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Fed Maintains Interest Rates, Leaving CRE Market in a State of Flux

The Federal Reserve has maintained short-term interest rates at 5.25% to 5.5%, suggesting a possible increase in late 2023. This represents a halt in the continuous 17-month trend of rising borrowing costs.

Fed Maintains Interest Rates, Leaving CRE Market in a State of Flux

The Federal Reserve has maintained short-term interest rates at 5.25% to 5.5%, suggesting a possible increase in late 2023. This represents a halt in the continuous 17-month trend of rising borrowing costs.

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Good morning. The Fed holds short-term rates steady with hints at a late 2023 hike. Major Wall Street rental firms struggle to buy homes. Tampa Bay Rays reveal plans for a historic new stadium in Tampa. Meanwhile, CBRE faces a $375K SEC fine for whistleblower protection violations.

Today’s issue is brought to you by Catalyst Capital Partners.

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Market Snapshot

S&P 500
GSPC
4,402.20
Pct Chg:
-0.9%
FTSE NAREIT
FNER
689.53
Pct Chg:
-0.5%
10Y Treasury
TNX
4.399%
Pct Chg:
0.7%
SOFR
1-month
5.31%
Pct Chg:
0.2%

*Data as of 9/22/2023 market close.

INFLATION NATION

Fed Maintains Interest Rates, Leaving CRE Market in a State of Flux

PHOTO BY ANNA MONEYMAKER/GETTY IMAGES)

The Federal Reserve has kept short-term interest rates between 5.25% and 5.5%, hinting at a potential hike in late 2023, marking a pause in the ongoing 17-month trend of increasing borrowing costs.

From the Fed: In a move surprising no one, the U.S. Federal Reserve kept its benchmark interest rate unchanged, suggesting borrowers brace for more high costs with another hike expected this year. Jerome Powell, unswerving, reiterated the Fed's resolve to enforce a strict enough policy to tug inflation back to the 2% goal. This comes after two years of steady rate increases, barring a brief pause in June, aimed at curbing inflation and bolstering economic stability.

Impact on CRE: The commercial real estate sector is grappling with the aftereffects of recent policy shifts, and rate increases that have significantly affected lending. The industry is exploring alternative financing solutions to navigate current economic conditions due to the high interest rates. While strategic changes have alleviated some immediate concerns in the capital market, some segments of the industry have been slower to adapt.

Market realignment: The prevailing environment of high-interest rates is leading to significant restructuring in the CRE market. Key stakeholders, like Ran Eliasaf of Northwind Group, see this as an enduring shift, necessitating strategic adjustments to maintain a strong investment environment. This transition is particularly evident in the multifamily sector. Despite the burgeoning demand, there is a noticeable slowdown in the construction of new units. Coupled with shifting consumer preferences and adjustments in valuations, this is recalibrating the dynamics and the nature of transactions within the market.

➥ THE TAKEAWAY

Forward-looking: The future of the CRE market is intricately linked to developments in interest rates and the market's corresponding adjustments. The full repercussions of these changes are anticipated to become prominent by early 2024, shaped by the continual modifications in interest and cap rates, along with the overall cost of capital.

HOUSING HURDLES

Wall Street Giants Face Home Buying Challenges

America’s Biggest Landlords Can’t Find Houses to Buy Either

Home-rental firm AMH says returns are higher on houses that it builds specifically to lease than those it can buy on the open market (WALL STREET JOURNAL)

Wall Street's major rental companies, including American Homes 4 Rent (AMH) and Invitation Homes (INVH), are struggling to expand rental portfolios due to high financing costs and fierce competition. Rising home prices have pushed the limits of what these giants can pay for properties while maintaining profit margins.

Ideal conditions: Analysts suggest that current conditions, including record home prices, high mortgage rates, and limited inventory for sale, make it an ideal time for large-scale single-family rental investments. Suburban rents remain competitive and affordable compared to homeownership, driving demand for rental properties. Wall Street analysts expect companies like AMH and INVH to outperform, but their success hinges on expanding rental portfolios.

AMH share price vs. index

Market shakeup: Large landlords with over 1K properties accounted for just 0.4% of US home purchases in 2Q23, a significant drop from their peak at 2.4% in late 2021, marking a serious shift since the 2008 housing crash. Sidelined landlords may indicate the Fed's rate policies are still impacting the housing market, potentially slowing down the rapid appreciation of property values and excessive spending.

