms proceed cautiously.

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Good morning, happy Friday. Multifamily landlords who enjoyed high pandemic rent growth are getting hit hard by rising costs and struggling to earn profits. Texas, long admired for its affordability, is now wrestling with its own housing crisis. Meanwhile, more real estate investment firms than ever are proceeding cautiously in this shaky economy.

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Market Snapshot

S&P 500
GSPC
4,151.33
Pct Chg:
0.9%
FTSE NAREIT
FNER
671.74
Pct Chg:
-2.1%
10Y Treasury
TNX
3.821%
Pct Chg:
2.7%
SOFR
1-month
5.05%
Pct Chg:
0.0%

*Data as of 5/25/2023 market close.

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BUMPY RIDE

High Interest, Insurance, and Taxes Put $47B of Multifamily Loans at Risk

According to Trepp data, multifamily landlords are struggling as rising costs outpace the income from properties financed with over $47 billion in securitized loans.

Vertigo-inducing heights: Property taxes have surged rapidly in recent months, weighing down profitability for multifamily property owners. And insurance rates are no better. Lockton Companies, a large insurance broker, notes that owners who renewed their policies this year saw costs spike by at least 30%, with amounts in coastal parts of Florida and Texas doubling or tripling. For example, at a building with over 700 units in Corpus Christie, TX, the yearly premium went up to $3.7M from $1M. Oof.

Too close to the sun: The golden child of CRE until the end of 2022, multifamily has finally fallen a little from its pedestal. Prices are down all around, and expiring rate caps will soon be panic-inducing. Take A&E Real Estate, a major NY landlord, which refinanced a portfolio of 3,500 mostly rent-stabilized apartments in June 2021 when pandemic policies pushed borrowing costs to historical lows. Their current rate cap policy, limiting interest on their $506M loan to 3.66% (roughly half the cost without the policy), expires in June 2024…

Looming on the horizon: Multifamily asset values are still above pre-pandemic levels, but some owners who opted for riskier loans and are looking to sell quickly are finding a desert where they expected at least a trickle of buyers. The multifamily market saw lenders eagerly issue highly leveraged bridge loans to meet demand in years past, but many investors are now struggling to cover these debts, and headline-making defaults may fall like dominoes in short order.

➥ THE TAKEAWAY

What doesn’t kill you…Multifamily investors are facing a very challenging multifamily market, with prices on their way down as risk factors keep growing. “We’re in the worst insurance market in history,” said Danielle Lombardo, chair of the global real estate practice for Lockton. “It’s the constant conversation: ‘If I have to buy the full limits, I can’t pay the debt service.’ It’s a wildly difficult time in multifamily unless you’re cash rich, which many of these guys are not.”

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HOUSING CRISIS

Skyrocketing Housing Costs Threaten Growing Texas Economy

Photographer: Ameer Basheer/Unsplash

Long admired for its affordability, Texas is now wrestling with its own housing crisis. With soaring property prices and dwindling supply, the state's economic charm is at risk. This alarming shift is stoking concern among developers, urban planners, politicians, and residents alike.

Rapidly rising costs: Texas has seen a swift surge in housing values and costs, and sky-high prices have begun to tarnish the Lone Star State’s long-held reputation for affordability, leading to growing discontent among native Texans. Housing costs have doubled in just five years, causing potential migrants to reconsider their plans.

Businesses rethink relocation: The escalating cost of living is beginning to discourage smaller businesses from moving to Texas. Thousands of companies, lured by the state's recent affordability and thriving tech talent pool, are now pausing expansion plans after coming face-to-face with rising cost implications. This trend threatens Texas' status as a business-friendly state.

More neighborly competition: As Texas grapples with its very own housing crisis, neighbors like Oklahoma are pitching themselves as more affordable alternatives. Adjacent states are leveraging the housing affordability issues in Texas to promote themselves as equally business-friendly but more cost-effective options.

➥ THE TAKEAWAY

A turning point for Texas? The housing crisis presents a significant challenge to Texas, once a beacon of affordability and economic opportunity. As costs continue to rise, businesses and residents alike may look to other states offering similar economic opportunities but at a lower cost. Texas must address its escalating housing costs to maintain its economic allure and sustain its growth trajectory.

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📰 Around the Web

📖 Read Greysteel’s analysis on how recent rent proposals may impact Montgomery County, MD, right outside D.C.’s city limits. What happens in Maryland’s most populous county could impact the entire state.

🖥️ Watch David O’Reilly, CEO of Howard Hughes Corp. (HHC), discuss the booming real estate market in the Las Vegas Valley on CNBC's Last Call.

