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NY and CA Lose Approximately $2T in Assets to the South

Over the past three years, NY and CA have lost investment firms managing nearly $2T of assets as wealth managers relocate to the southern US.

NY and CA Lose Approximately $2T in Assets to the South

Over the past three years, NY and CA have lost investment firms managing nearly $2T of assets as wealth managers relocate to the southern US.

Together with

Good morning. NY and CA have seen a $2T mass exodus of investment firms relocating to the Sun Belt. Newmark sees defaults mounting for overleveraged owners. Meanwhile, key market players gathered in Dallas to discuss what’s next for the Texas multifamily market.

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Market Snapshot

S&P 500
GSPC
4,436.13
Pct Chg:
1.1%
FTSE NAREIT
FNER
684.58
Pct Chg:
0.3%
10Y Treasury
TNX
4.196%
Pct Chg:
-3.0%
SOFR
1-month
5.30%
Pct Chg:
0.0%

*Data as of 8/23/2023 market close.

MASS EXODUS

Financial Firms Relocation to the South Costs New York and California ~$2 Trillion in Assets

There's a giant sucking sound echoing from Wall Street. Over the past three years, NY and CA have lost investment firms managing nearly $2T of assets as wealth managers relocate to the southern US, particularly to states like Florida and Texas, driven by lower taxes, better weather, and cheaper living costs.

The Grand Exit: Nearly 160 Wall Street firms, managing a combined total of a trillion dollars, have said "goodbye" to New York since 2019. High crime rates, rising taxes, and the Big Apple's increasingly extravagant lifestyle seem to be the culprits for the migration. But New York isn't the only one feeling the pinch; California has seen a similar exodus of assets, with Texas emerging as the top choice for relocation.

Firms managing billions in assets migrated South

(Bloomberg)

Mass migration: From 2020 to March 2023, Bloomberg’s study found that over 370 investment firms, representing 2.5% of the U.S. total and managing $2.7T in assets, have shifted their HQs to other states, causing a ripple effect across the nation. This transition has had nationwide repercussions. The exit of affluent asset managers and top executives results in a substantial decrease in taxpayers in the original states, potentially influencing tax revenues. The migration of such a significant number of high-net-worth individuals might curtail personal income tax collections, thereby impacting state financial plans.

Sun Belt boom: While New York remains a dominant hub for asset management, the South is experiencing a boom. Cities like Miami and Dallas are benefiting from this shift. For instance, Dallas's finance industry is growing rapidly, with Goldman Sachs and Wells Fargo setting up new campuses there.

Investment firms flock to Miami and Tampa

(Bloomberg)

Driving the shift: The allure of lower tax rates, temperate climates, and cost-effective living are the primary catalysts for these migrations. This shift is reshaping the traditional financial map. Consequently, areas previously recognized for sectors like oil, gas, and tourism, such as the Sun Belt, are emerging as the latest financial nexus. This change means that while longstanding financial hubs are undergoing economic transformations, new regions are spotting opportunities.

➥ THE TAKEAWAY

The bigger picture: Despite this shift, New York remains a global financial behemoth, with assets far surpassing other states. However, the southern states are undoubtedly gaining momentum, with Texas, Tennessee, and Florida seeing significant influxes of financial professionals. The pandemic has further accelerated this trend, encouraging firms to reconsider traditional financial hubs and explore new territories. Still, as some financiers admit, New York's stature as the world's financial center remains unshaken.

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LOOMING CRISIS

CRE Landlords Face a Massive $1.2T Debt Dilemma

Landlords With $1.2 Trillion of Debt Face Rising Default Risks

An empty office building in San Francisco. Photographer: David Paul Morris/Bloomberg

About $1.2T of US CRE debt is at risk due to high leverage and declining property values, particularly in the office sector, raising concerns about rising defaults among landlords and investors.

Office in crisis: Office properties appear to be at the eye of this storm. They represent over half of the $626B at-risk debt anticipated to mature by 2025's close. The value of office properties has seen a significant decline, dropping 31% since the Federal Reserve began increasing interest rates in March 2022, as reported by property analytics firm Green Street.

High-leverage property debt maturing

Crisis alert: The current scenario is sounding alarm bells for a potential rise in defaults due to plummeting property values and costlier refinancing amidst rising interest rates. Notable investors like Blackstone, Brookfield, and Goldman Sachs have shown signs of strain, with some defaulting or relinquishing assets. Newmark's David Bitner sees this trend growing, expressing surprise that more haven't already relinquished their properties.

➥ THE TAKEAWAY

A look around the corner: While banks hold the most at-risk debt ($303B set to mature by 2025), the aftershocks are also poised to hit the apartment building sector hard, which has nearly $192B in debt up for refinancing by 2025. Property owners clinging to their assets, hoping for better days, might end up at a more significant disadvantage. As Bitner rightly warns, procrastinating solutions could lead to more profound regrets in the future.

