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Good morning. The median asking rent in the U.S. fell to its lowest point in 13 months in March. Wells Fargo warns of more office-market stress on the way. Meanwhile, Rockefeller Center's luxury hotel exemplifies a shift to hospitality for Manhattan landlords targeting corporate and leisure travelers.

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Renters Cut Costs Despite 1st Annual Drop in Rents Since Pandemic Began

Looks like renters in the US can finally breathe a sigh of relief. After the never-ending rollercoaster ride of rising rent prices since the start of the pandemic, rent prices have finally dropped annually for the first time since March 2020.

It's happening: Redfin's analysis of the 50 largest U.S. metro areas found that the national median rent price dropped to $1,937 in March, a 0.4% YoY decrease, marking the first annual decline since March 2020. Apartment List data also shows that new renters in January paid 3.5% less than those who signed in August, the first time in five years rent has dropped monthly over a six-month period.

Asking rent: Despite the recent decline, rents still stand at 19.9% higher than they were before the pandemic. The median asking rent in March remained the same as in February, but wages have also increased at a similar rate during this time.

Distinct regional differences: Austin and Chicago saw rent declines of 11% and 9%, respectively, while Raleigh, NC and Cleveland had rent increases of nearly 17% and over 15%, according to Redfin's analysis of the 50 largest US metro areas. Redfin's chief economist, Daryl Fairweather, attributed the changes to fewer people willing to splurge on rentals. Manhattan remains the priciest rental market, with a median monthly rent of $4,022, while Louisville, KY is the cheapest with a median asking rent of $1,378 per month.

Priciest and cheapest cities:

➥ THE TAKEAWAY

Big picture: The US rental market is experiencing a decrease in demand due to rising prices and economic uncertainty, while supply is increasing with a record number of new multifamily apartments. However, rents remain high, with a 20% increase compared to pre-pandemic levels and overall inflation affecting prices.

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Office-Market Stress to Persist, Says Wells Fargo

The CRE market is shaky right now, and warnings are coming from Wells Fargo & Co (WFC). The bank is reviewing its $35B portfolio of office loans for ways to decrease risk as it seeks to counteract signs of weakness in the market.

Cracks in the office market: Wells Fargo's CFO, Mike Santomassimo, warns of increasing stress in the office market due to lower demand, higher financing costs, and challenging capital market conditions. The bank has been increasing its allowance for credit losses on office loans for the past four quarters, and provisions have increased in the first quarter of the year, partly due to commercial real estate loans.

Turning over every stone: The bank had $35.7B of office loans outstanding at the end of March, which represents 4% of its total loans. Office properties have struggled as owners are starting to default on these loans. Wells Fargo is reviewing its portfolio property by property to understand the situation before deciding on whether to lend against them.

JPMorgan loans: JPMorgan and other lenders discussed their commercial real estate exposure during recent earnings calls. JPMorgan's CFO mentioned that their office loan portfolio is focused on high-quality buildings, while their CRE exposure is mainly in supply-constrained markets for multifamily properties. JPMorgan's CEO, Jamie Dimon, said that the tightening in lending would mainly affect the real estate market, which is consistent with the views of real estate investors.

➥ THE TAKEAWAY

Tightening the screws: Commercial property owners are facing $400B in debt maturing this year, with banks holding more than 50% of loans coming due in 2026 and 2027. Office properties are struggling, leading to more defaults and heightened skepticism towards commercial real estate. The rise in interest rates poses a risk for more defaults in the future. Tighter lending will have a significant impact on the real estate market, with varying opinions among lenders.

📖 Read about the effects of recourse vs. non-recourse debt on CRE and why it might have a limited impact on the banking sector and real estate market.

🖥️ Watch this CCTV footage of multifamily developer Patrick Carroll of the Carroll Organization allegedly spitting in a Wynwood Miami restaurant manager’s face, courtesy of The Real Deal.

🎧 Listen to Andy Dunn, founder of Bonobos, about his experience with mental illness, the success and failure of apparel companies, selling to Walmart, and the future of e-commerce in this episode of The Fort with Chris Powers.

Rockefeller Center Owner Plans to Convert Offices Into Luxury Hotel

Rockefeller Center's owners are looking to transform vacant office space into a luxury hotel. The move follows other Midtown landlords that have also turned to hospitality and entertainment to adapt to post-pandemic norms.