Quarterly home purchases by landlods with over 1000 homes

Housing heatwave: During the COVID lockdown, many homes in booming cities like Miami, Houston, and Phoenix were purchased by investors who had no intention of residing in them. Meanwhile, big firms like Invitation were selling properties with low yields and accumulating cash for future investments, suggesting the Fed's rate policies are effectively cooling down the overheated housing market.

Renting the American Dream: AMH plans to build over 2.2K homes in 2023, with more land purchased for 13K more. CEO David Singelyn says building homes for rent is more profitable than buying, particularly with the recent drop in lumber prices. Housing market dynamics, marked by high barriers to homeownership, make renting single-family homes a cost-effective option. AMH expects rents to grow by over 30% before purchasing comparable houses makes more sense.

➥ THE TAKEAWAY

Housing headwinds: Even America's largest real estate investors face challenges in acquiring homes due to high borrowing costs and a shortage of available properties. Wall Street's rental giants, like AMH and Invitation Homes, are struggling to find suitable properties to add to their portfolios, reflecting the broader trend of rising home prices, high mortgage rates, and limited housing inventory, making homeownership increasingly out of reach for many Americans.

🌐 AROUND THE WEB

📖 Read: Top economist Mohamed El-Erian warns of impending distress in US CRE due to "massive" debt refinancing needs coinciding with high interest, potentially leading to more economic challenges.

▶️ Watch: Nick Timiraos of WSJ discusses how the Fed’s rate hike campaign may pose challenges to achieving a soft economic landing on CNBC’s Squawk Box.

🎧 Listen: Despite a shift to remote work, Related Cos. is building new office spaces in Chicago, Austin, and West Palm Beach. Philippe Visser, head of office development, discusses the decision in an interview with The Real Deal's Deconstruct.

FIELD OF DREAMS

Tampa Bay Rays Announce Deal To Replace Stadium as Part of Sweeping Redevelopment

Tampa Bay Rays Announce Deal To Replace Stadium as Part of Sweeping Redevelopment

The Tropicana Field and Historic Gas Plant District redevelopment would represent the largest economic development project in Tampa Bay's history. (Hines)

The Tampa Bay Rays have unveiled plans to construct a new stadium in a comprehensive redevelopment project involving residential, commercial, and cultural spaces in the Tropicana Field and Historic Gas Plant District.

End of speculation: The announcement to remain in St. Petersburg ends speculation about a potential relocation to Tampa proper or Montreal. This decision aligns with a trend among professional sports franchises to develop mixed-use facilities around their stadiums, similar to the Atlanta Braves and the Los Angeles Rams, as the Rays’ current lease for Tropicana Field in St. Petersburg expires in 2027. The team has faced low attendance numbers, partly attributed to the outdated location of their current stadium.

Neighborhood renewal: The new deal aims to address long-standing issues related to the stadium's impact on the neighborhood. Over the years, the community, particularly the Gas Plant district, has faced displacement and disruption due to stadium development and infrastructure projects. The agreement includes the construction of a new stadium, the development of a surrounding neighborhood, and a commitment to equity initiatives to benefit the community, with construction set to begin in 2024 and complete in 2028.

Mixed-use marvel: The Rays are partnering with real estate firm Hines to create an expansive mixed-use development encompassing nearly 8MSF of space. This includes residential units, affordable housing, commercial and medical facilities, retail spaces, and cultural amenities. The project's centerpiece is a baseball ballpark with a 30K capacity for Rays games and 35K for other events. The project's total cost is expected to eclipse $6.5B over the next 20 years, making it the largest mixed-use development in Tampa Bay's history.

➥ THE TAKEAWAY

Rays revival: In partnership with Hines, the Tampa Bay Rays' redevelopment project represents a significant step towards revitalizing the Gas Plant district and securing the team's presence in St. Petersburg. Beyond a new stadium, the initiative promises to create a dynamic mixed-use neighborhood, address historical community issues, and foster regional economic growth. The goal is to create a vibrant and inclusive live-work-play destination in St. Petersburg.

