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New Legislation Proposes to Take Wall Street Out of the Housing Market

In response to hedge funds growing interest in single-family homes, Congressional Democrats have proposed a bill to ban their purchase and ownership in the US.

The proposed bill: The End Hedge Fund Control of American Homes Act of 2023 (what a name), would require hedge funds to sell off all their single-family home assets over a 10-year period. During this phaseout, penalties of up to $10K per home would be assessed on owners with more than 75 single-family homes in their portfolio to fund down payment assistance programs.

The problem: Homeownership has become increasingly unattainable for most Americans due to soaring home prices and interest rates. The bill aims to nip the issue in the bud by reducing competition from hedge funds and increasing supply for individual buyers. In Charlotte, NC, investors purchased 17% of homes in 2022, often outcompeting first-time buyers relying on mortgages.

Corporate cheating: Most institutional investment has focused on modestly priced homes, often in neighborhoods with large African-American and Latino populations. These properties are frequently converted into rentals, exacerbating the affordability crisis. Institutional investors owned 3% of all single-family rentals nationwide by June 2022, with 20% ownership in Charlotte.

Ongoing challenges: Advocates argue that the real problem lies in the lack of new housing units. Estimates suggest that the country needs anywhere from 2 to 6.5M new housing units. According to Redfin, hedge fund buying has slowed down drastically by nearly 30% YoY in 3Q23. Yet they still managed to buy 49K homes in the quarter, which is actually the lowest Q3 figure since 2016.

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Balancing Act: The proposed bill seeks to address the affordability crisis and increase the housing supply for individual buyers by banning hedge funds from playing the game. While some argue the focus should be on promoting new development, proponents believe reducing competition from hedge funds can level the playing field for aspiring homeowners. With divided opinions and a divided Congress, the future of these bills remains uncertain.

• Debt-loaded deals: Brookfield Asset Management (BAM) eyes opportunity to purchase heavily indebted properties for profit, says CEO Bruce Flatt.

• Five-X: Amid a 70% drop in CRE transactions in the latter half of the year, online auction leader Ten-X has become more stringent in assessing the potential of auctions to result in successful trades.

• Glow up: Dallas will invest $140M to renovate the Cotton Bowl Stadium, securing the Texas-Oklahoma football game for 10 more years.

• Building a better nest: 1031 Crowdfunding launches the Covenant Senior Housing REIT, specializing in assisted living and memory care properties, with $51.25M in asset value.

• From cubicles to condos: ABC’s daily podcast Start Here explores the problem of vacant office buildings due to changing trends, with residential conversions now a common solution.

• Filling the financing gap: BridgeCore Capital has introduced a middle-market CRE loan program, offering loans ranging from $10–$30M on stabilized or near-stabilized properties in the US.

• Building for the skies: US airports are embarking on ambitious construction projects with $9B in federal funding since 2021, and another $6B expected over the next two fiscal years.

• Warehouse wars: Amazon (AMZN) is fighting against legislation in Southern California to limit warehouse development as it plans for 2024.

• Affordable housing triumph: Enterprise Community Development secures $123M in funding for affordable housing in NE Washington, DC, consisting of 151 units.

• Seizing the window: Market conditions are creating promising opportunities in CRE, particularly in multifamily, for investors who select the right time, assets, and partners.

• Real estate rebound: CRE distress may have bottomed out, and some private equity investors are expecting to seize soon-to-come opportunities, according to Newmark.

• Leadership change: JPMorgan Chase & Co. (JPM) announced that Chad Tredway will rejoin the company’s asset-management arm as Head of Real Estate in the Americas.

• From green to red: GVA, an Austin-based multifamily syndicator, faces foreclosure on properties in Texas after defaulting on $125M in loans.

• Race against the clock: NYC Mayor Eric Adams forms a task force to assist up to 50 projects in meeting the 421a tax break deadline that aims to preserve existing housing.

• Trading shift: Miami International Holdings is set to establish its first securities facility in Miami's Wynwood neighborhood, marking a shift in financial business from Wall Street. 