Little Nell’s sister: Aspen Hospitality plans to convert 10 floors of vacant office space at Rockefeller Center into a luxury hotel. The hotel will be the second location for the company's Little Nell chain, the first of which opened in Aspen, Colorado, in 1989. The decision to convert the unused office space has been in the making for years, but the pandemic forced their hand. The hotel is now awaiting city approval, a part of the special permitting process approved in 2021. Awaiting city approval, the hotel is set to open its doors in 2026 if all goes well.

Doing things differently: The hotel is one of the first to seek approval under New York City's new special permitting process, which requires Planning Commission and City Council approval. Aspen Hospitality has also reached a neutrality agreement with the city's Hotel and Gaming Trades Council that will enable the hotel's employees to unionize. The Little Nell in Aspen, CO, has a room rate starting at $1,800 in the winter season, but there’s no word on the expected rate of its newest NYC location.

Bringing back Midtown: Before the pandemic, many NYC residents avoided Midtown, which was crowded with tourists during the holiday season but was relatively quiet on weekends and after business hours. However, Tishman Speyer embarked on an ambitious overhaul, completing a redesign of the area around the Rockefeller Center ice-skating rink and adding several retail stores along with new high-end restaurants, such as Lodi and Le Rock.

➥ THE TAKEAWAY

Not many options: Many Midtown landlords have shifted to entertainment and hospitality due to the pandemic's impact on office demand. Tishman Speyer, which manages Rockefeller Center's day-to-day operations, revealed the tower’s office space is 93% leased. However, most of its buildings average only 50–60% occupancy on their busiest weekdays. Meanwhile, SL Green Realty Corp. (SLG) partnered with Caesars Entertainment Inc. (CZR) to propose converting a Times Square office tower into a hotel and casino.

• Billionaire problems: David and Simon Reuben are seeking to finalize one of Los Angeles' largest real estate projects, valued at $2.5 billion, after gaining control of significant portions of the plan through debt financing arrangements.

• Asian remix: Partial ownership deals for Asian properties are on the rise, with deal volume hitting $52B in 2022 as investors seek alternatives to full ownership for core assets.

• Flatlining rents: Rising expenses and falling rents have left landlords of up-market U.S. apartment buildings exposed following a wave of post-pandemic era buying and rent escalating predictions.

• Deal of the day: Penwood Real Estate Investment Management got a $125M commitment from Virginia Retirement System for its Penwood Select Industrial Partners VII fund targeting a $500M hard cap.

• Big wave incoming: NY Fed warns of a "systemic crisis" with a $47B wall of CRE debt backed by NYC office buildings due to mature, putting full economic recovery for NYC at risk.

• On solid ground: For the first time since the Federal Reserve initiated interest rate hikes in early 2022, underwriting assumptions for prime multifamily assets are beginning to stabilize, according to CBRE.

• Can’t catch a break: The WeWork (WE)-Rhone joint venture defaulted on a $240M loan for a San Francisco office tower where WeWork is an anchor tenant.

• Got capital? Dennis Wong's Verbena is seeking more than $170M for the NY Lanthian building, a 209-unit, multifamily, free-market property with a $103M mortgage, under a listing packaged with the debt.

• Unpacking rent: By analyzing extensive and intensive margins, a new study questions why rents in big cities have gone up despite reduced demand for local living due to remote work.

• Supreme shame: Supreme Court Justice Clarence Thomas failed to report receiving money from his wife’s closed real estate company. He also forgot to mention those all-expenses-paid vacations worth six figures annually for decades, paid by real estate mogul Harlan Crow.

• Changing landscape: A Colliers report identifies Georgetown and Leander as the two fastest-growing cities in the US., while Austin is one of the top 10 markets for emerging warehousing, shipping, and distribution center demand.

• “Smarter than we are”: Microsoft (MSFT) has invested $10B in OpenAI, developing AI-driven intelligent rules engine WillowTwin to integrate building systems.

• Debt of the day: Champion Real Estate secured a $40.5M loan for a growing student housing portfolio with 427-bed University Village Fullerton close to the LA-Orange County border.

• M&A trends: Private equity drove 91% of data center M&A activity, or $48B in 2022, with KKR & Co. (KKR), Blackstone (BX), and Berkshire (BKSH) making major acquisitions in the US.

Memphis leads the nation's largest multifamily markets with the highest apartment vacancy rate at 13.3%, up from 4.7% in Q3 2021. In contrast, NYC has the lowest vacancy rate at 2.4%, a slight increase from a record low of 1.83% a year ago.

*“Net Return" refers to the annualized internal rate of return net of all fees and costs, calculated from the offering closing date to the date the sale is consummated. IRR may not be indicative of Masterworks paintings not yet sold and past performance is not indicative of future results. See important Regulation A disclosures at masterworks.com/cd.