Soaring Yields and Tighter Lending to Reset CRE

With the 10-year Treasury yields hitting new heights, CBRE’s projections suggest a cooling period for real estate values in 2024

Soaring Yields and Tighter Lending to Reset CRE

With the 10-year Treasury yields hitting new heights, CBRE's projections suggest a cooling period for real estate values in 2024

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Good morning. As 10-year Treasury yields climb, commercial real estate values and investor sentiment are taking a hit. In other news, three suburbs in Austin have emerged as the fastest-growing in the nation, a recent study reveals.

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Looking to acquire or revamp a parking asset? AirGarage can help you identify revenue opportunities.

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Market Snapshot

S&P 500
GSPC
4,365.98
Pct Chg:
0.2%
FTSE NAREIT
FNER
668.12
Pct Chg:
2.2%

;

10Y Treasury
TNX
4.645%
Pct Chg:
1.9%
SOFR
1-month
5.32%
Pct Chg:
-0.2%

*Data as of 11/06/2023 market close.

CAPITAL CRUNCH

Soaring Yields and Tighter Lending to Reset CRE Landscape, Predicts CBRE

With the 10-year Treasury yields hitting new heights, CBRE's projections suggest a cooling period for real estate values in 2024, providing savvy investors an opportunity to capitalize on the expected market dislocations.

Falling property values: Following the spike in 10-year Treasury yields to a 5% high, CBRE reports a drop in confidence for commercial real estate investment, with projections of decreasing property values in 2024. The report forecasts value declines of 40% for national office properties, 28% for multifamily, 23% for retail, and 10% for industrial in 2024. Already, office properties have seen an approximate 30% depreciation, with variances based on property grade.

Cost of capital: The CBRE report highlights that as Treasury yields climb, the cost of securing capital follows suit, leading to tighter lending practices by banks. This shift is expected to drive up cap rates, which may depress commercial property values. Given these dynamics, CBRE has adjusted its 2024 growth forecast for commercial real estate investment volumes, turning a once-anticipated 15% growth into a forecasted 5% decline.

How we got here: The spike in 10-year Treasury yields has been fueled by strong economic performance and government financial policy. Despite positive trends like low unemployment and GDP growth, the persistence of inflation and job growth spurs worry over continuous high interest rates.

Between the lines: Further complicating matters, the U.S. federal deficit grew more than expected, signaling greater government borrowing needs. With the Federal Reserve and other major bond buyers reducing their Treasury holdings, bond prices have fallen, driving yields higher as investors seek risk compensation amid increased borrowing and inflation fears.

➥ THE TAKEAWAY

Buy low, sell high: Despite the current gloom, CBRE forecasts a yield decrease to 3% by 2025, likely triggering a rebound in property values. With a global capital surplus expected to inflate market prices, those who invest wisely during the current downturn, especially in resilient sectors such as multifamily, industrial, and retail, stand to benefit from the eventual market recovery.

A MESSAGE FROM AIRGARAGE

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DAILY HEADLINES

  • WeFailed: WeWork filed for Chapter 11 bankruptcy in New Jersey, with plans to cut "non-operational" leases and agreements with most of its secured creditors in place.

  • Rest in peace: Russian immigrant co-founder of Schon Tepler, Artem Tepler, has passed away at the age of 41, leaving behind a legacy of generosity and success in real estate.

  • From malls to homes: Converting just 10% of vacant strip malls in the US into housing could create over 700K homes, according to a report by housing nonprofit Enterprise Community Partners.

  • M&A shift: US REIT M&A activity in 2023 is down compared to previous years, with $63.9B YTD, according to Nareit data. Public-to-public deals have emerged as the dominant strategy.

  • Economic retreat: Blackstone Group's president, Jon Gray, believes that the Fed's monetary policy could lead to an economic slowdown.

  • SEC power struggle: Hedge funds and private equity firms are challenging the SEC over new rules, alleging a lack of authority.  Lawsuits have already been filed.