🎧 Listen to Donohoe Hospitality President Thomas Penny discuss recruitment strategies, debt ceiling concerns, and "bleisure travel" while Tiffany Townsend speaks on NYCs travel recovery on Bisnow Reports.

HERE THERE BE DRAGONS

Private Real Estate Firms Cautiously Slow Their Roll, Uncertainty Ahead

songqiuju/iStock/Getty Images

The private real estate investment market is being very cautious in the face of higher interest rates, economic uncertainty, and concerns about property values holding up. That’s why they’re looking for new ways to raise and deploy capital.

Easy, Cowboy: Private firms are "navigating with lots of precision and trying to slow down the pace," says Jonathan Bennett, President of AmTrust RE. The pause in the market has given investors more time than usual to evaluate deals and scrutinize opportunities to ensure they're a good fit. In other words, this isn’t the Wild West market we saw from 2020—2022 anymore. Firms are far more meticulous during the investing process now, with extra layers of due diligence.

Your request has been denied: CRE borrowers are also concerned about redemption requests hitting investment firms. So far, notable firms like Blackstone (BX), Starwood Capital (STWD), and KKR & Co. (KKR) have limited investor withdrawals that exceed 15% of their value. And redeemers aren’t too happy about it. However, it’s worth pointing out that the net worth of investors who invest in big funds is very different from those who invest in smaller funds—they’re getting really anxious.

New investment strategies: Private real estate firms are tweaking their investment strategies and moving forward despite the cautious market environment. For example, Palladius Capital Management launched a debt fund in September 2022 to accommodate the growing demand for debt, while others have embraced online investing platforms to raise more equity for their funds. And Glenstar Properties is focusing more on private partnerships than institutional capital.

➥ THE TAKEAWAY

Finding new ways to save money: Most real estate investment firms are dealing with market uncertainty the old-fashioned way: cutting costs. Jeffrey Grant, senior managing director at Roers Companies, notes that firms must capture savings wherever possible, whether via vendor changes or by integrating new technology. By doing so, they can at least ensure higher returns for their investors, no matter what the future holds.

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📰 Daily Picks
  • Cooling Hamptons: Average nightly rates in the Hamptons dropped down to $970 from $1,080 in 2022, offering summer vacation savings as the post-pandemic real estate frenzy eases.

  • Blackstone fills gaps: Blackstone seeks to buy assets and loans from regional banks retreating from certain economic activities as banks reassess their priorities and struggle with bad loans.

  • How the mighty have fallen: Athens-based real estate investor Bluehouse is facing a crisis due to unmet promises and leaked internal documents, shaking investor confidence.

  • Tough week: Pacific Western Bank sold its residential business-purpose lending arm, Civic Financial Services (CIVIC), to Roc Capital Holdings (Roc360) for an undisclosed amount.

  • The Fitch is on the prowl: CRE loans at banks have grown slightly over 100% in a decade and are now a bigger part of total loans, increasing risk for smaller regional banks.

  • Who said it’s a hard career? Architecture firms experienced a modest decrease in billings from March to April, but inquiries into future projects increased slightly.

  • Building a neighborly feud: Federico Pignatelli has filed a lawsuit against billionaire Ray Dalio, alleging his penthouse construction above Pignatelli’s SoHo apartment caused structural damage.

  • NIMBYs vs. data centers: NIMBY activists in Northern Virginia lost a battle against data center expansion, resulting in several new ‘hyperscale’ projects in Prince William County.

  • M&A of the day? Choice Hotels International (CHH) reportedly seeks to acquire Wyndham Hotels & Resorts (WH), but there are doubts about the viability of the merger.

  • Hitting pause: Mortgage applications fell 4.6% from the previous week, with refinancing activity at its lowest level in two months and purchase application volumes limited.

  • Navigating the new office normal: Most US companies prioritize easy commutes and parking, with 65% requiring some in-office work, according to CBRE.

  • Loan of the day: Sterling Bay and Harrison Street secured a $265M loan from Bank OZK (OZK) to build the first phase of a 500 KSF life sciences campus in San Diego.

  • Where's the inventory? Pending home sales saw no change in April, but the Northeast saw a decrease as three other regions gained, but all regions saw YoY declines.

📈 Chart of the Day

The U.S. metros expected to see the most new apartment supply in their submarkets from 2023–2024 include Nashville (#1), Salt Lack City (#2), and Phoenix (#3). Charlotte and Philly round out the top 5.

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