Q4 ‘22 Property Sales Post Worst Slowdown Since the Great Recession
In today's edition, 2022’s Q4 property sales were this century’s worst since the Great Recession. Apple announced plans to add nearly 1 MSF of development to its Austin, TX campus. Manhattan tenants in Stuy Town won an ongoing case that will prevent Blackstone from destabilizing their rents, and much more.
GM. Welcome back to CRE Daily. In today's edition, 2022’s Q4 property sales were this century’s worst since the Great Recession. Apple announced plans to add nearly 1 MSF of development to its Austin, TX campus. Manhattan tenants in Stuy Town won an ongoing case that will prevent Blackstone from destabilizing their rents, and much more.
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Watch: Robert Reffkin, Compass co-founder and CEO, joins 'Squawk on the Street' to discuss their latest round of layoffs and goals for this year.
Listen: Listen: Here’s how third-generation construction magnate Greg Gordon grew his business (and what it’s like to build for Amazon) on The FORT with Chris Powers.
Read: Meet the guy whose algorithm could solve the crisis of America's empty office space by quickly calculating which offices can and should be converted into apartments.
Q4 ‘22 Property Sales Post Worst Slowdown Since the Great Recession
Last year, US property sales saw their worst Q4 drop since the Great Recession. The second-worst Q4 of the 21st century indicates we’re heading for another rough patch, including a slowdown in sales that’s likely to last for much of 2023.
The ugly numbers: Typically, Q4 outperforms other quarters when it comes to property sales, inspiring a year-end rush that rakes in about 30% of total annual sales. Last year, however, Q4 only contributed to 17.9% of 2022’s total sales. This translated to a total of $156B in sales compared to the average $201B. It’s also the worst Q4 percentage this century after Q4 2008’s 17.3% slump.
Where are the buyers? High borrowing rates and unpredictable volatility in the debt market have everyone spooked. Nobody wants to commit to big and risky transactions. In the second half of 2022, sales below $250M fell by 19%, but sales above $250M dropped off a cliff, falling 64%. It doesn’t help that many sellers have taken properties off-market to wait out the storm. A smaller property pool makes it much harder for buyers and sellers to settle on a fair price.
➥ THE TAKEAWAY
The bottom line: According to Doug Banerjee, Senior Managing Director at Greysteel, the sharp rise in interest rates from the second quarter to the fourth quarter of 2022 has caused a significant decrease in sales that require new debt and this is likely to persist until the short-term debt market stabilizes. He also notes that despite these challenges, loan assumption deals are still being completed primarily through Fannie, Freddie, or HUD, but at a slight discount to previous pricing due to the additional equity required from buyers. Banerjee expects this to remain the norm for the majority of deals in the first half of 2023.
THE BIGGER APPLE
Apple to Add 900 KSF of New Development to Austin Campus
Apple (AAPL) has some juicy new additions planned for its 33-acre campus in Austin, TX. The company just filed plans with the Texas Department of Licensing and Regulation (TLDR).
The rough draft: The second phase of Apple’s $1B Austin development, which it broke ground on three years ago, will add 900 KSF of new office space to the campus by March 2025. The initial plan was for the development to span 3 MSF and accommodate 5,000 employees across multiple departments, such as R&D, engineering, finance, operations, sales, and customer support.
New kids on the block: If TLDR gives them the green light, Apple will begin construction later this year on half a dozen new additions that should all take about two years to complete. The tech giant didn’t share specific details on the intended purpose of each building, but one will be a parking garage. In total, Apple expects these office additions to run them $280M.
➥ THE TAKEAWAY
Lone Star no longer: Apple’s not the only one messing with Texas. As of November, the Austin metro area had 7.7 MSF of new projects in the construction pipeline, and office developers are building more office space relative to existing stock than in any other city nationwide. But it’s more than just offices—Austin’s office aspirants are also looking for apartments, restaurants, and retail space, too.