🌐 AROUND THE WEB

📖 Read: The number of nursing homes in the US has fallen over the past six years, leading to extended hospital stays for seniors waiting for care, highlighting a shift towards more home-based senior care.

🎧 Listen: In this episode of CBRE's The Weekly Take, Melinda Richter, Johnson & Johnson's (JNJ) Global Head of Innovation, JLABS, talks about discovering, financing, and nurturing startups, while CBRE’s Matt Gardner shares insights on CRE and the Life Sciences sector.

BOOM AND BUST CYCLE

Frozen Capital Markets and Skyrocketing Growth: When Will Stability Return to Texas' Multifamily?

When will Texas multifamily rollercoaster ride end

(Photo Illustration by The Real Deal with Getty)

Texas multifamily investors are navigating tumultuous waters as they grapple with the aftermath of the Federal Reserve's interest rate hikes. At the Connect CRE conference in Dallas this week, industry stakeholders gathered, seeking clarity on their industry's future.

Market trends: Major Texas cities continue to pull in a robust young demographic and job market. Dallas and Houston are leading the charge in young adult migration, and with Dallas-Fort Worth adding 200,000 jobs last year, the potential for multifamily growth remains promising. A significant economic factor is the comparative affordability of renting over buying, a trend especially pronounced in Austin and Dallas.

Shifting dynamics: While the explosive rent growth observed in 2020 and 2021 has tapered, fluctuations persist. Rents have seen a moderate increase in Houston and Dallas, but cities like Austin are experiencing reductions. This slowing in rent hikes is attributed to the expected surge in apartment availability. With Dallas-Fort Worth anticipating 73,000 new units and Austin, Houston, and San Antonio collectively expecting over 100,000 more, a shifting dynamic in the market is evident.

Opportunity exists: Construction starts have sharply declined due to financing challenges, creating an opportunity for future groundbreakers to enter a market with limited supply and strong fundamentals. Assuming ongoing migration trends, slow starts may restore the supply-demand balance that led to significant rent growth. Greg Willett anticipates rent improvement by Spring 2024, with robust prices by 2025. Yet, market uncertainty leaves valuations uncertain, as pricing expectations are down 20–25% from prior years.

➥ THE TAKEAWAY

Clashing expectations: Rising costs, particularly for labor, are an ongoing challenge, impacting multifamily profitability as returns remain steady while operating income stagnates. Rapid inflation in labor-intensive areas further complicates multifamily owners efforts to boost income. Despite a surge in transactions as a new wave of supply enters the market, mounting debt costs have led to differing expectations between lenders and developers. The one thing experts agreed on? The market will keep moving and evolving.

✍️ DAILY PICKS

  • Mid-priced resiliency: Mid-priced, three-star apartments in Sun Belt states are experiencing stronger rent growth compared to higher-quality units.

  • Buying opportunity: The REIT market is both cautious and bearish, with the largest REIT-focused ETF experiencing a small loss YTD compared to the S&P 500's gains.

  • Office space shrinkage: Office tenants are renewing leases for less space, with the average lease size in 2Q23 being 19% smaller than pre-pandemic averages between 2015–2019.

  • Fund fraud: The SEC charged Summitcrest Capital with fraud through their real estate investment fund, which raised $19.8M in 2018–19 before filing for bankruptcy in 2020.

  • Meta's in-person mandate: Zuckerberg wants Meta (META) employees to work in person to build more connections and stay efficient, threatening discipline for noncompliance.

  • Losing control: Two Manhattan properties owned by Thor Equities have been placed in receivership due to a failure to make payments on the $105M loan.

  • Making moves: Gilda Perez-Alvarado, CEO of JLL’s hotels and hospitality division, is leaving to become Accor's Group Chief Strategy Officer, responsible for overseeing the hotel brand's global strategy, relations, and partnerships.

  • Taking the leap: CBRE is the next firm to delve into AI by introducing its Nexus Platform aimed to reduce maintenance and energy costs across 20,000 facilities.

  • Developing confidence: Despite facing a competitive market and increased costs in land, labor, and construction materials, multifamily developers remain confident about 2024 prospects.

  • Going vertical: The rise of multi-story warehouses, driven by Amazon's (AMZN) dominance in occupying Class A warehouses with 3+ floors, is prompting other developers to follow suit.

📈 CHART OF THE DAY

US mobile data indicates that central business travel in major cities has steadied at roughly 60% of its pre-pandemic activity, while smaller cities have rebounded to their former levels. In 274 US cities with a significant remote work adoption, there's an average welfare decline of 2.7%.

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