Commercial Property’s Great Reset

Real estate markets are grappling with multiple challenges, leading to a major reset across all property sectors. What sets this time apart from previous cycles? Meanwhile, Greystar has introduced a fresh workforce housing brand, and the build-to-rent (BTR) sector is witnessing remarkable growth, poised to break records this year.

Commercial Property's Great Reset

Real estate markets are grappling with multiple challenges, leading to a major reset across all property sectors. What sets this time apart from previous cycles? Meanwhile, Greystar has introduced a fresh workforce housing brand, and the build-to-rent (BTR) sector is witnessing remarkable growth, poised to break records this year.

Good morning. Real estate markets are currently facing several adverse factors that are causing a significant reset across all property sectors. But what makes this time different from previous cycles?

In other news, Greystar has recently launched a new workforce housing brand, while the build-to-rent (BTR) sector is experiencing unprecedented growth and is expected to set new records this year.

Market Snapshot

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*Data as of 5/310/2023 market close.

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The Great CRE Property Value Reset is Coming

It's typical for property values to experience a cyclical reset, typically from overbuilding, interest rate movement, market dislocation, and/or economic shifts. But is this time really any different?

Setting the scene: At the onset of the pandemic in 2020, many industry observers anticipated that a cyclical reset was coming. But instead of a downturn, the market experienced record-low inflation and a white-hot property market in 2021. With central banks slow to react to rising inflation, aggressive tightening began, leading to a quick decline in public REIT values in 2022. Private owners were slower to recognize the drop in values, hoping housing, logistics, and life sciences rent increases would offset rising cap rates.

The perfect storm: Now CRE owners face too many headwinds to count, with higher interest rates putting downward pressure on values. Financing is also hard to come by due to the regional banking crisis and dislocation in the debt markets. Office has been the worst-performing CRE sector post-pandemic, with rental growth in housing, logistics, and life sciences also slowing down. Finally, $1T in loans are coming due over the next 18 months. Prices are expected to reset as loans mature, with lenders reluctant to refinance.

Deja vu: Seasoned property investors have encountered this scenario in the past. After a substantial surge in property values, prices inevitably readjust, erasing years of profits and transforming the credit markets into a battleground for ownership shifts. But this time around, the recovery may look different.


Experience matters: The current property market is undergoing significant changes in tenant behavior, surpassing the influence of capital markets. This suggests that the expected cyclical recovery may unfold differently. Lenders will face challenges extending bad loans due to higher carrying costs and capital requirements. Eventually, prices will readjust across sectors, creating new entry points with adjusted risk premiums. Slower new property deliveries, influenced by inflationary pressures, will give landlords pricing leverage.

Opportunity knocks: Private market lenders will benefit in the near term by delivering capital when the industry needs it the most. Following that, opportunistic investors will seek favorable deals on viable assets. Momentum investors will have their war chests ready to join in and capitalize on the waves of recovery and expansion — until the tide inevitably turns once again.

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🌐 Around the Web

📖 Read about how Blackstone (BX) made strategic decisions to reduce its exposure to office, now only 2% of its portfolio, while shifting focus to other asset classes, such as logistics and residential.

🖥️ Watch HqO CEO and co-founder Chase Garbarino talks about his concerns with U.S. CRE posing a risk to banks and problematically high rent prices.

🎧 Listen to this episode of The Real Deal’s Deconstruct, where they highlight the challenges Texas property owners and homebuilders are facing as rising interest rates start to cause distress in the Lonestar State.

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Greystar Rolls Out Workforce Housing Brand With Capped Rent Growth Model

Rendering of Ltd. Med Center, the first apartment project under Greystar's new brand aimed at addressing a shortage of workforce housing. (CoStar)

Greystar looks to solve the nationwide workforce housing shortage— estimated to be 4.4 million units across 75 U.S. metros—with modular constructions via their newly unveiled brand, Ltd.

Limited edition: Ltd. by Greystar aims to provide newly built housing for workers like teachers, first responders, and nurses. The brand will incorporate the latest technology to reduce operating costs with self-guided tours and fewer staff to keep rents low. Rents will be set at an attainable level and guaranteed not to rise above the higher of CPI (4.9% in April) or 3%.

Solving the shortage: The company's first development, Ltd. Med Center, is leasing near Houston's Texas Medical Center, with rents of $1,043 a month, or about $800 below the average for new apartments, according to CoStar. Greystar joins other big-name developers addressing the workforce housing shortage after rent growth soared during the pandemic. Workforce housing is defined as housing tenants with earnings between 80–120% of an area's median income.

