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

The New Era of Rental Prices

For renters who’ve felt the sting of rapidly increasing costs, there’s a sigh of relief on the horizon. The rapid inflation of rent prices, which has been a pressing concern for many in recent years, is showing signs of stabilization.

The New Era of Rental Prices

For renters who've felt the sting of rapidly increasing costs, there's a sigh of relief on the horizon. The rapid inflation of rent prices, which has been a pressing concern for many in recent years, is showing signs of stabilization.

Together with

Good morning. There's a sigh of relief on the horizon for renters who've felt the sting of rapidly increasing costs. The SEC is preparing to introduce strict rules that would greatly impact private funds. Meanwhile, a new market analysis from Coresight Research reveals that the mall's demise might be exaggerated, with some even flourishing.

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

👋 First time reading? Sign up here

Market Snapshot

S&P 500
GSPC
4,387.65
Pct Chg:
-0.3%
FTSE NAREIT
FNER
682.41
Pct Chg:
-0.9%
10Y Treasury
TNX
4.332%
Pct Chg:
-0.2%
SOFR
1-month
5.30%
Pct Chg:
0.0%

*Data as of 8/22/2023 market close.

A NEW DAWN FOR RENTERS

From Skyrocketing to Stabilizing: The New Era of Rental Prices

rental prices across the US

Analysis based on average monthly rent data for provided by CoStar Group. The data includes newly posted rents, not lease renewals, for 1,660 counties for June of each year from 2019 to 2023. Counties with fewer than 1,000 multi-units, according to Census Bureau data, were excluded.

Good news is on the horizon for renters: The rapid escalation in rental prices, which had previously seemed unstoppable, appears to be taking a pause.

Rental rollercoaster: Between 2020 and 2022, rents surged by a striking 15%, the most rapid increase in nearly a century. However, the fervor has calmed. Rent growth has reverted to pre-pandemic rates, seeing an annual growth of about 1 to 3 percent. Interestingly, in cities that recently witnessed surging rents like Austin and Atlanta, prices are now dropping. As Igor Popov, chief economist at Apartment List, observes, the rental market is "taking a breath."

Why the slowdown? A significant factor in this slowdown is the surge in housing construction. An impressive nearly 1 million new apartment units are currently under construction nationwide. By the end of 2023, over half of these are expected to be on the market. Concurrently, the demand for rentals is waning as the U.S. adjusts to post-pandemic life. The appetite for apartment living has decreased, with fewer individuals moving out and more staying in familial homes. This change has created a discrepancy between available apartments and interested renters, thereby stabilizing price growth.

more new apartments over 50 years

The Sun Belt phenomenon: The Sun Belt region, which includes parts of the Southern U.S., experienced a unique scenario. Initially, during the pandemic, there was a spike in demand as individuals sought warmer climates and more affordable living conditions, moving away from urban centers like New York. This shift led to a boom in rental prices in cities like Phoenix, Dallas, and Miami. However, the rush to meet this demand has led to an oversupply, causing rents to stabilize and even decrease in some areas.

sun belt cities rent price growth

➥ THE TAKEAWAY

The new normal: While renters can find solace in stabilizing prices and even some reductions, it's crucial to note that the cost of renting remains substantially higher than pre-pandemic levels in many areas. Areas like Atlanta, despite witnessing recent rent reductions, still have renters paying substantially more than before the pandemic. The introduction of incentives like months of free rent indicates a market adjusting to new realities, but the days of pre-pandemic affordability seem to be a distant memory for now.

TOGETHER WITH VIKING CAPITAL

A multifamily investment opportunity located in South Bend, Indiana

viking capital park 33

Park 33 is a 2018 built property with a value-add upside located in South Bend, Indiana. Already above a 6% cap on acquisition, the opportunity exists to increase revenue on-site while benefiting from the reduced risk profile of a newly built and best-in-class asset.

By assuming the in-place 3.08% fixed rate agency financing, Park 33 benefits from positive leverage and conservative 2.1+ DSCR. With little comparable competition in the market, this asset is positioned to earn a 1.6-1.8x equity multiple and targeted 6% average cash on cash over a 5-year investment period.

Viking Capital already owns 400 units in the South Bend MSA and plans to use its market knowledge and increasing economies of scale to further increase investor profitability. The South Bend economy has proven steady economic expansion and continued rent growth even as other markets have slowed.

Want to learn more? Get access to the deal here.

*Disclosure: This post contains sponsored content. Past performance is not indicative of future results. This information should not be used as a basis for an investor's decision to invest.