SLAP ON THE WRIST

SEC Fines CBRE $375K For Violating Whistleblower Protections

CBRE Agrees To Pay SEC Penalty, Change Procedure To Avoid Violating Whistleblower Protections

CBRE cooperated with an investigation by the SEC, which determined the company violated a whistleblower protection rule. (CoStar)

CBRE, the world's largest CRE brokerage, agreed to pay a $375K penalty and stop requiring employees to sign agreements that could obstruct whistleblowers from reporting misconduct in response to charges from the SEC.

Blowing the whistle: The SEC's settlement with CBRE highlights the company's alleged wrongdoing between 2011–2022, when CBRE required departing employees to sign agreements stating they hadn't filed complaints against the company with federal agencies. This requirement was seen as an attempt to discourage potential whistleblowers, violating Rule 21F-17 of the Dodd-Frank Act.

Cease and desist: The SEC did not require CBRE to admit wrongdoing but emphasized that they had to stop infringing upon whistleblower protections. CBRE cooperated with the SEC and promptly clarified its agreements, agreeing to "cease and desist" from potential violations on top of paying a civil penalty. The firm maintains that its separation agreement language is in line with industry standards.

Enhanced scrutiny: This enforcement action against CBRE is part of a broader SEC investigation into company agreements with employees. The SEC is scrutinizing various types of agreements, including nondisclosure agreements, for language that might obstruct whistleblowers from reporting federal security law violations.

➥ THE TAKEAWAY

Industry implications: The CBRE settlement and a recent case involving Monolith Resources show that the SEC is intensifying enforcement of whistleblower protections. Legal experts advise companies to carefully review and modify agreements to comply with rules as the SEC becomes more aggressive in holding firms accountable. Companies should take immediate steps to revise their agreements to ensure compliance with these rules.

✍️ DAILY PICKS

  • Power struggle: Lenders and investors, including Oaktree Capital and Elon Musk, are embroiled in a high-stakes battle over distressed CRE loans.

  • Magic expansion: Disney (DIS) plans to double its investment in its parks and cruises business to $60B over the next decade as it pursues growth amidst challenges to its streaming business.

  • Mall Renaissance: Centennial and Pacific Retail Capital Partners are investing heavily in struggling malls by transforming them into 24/7 mixed-use communities.

  • Short trends: In August, average short interest in US REITs remained unchanged at 3.6% of shares outstanding, although regional mall REITs experienced a substantial 60 bps decline, while the office sector saw the largest bump in short interest.

  • Now trending: A report from the Alternative Credit Council and global law firm Dechert reveals these three emerging trends in the $1.2T private credit market.

  • Medical office marvel: Kayne Anderson Real Estate, through its debt platform KARED, purchased a $1.3B medical office loan portfolio from Synovus Bank, diversifying its investment portfolio across 33 states with 308 medical office building assets.

  • Affordable futures: Nuveen has secured a $250M commitment from TIAA to support its Real Estate US Impact Housing Fund, which provides affordable housing opportunities and supports minority and women developers across the US.

  • WeWork's walkout: DivcoWest is suing WeWork (WE) for $30M, alleging that WeWork did not provide notice of its departure or remove its property from the location.

  • Crisis in China: China's office market is grappling with a staggering 24% vacancy rate in major cities, driven by an oversupply of office space and a sluggish economy.

  • AI revolution: CBRE is leveraging generative AI tools to enhance efficiency across its business, aligning with the growing interest in generative AI among real estate industry executives.

  • Immigrant influx: NYC’s migrant crisis, with at least 110K immigrants seeking asylum, is straining the city's budget and its CRE market.

  • Trouble on Broadway: JLL has listed a $240M nonperforming loan on a 61 Broadway office building in NYC’s Financial District, which RXR now owns through a deed in lieu of foreclosure.

  • Cut and run: Barberry Rose Management sold 16 rent-stabilized buildings for $47M at a 44% discount due to challenges posed by the 2019 rent law, the pandemic, and rate hikes.

📈 CHART OF THE DAY

Industrial Construction Starts H1

The industrial sector saw significant growth in 1H23, marked by 28.6% more completed industrial spaces compared to the 1H22. The shift is attributable to e-commerce growth and reshoring efforts, with DFW leading in construction and Houston maintaining steady growth with a significant boost to construction starts.

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