Logistics Shipping-Market Rebounds in 2024

The U.S. logistics industry is showing signs of recovery marking an end to its nearly two-year slump.

Logistics Shipping-Market Rebounds in 2024

The U.S. logistics industry is showing signs of recovery marking an end to its nearly two-year slump.

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Good morning. The logistics industry is witnessing a rebound in early 2024, marking a potential end to the nearly two-year-long downturn. Meanwhile, a$22,000-a-month LA rental showcases KKR’s property stress.

Today’s issue is brought to you by Viking Capital.

Market Snapshot

S&P 500
GSPC
4,997.91
Pct Chg:
+0.052%
FTSE NAREIT
FNER
724.90
Pct Chg:
+1.21%
10Y Treasury
TNX
4.168%
Pct Chg:
-0.002
SOFR
1-month
5.32%
Pct Chg:
0.0%

*Data as of 2/08/2024 market close.

SIGNS OF RECOVERY

Growing Demand, Rising Freight Rates Indicate Rebound in Shipping

In early 2024, the U.S. logistics industry is showing signs of recovery, marking an end to its nearly two-year slump. This turnaround is highlighted by increased freight activity, rising containerized imports, and growing transportation prices.

Revival: January 2024 saw a significant rise in U.S. freight activities. Containerized imports experienced their highest month-over-month growth in seven years, as per Descartes Datamyne. Additionally, transportation prices increased for the first time since June 2022. This upsurge indicates retailers are restocking inventories, reversing their previous trend of cutting back.

Economic drivers: The broader economic landscape is contributing to this revival. The U.S. economy exhibited a 3.3% growth in Q4 2023, and December retail sales unexpectedly rose by 0.6%. These factors are positively impacting freight companies, which have struggled with an inventory surplus and reduced consumer spending on goods.

Cautious optimism: Industry leaders express cautious optimism. Paul Bunn of Covenant Logistics views the current trend as a potential "U-shaped recovery." Similarly, ArcBest observed a significant improvement in its contracted shipments, increasing by 8% year-over-year in January.

➥ THE TAKEAWAY

Sigh of relief: The logistics industry, once beleaguered by truck surpluses and plunging shipping volumes leading to notable collapses like Yellow and Convoy, is now witnessing a resurgence. A 5% rise in the Logistics Managers' Index and a surge in job creation signal renewed market confidence. Retailers, emerging from inventory excess, are realigning stock with sales, setting the stage for increased freight activity.

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✍️ Editor’s Picks

  • Designer fraud: Former HFZ Capital Group executive Nir Meir, arrested in Miami after his company collapsed, has been indicted for a multimillion-dollar fraud scheme.

  • Debt funds soar: Real estate debt funds raised $5.5B in Q4, second only to value-added funds, according to Preqin.

  • Shaky ground: Over $2.2T in U.S. CRE loans are set to expire by 2027, potentially straining the relationship between lenders and borrowers.

  • Closing the floodgates: The U.S. Treasury wants real estate professionals to flag suspicious transaction activity, as $2.3B was laundered through real estate from 2015 to 2020.

🏘️ MULTIFAMILY

  • Building success: Pretium, led by ex-Goldman partner Don Mullen, raises almost $1B to buy rental homes from builders.

  • Oversupply storm: Pricing power in Texas apartment markets is slipping as new units come online, causing concerns of distress.

  • Converting the masses: Chicago has over 2.8K office-to-apartment conversions in the works, outpacing most other metros, with a total of over 5.1K planned.

  • Dream retirement: Waterfall Development purchased 3,114 acres of land in Denison, TX for a $6B master-planned community with 7.5K new homes.

🏭 Industrial

  • Teaming up: Blackstone (BX) and Worthe Real Estate team up to market a fully permitted industrial redevelopment of a vacant 1.5MSF office and warehouse campus in LA.

  • Plastic profits: Component Plastics Inc. purchased a 144.41KSF facility in Elgin, Illinois for $19.4M.

🏬 RETAIL

  • Mixing it up: Simon Property Group (SPG) is set to construct five to six mixed-use projects this year, amounting to $800M in spending across various locations.

  • Revitalizing retail: Broadway Commons, a 730KSF shopping center in Hicksville, NY, was purchased by a partnership for $40M.

🏢 OFFICE

  • The bright side: Major U.S. cities like Atlanta, Chicago, Dallas, Houston, LA, NYC, and San Francisco offer opportunities in their downtown office markets, according Cushman & Wakefield.

  • Never sleeps: Empire State Realty Trust (ESRT) leases a 12.62KSF office space at 250 W. 57th St. in Manhattan to Hanover Street Capital.

WRITING ON THE WALL

A $22K Monthly LA Rental Showcases KKR’s Property Distress

A $22,000-a-Month LA Rental Showcases KKR’s Property Stresses

The Los Angeles skyline. Photographer: Eric Thayer/Bloomberg

KKR Real Estate Finance Trust faces increasing stress in its property investments, including a high-end apartment complex in West Hollywood.

Under pressure: A newly built apartment complex in West Hollywood featuring luxury amenities like a yoga studio and bowling alley is under financial strain despite high rental prices of $19,500 to $22,000 a month. The $105 million floating-rate loan for this 37-unit property is on KKR's watchlist of troubled debt, reflecting broader challenges in the multifamily and CRE sector.

Beyond offices: KKR's concerns extend beyond office buildings in cities like Philadelphia and Boston, encompassing various property types nationwide. This includes apartment buildings in San Diego and Raleigh and a life science facility in Seattle, indicating a widespread sector impact. Apartment buildings, once deemed safe investments due to rising homeownership costs, are now facing difficulties. Higher interest rates and an influx of new properties have increased operational costs while capping potential rent hikes.

The response: KKR REIT has reduced its dividend due to losses in office loans, leading to a significant drop in its stock value. The REIT, with 41% of its portfolio in apartments, is attempting to manage these challenges. CEO Matt Salem anticipates limited distress in the portfolio, mainly consisting of higher-quality apartments, but acknowledges potential issues.

Widespread distress: The U.S. apartment sector shows more than $67 billion in potentially distressed debt, exceeding the office sector's $54.7 billion. Additionally, a record addition of new apartments in 2023 poses further challenges, with the market expected to adjust only by 2025 due to a construction slowdown.

➥ THE TAKEAWAY

Why it matters: The commercial real estate sector, including KKR's LA properties, faces a crunch due to misplaced optimism in growth during low-interest times, now clashing with higher borrowing costs and market oversupply. This trend challenges current owners but opens doors for investors in distressed assets, signaling a significant market shift.

📈 CHART OF THE DAY

FHA multifamily loan closing fell to just over $1 billion in 4th Quarter 2023. Fewer transactions have improved processing times.

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