INDUSTRY REFORM

Sweeping Regulatory Changes Await the US Private Fund Sector

Private fund industry prepares for battle over sweeping US rules

Gary Gensler, the SEC chair, said ‘efficiency and competition in the capital markets’ applies to sophisticated investors © Bloomberg

The global private fund sector, encompassing private equity, real estate, and hedge funds managing a colossal $25T in global assets, is on the brink of significant transformation. This comes as the SEC proposes a set of rigorous rules aimed at this industry segment.

Sweeping reforms: The far-reaching rules, aimed at safeguarding investors, include requirements for detailed performance reporting, bans on undisclosed preferential deals, and restrictions on expenses passed to clients. If adopted, these rules could impact tens of thousands of US and overseas private funds, making it one of the most significant regulatory overhauls in the industry's history.

Industry impact: The potential adoption of these rules by the SEC, set to occur during an upcoming meeting, would impact numerous US private funds and global asset managers with American investors. The initiative could be the most significant one since the 2010 Dodd-Frank financial reform law. According to Christine Lombardo, an attorney at Morgan Lewis, this move would mark a notable shift as the SEC takes a more active role in deciding on terms within institutional arrangements between private fund managers and investors.

Renegotiation concerns: Industry groups are raising concerns about proposed rules that lack exemptions for existing agreements, potentially necessitating the renegotiation of tens of thousands of contracts with investors. Some groups are considering legal action, asserting the SEC is overstepping its authority. Critics argue that the SEC needs to adequately demonstrate a market failure or conduct a comprehensive cost-benefit analysis.

➥ THE TAKEAWAY

Mixed reactions: While the SEC's chair, Gary Gensler, has defended the proposal by emphasizing its alignment with congressional mandates regarding efficiency and competition in capital markets, industry leaders remain apprehensive. Fund managers are also concerned about a rule that shifts liability from "gross negligence" to "negligence," potentially stifling innovation and returns. Meanwhile, consumer groups view the proposed rules positively, as they improve accountability and transparency, especially in an industry that manages trillions of dollars and engages with public pensions.

🌐 AROUND THE WEB

📖 Read: According to Moody’s, rent is outpacing wages in several US cities, with NY and LA seeing high rent-to-income ratios that are growing increasingly burdensome for renters.

▶️ Watch: In this CBS News Money Watch segment, Al Root, senior writer at Barron's, discusses the trend of Wall Street firms raising billions of dollars to acquire distressed CRE on the cheap.

🎧 Listen: In this episode of Bisnow Reports, Jarred Schenke and Ethan Rothstein discuss the Nightingale fiasco that lost $40M in crowdfunding and how CrowdStreet is scrambling to rebuild investor confidence.

MALL MAGIC

The Mall Isn't Going Anywhere Despite Overblown Reports of Its Downfall

The Surprising Revival of Malls

Farmers market in the atrium of Aventura Mall in Miami, Florida. Jeffrey Greenberg | Universal Images | Getty Images.(Institutional Investor)

US malls have been slowly dying for decades, yet they are far from disappearing. Coresight Research's recent analysis shows that many malls are experiencing increased occupancy rates and larger crowds compared to pre-pandemic levels.

Mall resurgence: Malls have experienced a surprising resurgence, with a notable 11% increase in sales, reaching $819B in 2022. Factors contributing to the resurgence include a halo effect from online and offline presence, brand synergies, and investments in enhancing the online/offline customer experience. Despite concerns about shrinking mall presence nationwide, the appeal of malls as community centers and "third places" persists among consumers.

Top-tier triumph: Malls in affluent areas saw 12% growth in foot traffic last year compared to 2019, while lower-tier malls enjoyed a 10% uptick. Top-tier malls reported a 5% annual growth rate between 2020 and 2022, with $7.5B in revenue, while lower-tier malls achieved nearly 9% growth. Despite occasional store closures, high occupancy rates are a key indicator of mall health, and both top-tier and low-tier malls are proving attractive to retailers and landlords.

People are still people: The unstoppable engine of e-commerce growth over the past decade led to understandable concerns that online shopping would replace physical malls, especially among digital natives. But malls are adopting omnichannel strategies and partnering with online brands to enhance offerings. Some digitally native brands are even entering malls to provide ‘pop-up shop’ experiences, while others recognize the cost-effectiveness of brick-and-mortar stores for customer engagement (e.g., Warby Parker, Allbirds, Wayfair, etc.).