Going modular: Greystar has four other Ltd. developments planned over the next 18 months, including one in Knox, PA, built solely of modular components. Modular construction offers cost savings due to the speed at which the modules can be built, delivered, and installed. Modular apartment construction has increased in popularity over the past several years, with residential disruptors like Boxabl making headlines.


Brighter future: Multifamily construction has been the largest user of modular components, representing about one-third of all output. The industry has tripled since 2015, hitting $12B last year. Many developers have used modular constructions in growing markets like Texas, Atlanta, and South Florida. Hopefully, if modular properties continue to grow in popularity and companies like Greystar continue to innovate, the workforce housing shortage may eventually be a thing of the past.

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Build-to-Rent Construction Tripled in 2022 and Hit Record Completions

From 9,928 units in 2021 to 14,541 by 2022, construction volume for the new-build-to-rent sector tripled in one year, according to RentCafe. While the pandemic's long-term effects were seen as the "wind in the sails" of this trend, other key factors also played a role.

The hard-pressed American Dream: Historically high home prices across the country, coupled with a 7.12% mortgage rate, are causing most aspiring homeowners to seek rental options rather than purchase homes. Naturally, institutional investors are filling the gap, swooping in to buy single-family homes as rentals.

If you build it, we will rent it: BTR homes are the cream of the multifamily crop right now. Construction volumes were up 47% last year from 2021. The average occupancy rate across BTR homes is 97%, higher even than the sterling 95% occupancy of standard apartment units. And with 44,700 units under construction, 2023 could be BTR’s biggest year yet.

The BTR top 10 list: Surprisingly, three of the top 10 U.S. metros with the most SFRs completed in 2022 came from South Carolina. Dallas took the top spot (2,773 units completed), followed by Phoenix (1,527), Atlanta (808), Greenville (584), Charlotte (475), Detroit (458), Myrtle Beach (383), Panama City (357), Charleston (354), and Austin (324). Notably, Detroit is the only one metro in the top 10 not in the South.

Metros with most units under construction: Zooming out to see the bigger picture, the top 20 U.S. metros with the most SFR units under construction isn’t too dissimilar, but a few of the top spots are switched around and a few other metros enter the picture. Phoenix has 5,473 units under construction, followed by Dallas with 4,350, Houston with 2,553, Atlanta with 2,182, and Charlotte with 1,714.


Lifting all boats: The rising affordability of the new build-to-rent industry will present many new investment opportunities for institutional investors. The build-to-rent trend is growing rapidly due to numerous overarching, generational factors that will persist long after current economic headwinds die down. And as more Millennials and Zoomers age into renters rather than homeowners, the rising tide could become a great wave.


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📰 Daily Picks
  • Credit downgrades: Moody’s placed SL Green Realty’s rating on watch for a downgrade, with more credit downgrades for office REITs expected.

  • To the rescue: As banks pull back from CRE lending, RREAF Holdings looks to fill the gap.

  • Housing relief: The S&P CoreLogic Case-Shiller Index went up 0.7% from March ‘22 to ‘23, signaling a possible end to the downward trend in home prices.

  • City revival: While downtown office districts are still hurting, big cities are seeing a resurgence in neighborhoods with apartments, bars, and restaurants.

  • Office-to-resi: LA is proposing an initiative to encourage more office-to-resi conversions to help combat the growing housing shortage.

  • Word of warning: The ECB warned that the fight against inflation is causing vulnerability in the financial markets, with real estate among the many sectors at risk.

  • Wholesale wars: Costco (COST) has decided not to raise membership prices due to rising inflation. The $1.50 hot dog is here to stay, too.

  • Fast PACEd: A JV between D.A. Davidson and Petros PACE Finance received a record-breaking $160M in C-PACE financing for Summit Vista, Utah’s first life plan retirement community.

  • Champion status: Miami currently ranks #1 for Airbnb (ABNB) rental listings in the nation, with the 10th most expensive daily rates.

  • Voted down: LVMH’s proposed luxury hotel in Beverly Hills, Cheval Blanc, was shot down by voters concerned about developments and unions.

  • Another one bites the dust: Yet another retailer flees downtown San Francisco as Old Navy’s (GPS) flagship store will close on July 1st.

  • More layoffs: After reporting a $3B net loss, Walgreens (WBA) plans to lay off 10% of its workforce, or around 504 workers.

  • JV of the day: Deutsche Bank (DB) is partnering with L+M Development Partners to finance a $120M affordable housing project in Coney Island.

  • Flatiron fantasies: What would it be like to live in one of NYC’s most iconic buildings? The charm and allure of the historic building is every NYC renter’s dream.

📈 Charts of the Day

Private equity transactions fell drastically in Q123, with purchases dropping even below pandemic lows.

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