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

Midtown Manhattan Defies Remote Work Real Estate Slump

In the face of nationwide impacts on commercial real estate due to remote work leading to negative office space absorption, Midtown Manhattan intriguingly demonstrates signs of robustness and expansion.

Midtown Manhattan Defies Remote Work Real Estate Slump

In the face of nationwide impacts on commercial real estate due to remote work leading to negative office space absorption, Midtown Manhattan intriguingly demonstrates signs of robustness and expansion.

Together with

Good morning. BREIT sells Simply Self Storage to Public Storage for $2.2B to help meet investor redemptions. Meanwhile, despite remote work shaking up national commercial real estate with negative office space absorption, Midtown Manhattan shows unanticipated growth and resilience.

Today's edition is brought to you by Lloyd Jones.

Market Snapshot

S&P 500
GSPC
4,554.64
Pct Chg:
0.4%
FTSE NAREIT
FNER
737.20
Pct Chg:
0.4%
10Y Treasury
TNX
3.872%
Pct Chg:
-3.0%
SOFR
1-month
5.06%
Pct Chg:
0.0%

*Data as of 7/24/2023 market close.

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DEAL OF THE DAY

BREIT Sells Simply Self Storage to PSA For $2.2B

A Public Storage location in Buena Park, California.Source: Public Storage

A Public Storage location in Buena Park, California.Source: Public Storage

Blackstone Inc.'s real estate trust, valued at $68B, has agreed to divest its Simply Self Storage to Public Storage (PSA) for a cool $2.2B. This move comes as the property entity struggles with investor withdrawals and turbulence within the commercial real estate sector.

The portfolio: Blackstone acquired Simply Self Storage from Brookfield Asset Management in 2020 for $1.2B, just four years after Brookfield had taken ownership. Simply's portfolio comprises 127 owned properties and offers 9 million net rentable square feet across 18 states. Notably, almost two-thirds of these properties are situated in the Sun Belt market.

Between the lines: According to Nadeem Meghji, Head of Blackstone Real Estate Americas, the sale will enable BREIT to focus more intensively on its highest growth sectors. During the early stages of the pandemic, self-storage was a thriving real estate sector as homeowners sought extra space for family returns and home office setups. However, market activity in this area has since diminished.

Gaining steam: Blackstone's REIT, valued at $68B, is regaining momentum after a challenging period. It recorded its strongest performance in almost a year last month, securing a 0.96 percent return for June. The fund had been swamped with redemption requests, causing it to limit withdrawals for months. BREIT's recent growth has been driven by industrial real estate in the Sun Belt, along with the multifamily market and data centers.

Public Storage's growth: Since 2019, Public Storage has expanded by 55 million net rentable square feet and allocated $10.6 billion towards acquisitions, development, and redevelopment. Its acquisition of Simply comes after a missed opportunity to acquire another self-storage company.

➥ THE TAKEAWAY

The bigger picture: With an expected $600M profit from the Q3 sale of Simply Self Storage, Blackstone's $68B real estate trust, BREIT, may be aiming to alleviate the ongoing pressure from persistent investor redemption requests that have strained the fund for the past eight months. As BREIT refocuses on high-growth sectors, Public Storage persists in its expansion plans despite a recent setback. In such a fluid environment, firms' ability to adjust, reorient their assets, and capitalize on new opportunities is critical for sustaining competitiveness.

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DEFYING TRENDS

Midtown Manhattan Emerges as a Hotspot in US Office Market

As remote work impacts commercial real estate nationwide, causing negative office space absorption, Manhattan's Midtown area surprisingly exhibits signs of resilience and growth.

Big Apple resurgence: While the rise of remote and hybrid work has negatively impacted the health of commercial real estate nationwide, leading to a reduction in net absorption of office space, Midtown Manhattan stands out as an exception. Contrary to the prevailing narrative of crisis, Midtown has the highest net absorption in the US office market with 3.3 million square feet, ranking seventh in percentage terms and demonstrating an unexpected resilience amidst lower property values, high vacancy rates, and unsustainable debt loads.