➥ THE TAKEAWAY

Gen Z's influence: Gen Z is playing a pivotal role in the mall revival. Despite their digital upbringing, they visit malls consistently, valuing in-store experiences and seeking social engagement. In fact, 73% of Gen Z shoppers frequented malls in the past month, a higher percentage than Millennials and Gen X. Malls are adapting with experience-focused offerings, such as go-karting and virtual reality, which resonate with Gen Z's desire for up-to-date communal spaces. The pandemic underscored the importance of community, and malls offering upscale amenities are prospering.

✍️ DAILY PICKS

  • Founder's tower: Pontegadea, the family office of billionaire Zara founder Amancio Ortega, has purchased a 492-unit luxury apartment tower in Chicago's West Loop for almost $232M, the highest sale price for a multifamily building in the city this year.

  • Strategic raise: Charles Schwab (SCHW) plans to raise debt in the US investment-grade bond market after announcing job cuts and office closures, with a potential yield of 2.05% over Treasuries for the 11-year fixed-to-floating rate note.

  • Urban comeback: IKEA is opening a new store in downtown San Francisco, testing its new city-center store format that caters to casual shoppers and office workers with a smaller selection.

  • NYC's vacancy conundrum: A recent study revealed NYC has too many long-term, rent-stabilized vacancies, indicating landlords struggle to rent out older units despite tenants returning.

  • China's demographic shift: China's population has experienced its first decline since the early 1960s, with the National Bureau of Statistics reporting a drop from 1.413B in 2021 to 1.412B in 2022.

  • On the hunt: Cushman & Wakefield (CWK) is searching for a new leader in Texas following the departure of the Dallas-Fort Worth head from the Chicago-based firm.

  • Brand refresh: On Tuesday, Macy’s (M) announced plans to open four new stores, differing from its usual large mall locations, in an effort to rejuvenate its brand appeal to consumers.

  • Bond blitz: Financial firms worldwide have rapidly issued a record $2T in bonds this year, driven by European lenders repaying central bank loans and Chinese firms strengthening balance sheets amid economic challenges.

  • Timber transformation: The first mass-timber office building in Texas, the Soto in San Antonio, is 95% leased, with Pabst Brewing and Hixon Properties among the tenants.

  • More likely than not: Goldman Sachs economists predict a probable temporary government shutdown post-Sept. 30, as stated by the firm's chief US political economist.

  • Pay cut: After years of salary increases, businesses are reducing starting salaries for new hires, with companies paying new recruits less than they did just months ago as the job market cools and businesses become more cautious in their hiring.

  • Default looming: A $384M loan backed by a luxury apartment tower in San Francisco faces default as the tower struggles to fill vacancies, with the loan being transferred to special servicing and the DSCR remaining below 1 since 2020.

  • Constant confidence: Multifamily developer confidence remained positive in Q2 despite near-term challenges such as reduced availability of credit, project approval delays, and increased expenses.

  • Grocery growth: Discount grocery chains like Lidl, ALDI, Grocery Outlet (GO), and Dollar General (DG) are enjoying growth and expansion, targeting smaller footprints and busy locations to meet consumer demand for affordable groceries.

  • Industrial expansion: Global private equity real estate firm Taurus Investment Holdings has acquired a $124M industrial portfolio of 12 Class B buildings in Atlanta and Dallas, expanding their industrial footprint to over 18MSF nationwide.

  • Urban fusion: The Rainier Cos., a national CRE investment firm, has launched a new platform to develop mixed-use properties with a retail focus in Texas and high-growth cities across the US.

📈 CHART OF THE DAY

High-End Multifamily Asking Rents Declining For 4 Consecutive Months

The Tampa multifamily market, which experienced high demand and rent hikes due to post-pandemic migration, is now facing dropping rents as increased competition leads to a surplus of units and diminished demand for 4- and 5-star properties. Landlords are also grappling with historic construction completions and a 5-year high vacancy rate.

What did you think of today's newsletter?

Login or Subscribe to participate in polls.

📣 HIT THE INBOX OF 65K+ CRE PROFESSIONALS
Advertise with CRE Daily to get your brand in front of the Who's Who of commercial real estate. Subscribers are high-income decision makers, investors, and C-suite executives. For more information, please email partnerships@credaily.com.

Latest NEWSLETTERS
View All
America’s Rental Market at the Start of 2024
February 28, 2024
READ MORE
sentiment for commercial real estate fear and greed index
Burns + CRE Daily Fear and Greed Index Reveals Investor Pause in 4Q23
February 27, 2024
READ MORE
High Supply Markets Lead to Deeper Rent Cuts
February 26, 2024
READ MORE

Back to top