Tenants Win Case to Keep Manhattan Apartments Rent-Stabilized
Tenants in NYC’s largest apartment complex, the Stuyvesant Town-Peter Cooper Village (“Stuy Town”), just won a legal battle against their landlord, Blackstone (BX). The decision will protect Stuy Town tenants from large rent hikes that Blackstone would have really loved.
The rents were too damn high: When Blackstone bought the 11,200-apartment complex back in 2015 for $5.4B, it promised that half the apartments in the complex would be rent-controlled. The other half of apartments were set to lose rent stabilization by July 2020. But now they won’t, because tenants just won the lawsuit they filed back in March 2020 arguing that all Stuy Town apartments should remain rent-stabilized.
A quick history lesson: Built for WWII veterans in the 1940s, Stuy Town housed middle-class Americans until Blackrock and Tishman Speyer bought the complex in 2006 and tried to evict hundreds to renovate and raise rents. The move produced widespread outrage and a settlement that led to Blackstone acquiring the complex. As a result, the property is so high-profile that Blackstone has to be very careful about any changes they want to make at the expense of tenants.
➥ THE TAKEAWAY
The PR response: Blackstone argued that its proposed rent increases were legal, within tenant budgets, and warranted because it had “materially improved” the units. But it’s not clear whether the world’s largest asset manager will appeal the ruling. It could hurt their image, which is already on the rocks after the firm limited investor withdrawals from its flagship fund, BREIT, in Fall 2022.
📰 Editors' Picks
They’re Lovin’ It: Fast-food giant McDonald’s (MCD) announced it will accelerate store openings in 2023 with a shiny new growth plan.
Bed, Bath & Bankrupt: After Bed, Bath & Beyond (BBBY) warned it could go bankrupt, REITs with significant exposure to the company’s holdings are in danger of suffering serious losses.
Shrinking pains: Redfin’s (RDFN) CEO foresees a devastating contraction in the real estate sector, which he thinks is necessary for the health of the market.
Metadata: Private equity firm KKR purchases 220 KSF of office space that Meta (META) left behind in NYC’s Hudson Yards as part of its mission to cut costs by consolidating office space.
No such soft landing: After years of steep gains, the rental market is in for a big plunge—one so steep it might stifle supply for years to come.
All-time classic: Rolex watches have outperformed stocks, real estate, and gold over the past decade, and just might be a store of value that never goes out of style.
Slippery Santos: The family of disgraced Representative-elect George Santos has fallen under scrutiny as records indicate his sister has abused eviction moratoriums to avoid paying rent.
San Fran for lease: As demand for office space keeps falling, a full one-third of San Francisco office space is now up for lease. If only they put an end to all those carjackings…
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🤝 Deals & Dealmakers
Evernest ever bigger: The full-service property management firm Evernest has acquired RPM Direct, adding 325 homes to its portfolio.
Pizzuti plays ball: The Pizzuti Cos. have just broken ground on Coppia, a 298-unit, 19-story highrise slated for construction in Chicago.
Realty’s rich: REIT Realty Income Corporation (O) closed a $1B multicurrency unsecured term loan from nine lenders that will mature in January 2024, with two 12-month extension options.
Cleaning up: Blackstone portfolio company Transmission Developers, which develops clean energy transmission projects, has just secured a second NYC office.
It’s still New York: TheRealDeal covers NYC’s 10 biggest office leases signed in December 2022. Hudson Yards and Times Square top the list.
Good Fortune: Fortune International Group and Kar Properties landed a $38M loan to re-start construction on a stalled luxury condo complex in downtown Miami.
LTC cares: LTC Properties (LTC) invested $128M in 12 assisted living/memory care properties in North Carolina, spanning 937 beds and 568 units.
📈 Chart of the Day
The 10-year Treasury yield surged in 2022. The public real estate market reacted. The private market? Not so much. As of Q3 2022, the REIT-implied cap rate was over 100 basis points above the private real estate cap rate. All else equal, this suggests private real estate valuations could drop 20% or more.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.