The vacancy rate challenge: Another crucial indicator of a commercial real estate market's health is the office vacancy rate. As of the second quarter, Manhattan's rate stands at 22.4%, about double the pre-pandemic rate and the highest since record-keeping began in 1984 by Cushman & Wakefield. Notably, the net absorption numbers are less impressive outside of Midtown, with Downtown and Midtown South's negative net absorption nearly offsetting Midtown's gains over the past year.

Manhattan's unique position: While Manhattan's office market struggles are undeniable, they're not unique, and the city displays resilience unseen in others. With an office vacancy rate not far above the national average and lower than cities like San Francisco or Chicago, Manhattan's issues are comparative. Moreover, Midtown's positive net absorption over the past year sets it apart.

➥ THE TAKEAWAY

Zoom out: Midtown Manhattan's addition of 17 million square feet of new office space underscores its continued allure as a corporate hub. The filling of these high-cost structures with tenants has boosted city revenues significantly, with Hudson Yards exceeding property tax projections by $200 million annually. Despite concerns over declining office values affecting revenues, the predicted impact is substantial but not catastrophic.

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Around the Web

📖 Read: Does 5% make a world of difference? Learn how through the Wall Street Journal's analysis of the Federal Reserve's rate increases.

🖥️ Watch: Scandinavian architects are designing Stockholm Wood City, set to become the world’s largest wooden city. The project aims to have the ‘serenity of a forest.’

🎧 Listen: Is the CRE bottom in? According to Real Estate Roundtable Chair John Fish, “nobody knows.” Read about this ‘slow-motion crisis’ in this piece from Bloomberg.

✍️ Daily Picks
  • Filling the void: CrowdStreet aims to correct past errors by purchasing the Nightingale property that wrongly took $50M from its investors across two failed deals.

  • Saving grace: New guidelines from the Fed aim to aid lenders in extending and reconfiguring loans, potentially without any losses.

  • Biting the dust: The parent company of KY Advisors files for Chapter 11 bankruptcy, carrying a debt of $7.5M against assets now valued between $500K and $1M.

  • Identifying opportunity: For 2023 and 2024, the best CRE strategy could be investing in the 3,600+ distressed deals predicted to emerge in the market over the coming years.

  • Icon on sale: The famed Statler Hotel at 1914 Commerce Street in downtown Dallas is now up for grabs, marketed by the CBRE Group.

  • Falling star: Single-family rentals (SFR), previously the glowing star of CRE, are starting to fade, dropping from 20.4% of all CRE in the nation's 50 largest markets to 16.2%.

  • Water world: Bill Swaim, a Florida investor, is making large-scale purchases of submerged land in the Intracoastal Waterway. Discover his reasoning.

  • Rotten Apple: NYC's investment sales have seen a 36% YoY decrease by the end of Q2, as reported by Ariel Property Advisors, yet multifamily deals have soared from $1.1B to $3.9B.

  • Sale of the day: Morgan Stanley (MS) has offloaded $6.75B in bonds through a four-part deal, following similar actions from JPMorgan (JPM) and Wells Fargo (WFC).

  • Back to school: As summer winds down, student housing is projected to thrive, following five consecutive months of 7% rent growth reported from 200 universities by Yardi.

  • The hardest feat: In the aftermath of the devastating Surfside condo collapse in 2021, Florida condo owners are struggling to sell their properties due to unfavorable interest and insurance rates.

  • Crystal ball: Analysts widely expect the Fed to increase rates by an additional 25 bps to 5.5% on July 26th. CRE, brace yourself.

📈 Chart of the Day

The latest quarter looks a lot like the last quarter, according to the MBA’s analysis of outstanding CRE and multifamily mortgage debt. The biggest debtholders between 4Q22 and 1Q23 are essentially unchanged.

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