Together with

Good morning. An influx of new apartments in cities like Atlanta is cutting into the profits of the largest publicly traded property owners. US banks are preparing to sell CRE loans at a discount, even when borrowers are up to date on repayments, due to concerns about the market's stability.

Meanwhile, Airbnb is suing New York City after being forced to remove many NYC listings from the platform due to new regulations requiring short-term rentals to be formally registered.

Today’s issue is brought to you by BetterPitch. Focus on your deal, not your deck.

👋 First time reading? Sign up here.

Sunbelt Construction Boom Threatens Top Apartment Rental Profits

A wave of new multifamily rental units is coming online in Sunbelt cities like Atlanta, and it’s set to cut into the dwindling rental profits of the largest publicly traded landlords in the region.

Sunbelt cities exposed: Sunbelt cities are the most exposed to the ramp-up in new supply, according to a May report from real estate analytics firm Green Street. Cities like Atlanta are already seeing rents flattening out, and occupancy rates are expected to continue to decline. Nationally, more than 950K multifamily units are under construction, according to the U.S. Census Bureau, which is three times the number for apartment construction from two decades ago.

Apartment REITs impacted: Camden Property Trust (CPT) and Mid-America Apartment Communities (MAA) are among the publicly traded landlords with the largest holdings in the South and Southwest, where new supply is booming. Both firms beat Q1 expectations, but investors are looking to the future, when new leases will be signed with much lower rent increases and more competition. Multifamily building values also fell 12% YoY in April, according to MSCI Real Assets.

A short-lived shift in the market: While apartment REITs like Camden and Mid-America face pressure from all the new units, they think it will be a short-term problem. Landlords expect permitting for future apartment developments to slow down soon due to prohibitively high construction financing rates. The FTSE Nareit Equity Apartments index, which tracks the performance of publicly traded multifamily owners, indicates overall performance is up just 5% year-to-date, compared to a 12% gain for the S&P 500.

➥ THE TAKEAWAY

Enjoy it while it lasts: While publicly traded apartment owners are expected to report larger profit growth than some other property sectors this year, it’s unclear how sustainable the current trend is. Many tenants seem to be running into the upper limit for how much more they can pay in rent, while others may simply be spending less, worried about a slowing economy and the prospect of more job losses. Sunbelt cities like Phoenix and Las Vegas are already seeing rents fall, indicating potential market softening.

⏩ Forward this article by clicking here.

Focus on your deal, not your deck

Did you know that having the right pitch can drastically impact your chances of raising funding?

But getting it right can be costly and time-consuming…

That's where BetterPitch comes in.

BetterPitch provides a comprehensive solution for your pitch deck needs, from detailed research to professional design.

• Asset Acquisition: Raise debt and equity with ease.

• Asset Management: Investor reporting, simplified.

• Asset Disposition: Streamline the sale process.

BetterPitch has helped dozens of companies raise funding and offer an experienced set of eyes on your deal to craft your perfect pitch and investor materials.

US Banks Prepare For Wave of CRE Loan Discounts And Losses

Some US banks are preparing to sell off property loans at a discount even if borrowers are up to date on repayments, a sure sign of their determination to reduce exposure to the distressed CRE market.

The juice ain’t worth the squeeze: Some banks are willing to take outright losses on 'performing' real estate loans, which will retain their full value as long as borrowers make repayments promptly. Buyers are encouraged to acquire these loans based on the fact that the banks involved in the sales are focused on "keeping a clean loan book.” HSBC USA, for example, is selling hundreds of millions in CRE loans, many at a discount, to wind down direct lending to US property developers.

Delinquencies and value erosion: Fears of an uptick in delinquencies are expected, particularly on debt secured against office properties that have experienced falling demand due to the enduring popularity of work-from-home. The low demand for CMBS has left banks of all sizes holding onto more property debt than they or regulators would like. Meanwhile, executives and regulators are raising alarm bells over the overall health of the CRE sector (even Elon Musk gave his two cents).

Changes in loan accounting: Some banks, including Citizens (CFG) and Customers Bancorp (CUBI), are changing the way they account for loans by switching designations from “hold to maturity” to “available for sale.” Citizens, which is reducing its CRE lending, more than doubled its “available for sale” inventory to $1.8B in Q1. Meanwhile, Customers Bancorp reduced CRE lending by nearly $25M while recategorizing $16M of the loans as “held for sale,” up from zero in 4Q22.