• Club crisis: The Princeton Club of New York was sold for $8M to 15 West 43rd Street LLC after defaulting on a $39M mortgage in 2021.

• Surge in supply: The single-tenant net lease market saw a significant supply surge, with 3,905 properties listed in 3Q23, a quarter-over-quarter increase of almost 19%.

Blackstone and Digital Realty Join Forces for $7 Billion Data Center Expansion in US and Europe

Blackstone (BX) and Digital Realty (DLR) are joining forces to launch a new venture, investing $7 billion in developing data centers. These facilities will cater to the booming demand from major online content providers, cloud services, and artificial intelligence sectors.

What happened: The plan involves constructing 10 data centers across four campuses located in Frankfurt, Paris, and northern Virginia over the next five to six years. Digital Realty, a global leader in data-center operations, will manage and lease these facilities, while Blackstone will primarily finance the project.

Market demand: There's a skyrocketing demand for data centers, driven by cloud computing companies and emerging players like TikTok. The rise of artificial intelligence, which requires significantly more computing power than standard searches, is further fueling this demand. Blackstone President Jon Gray highlighted the exceptional growth in data centers, spurred by cloud adoption and AI advancements.

Overcoming challenges: This venture emerges amidst concerns about the availability of power and land for data center expansion and environmental issues related to the water-intensive cooling systems used in many facilities. However, Digital Realty's existing land ownership and power commitments, along with plans for waterless cooling systems, position the venture to navigate these challenges effectively.

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Zooming out: The partnership between Blackstone and Digital Realty represents a strategic move in the rapidly growing data center industry. With an initial capacity to power over 375,000 homes, this venture not only signifies a significant expansion in the data center market but also highlights a shift towards environmentally conscious infrastructure. This collaboration sets a new precedent in meeting the explosive demand of the digital age, catering to the needs of global tech giants while addressing environmental concerns.

Will 2024 Be the Year of Distressed Deal-Making?

As the real estate community gears up for 2024, Reid Bennett, a multifamily broker and National Council Chairperson of Multifamily Properties for SVN, provided valuable insights into the CRE landscape in a recent episode of the Best Ever Show podcast, shedding light on crucial trends and challenges that investors should monitor in the coming year.

Stabilizing Rental Market: The rental market is showing signs of stabilization, with double-digit percentage increases seen in 2021 and early 2023 slowing down. Simultaneously, inflationary pressures continue to affect the market, leading to increased expenses for property owners. Key factors include rising insurance costs, which have seen significant increases in some regions, as well as other operational expenses like real estate taxes.

Fed Interest Rate Hikes: Drastic interest rate hikes by the Federal Reserve, tripling in some instances, are affecting multifamily owners and operators with variable rate debt or bridge debt. Challenges on the horizon, as these debts approach maturity, may prompt discussions with special servicers and receivers to assess the release of funds for renovations in light of market uncertainties.

Supply, Labor, & Housing Shortage: Supply chain disruptions and labor shortages are contributing to increased costs in construction and property development. The impact of these issues on the supply of new housing units and the overall property development costs will be especially important to consider in 2024. There is also an estimated shortage of 4.3–4.5M apartment units in the US as governmental regulations, supply chain challenges, and labor shortages hinder the construction of new units.

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Anticipating Distressed Properties: 2024 may see an increase in distressed properties, especially as some property owners face challenges with debt service coverage ratios dropping below 1. Now is an opportune time to identify and capitalize on distressed properties. “You cannot make very aggressive assumptions,” Bennett said. “But if there's a deal that makes sense right now with today's debt, you need to buy it, and you need to buy it quickly before everybody else that's having analysis paralysis steps off the sidelines and buys it.”

The Alignable November Rent Report reveals a concerning trend for small businesses struggling with rent payments. The combination of rising rents, high interest rates, and falling revenues has resulted in 41% of small businesses nationwide unable to pay rent on time in November.

This figure marks the highest monthly rate in 2023, slightly above the 40% recorded in both September and October, and a significant increase from the 30% low in January. However, there's a silver lining in Florida, where the delinquency rate dropped to 27% in November, a notable decrease from 45% in October.