  • Back to campus: Demand for student housing is surging, but high interest rates and stricter lending criteria have led to reduced investment in the sector.

  • Checking in: Here’s how David Martin, founder of Terra, has built a diversified real estate portfolio in Miami, prioritizing development and community engagement.

  • Escaping cities: During the pandemic, around 468K people left NYC, accounting for over 5% of the city's population.

  • Downsizing dreams: San Jose developers are using a legal loophole to downsize housing projects, potentially leading to the loss of 5K units.

  • Diversifying portfolios: Landlords diversifying into CRE properties can create a more balanced real estate market, reduce the risk of bubbles, and attract businesses, according to Shawbrook.

  • Debt dilemma: Special servicer flags $150M in delinquent debt from troubled multifamily syndicator Tides Equities, including $48M in debt from Ready Capital.

  • From dream to reality: The Horizon Group secured a $48M construction loan for Residences at Nomi, a mixed-use complex in North Miami featuring 175 units and a six-story mall.

  • Uncovering opportunities: The narrow equity market this year highlights the importance of analyzing sectors and sub-sectors beyond broad indices to identify value opportunities.

SUBURBAN LIVING

These 3 Austin Neighbors Are Some of the Fastest-Growing Suburbs in the U.S.

Austin's suburbs, Georgetown, Kyle, and Leander, are redefining affordable living as they rank among the nation’s top three fastest-growing, budget-friendly suburbs in the U.S.

Leading the way: Georgetown is now the leading US suburb in terms of growth rate, per moveBuddha's research. It has grown by 26.7% since 2020. In September 2023, the average housing price in Georgetown was $453,376, surpassing Williamson County's median home price of $426,752. Families appreciate Georgetown's park system and child-friendly festivals.

America's fastest-growing bargan suburbs

Coming in at No. 2: Kyle has grown by 23.7% since 2020. With an average housing price of $336,615 (the lowest among the top Austin suburbs) and its close proximity to Austin, it is considered "the most happenin' suburb around," according to the study. Being only 22 miles from Austin, you can enjoy the suburban life while still being able to experience live music and mega festivals nearby.

Rounding out: Meanwhile, Leander enjoyed a 22.2% growth rate. The suburb’s average home prices are slightly lower than Georgetown's at about $450,798. The city has experienced significant growth, leading to projects like Leander Springs (with a beach and lagoon) and the Northline (a planned downtown district). Fortunately, housing prices have not increased significantly, allowing new residents to get more value for their money compared to other suburbs.

➥ THE TAKEAWAY

Big picture: Texas suburbs are evolving rapidly, casting a new light on affordable suburban living with the kind of growth usually reserved for bustling city centers. Despite Georgetown's higher-than-average housing costs, it clinches the title for growth and affordability, challenging the perception that rapid expansion comes at the cost of community and convenience. The full report can be found here.

QUICK HITS

📖 READ: When rates were low, banks became unprofitable, so investors turned to real estate. But to fight inflation, the Fed raised rates, and properties became bad investments. What comes next?

🎧 LISTEN: In this episode of Bisnow Reports, Jim Costello, chief economist at MSCI Real Assets, predicts a potential rise in distressed assets changing hands in the near future.

📊 DOWNLOAD: Retailers looking to expand their footprints have gone from having their pick of prime real estate to searching for the needle in a haystack, according to CBRE's newest retail report.

📈 CHART OF THE DAY

US Apt Rent Growth Plateauing (For Now) at 0.1%

Rent growth has leveled off with only a 0.1% year-over-year increase by October, hinting at a potential winter stabilization due to last year's similar rent declines—a pattern influenced by the base effect.

Housing supply continues to be the key factor in rent changes: less new construction correlates with higher rent increases, and vice versa. Wage growth outstripping rent hikes could lead to improved affordability, benefiting the overall rental market as it adjusts to these supply and demand shifts.

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