➥ THE TAKEAWAY

Willing to take losses: The decline in demand for commercial mortgage-backed securities has prompted banks of all sizes to hold a higher percentage of property debt than desired. Banks are expected to ramp up discounted sales of performing real estate loans this year in a bid to reduce commercial property exposure, even if it means taking losses. And CRE loans, especially those backed by office properties, are particularly vulnerable to non-repayment and value erosion.

⏩ Forward this article by clicking here.

Airbnb Loses Millions, Sues NYC Over New Short-Term Rental Restrictions

Airbnb (ABNB) is suing New York City over regulations that the platform claims forced hosts to remove listings that could cost Airbnb $85M and counting.

Short-term rental registrations: Local Law 18 in New York will no longer allow short-term rental platforms to process payments for those units unless the units have been formally registered (fun). However, starting back in March, only 29 units have successfully registered with the Office of Special Enforcement because registering requires inspections, which results in delays, which may result in denials, etc.

Listen to the lawyers: Airbnb's attorney told Crain's that only 9 out of 38,500 Airbnb units have successfully registered as of May 3rd, which represents 0.05% of the $85M Airbnb earned in NYC revenue in 2022. The lack of clarity around registration requirements has led Airbnb to face consequential delays, according to two lawsuits the company filed against New York City this week.

What’s at stake: While Airbnb is requesting the court for a temporary restraining order against the law, Airbnb’s attorney claims it will have to cancel thousands of NYC registrations if the platform is not granted the interim injunction on time. The platform aims to demonstrate that the new laws banning short-term rentals breach the city’s prior contracts.

NYC tourism will suffer: One of Airbnb’s primary arguments is that the short-term rental platform has become an essential component of the city's tourism industry. And they probably aren’t wrong about that, as Airbnb reservations tend to be much more affordable than hotel stays. But the optics are working against Airbnb. Short-term rentals as a whole are perceived to worsen the Big Apple’s housing crisis, and long-term rental opportunities are still scarce and expensive.

➥ THE TAKEAWAY

NoBnB: NYC's new registration rules are a reflection of cities across America seeking to regulate online short-term rental platforms. Data shows a slightly to significantly reduced number of Airbnb listings after similar registration schemes took effect in Santa Monica, Boston, and San Francisco. Although NYC expects a bumper travel season with 3M visitors this summer, Local Law 18 could seriously limit their lodging options. The future of Airbnb in New York remains uncertain as the city could potentially challenge the lawsuits.

⏩ Forward this article by clicking here.

• One man’s trash…Blackstone (BX) scored big by betting on neglected urban warehouses before anyone else realized they would become prime real estate.

• From desks to dwellings: Jamison Services plans to convert a 144 KSF office to 210 apartment units and a 95 KSF office to 141 apartment units in Los Angeles.

• Mortgage mayhem: Delinquency rates for commercial and multifamily mortgages went up in Q1 and accelerated throughout Q2 as well.

• Bears widen stadium search: After meeting with the mayor of Naperville about a potential stadium, The Chicago Bears are potentially listing their 326-acre site in Arlington Heights for sale.

• Activist investor hates merger: Global Net Lease (GNL) and The Necessity Retail REIT (RTL) plan to merge into a $9.6B net lease REIT, and Blackwells Capital opposes the deal completely.

• Retail’s latest lifeline: Experts at the annual ICSC conference in Vegas say equity investments will be crucial for retail deal activity due to tighter lending environments.

• Multifamily meltdown: Multifamily debt origination volumes dropped 61% YoY in 1Q23, according to the MBA's originations index.

• Industrial sector update: Despite a 40% drop in overall industrial sector transactions in Q1, certain areas still show momentum, according to Green Street's latest sector update.

• Soccer swag: Paris Saint-Germain (PSG) has opened its third U.S. location in Miami Beach, featuring team gear and limited collections. Lids operate all three locations.

• Office bonds hit breaking point: The delinquency rate on office building mortgage bonds spiked to its highest level since 2018 in May, signaling a potential "tipping point" for investors.

• More redemption requests: Blackstone Real Estate Income Trust Inc. (BREIT) saw $4.4B in redemption requests in May and fulfilled $1.3B of them.

• The deceptive investor: A former Wisconsin nurse anesthetist turned real estate investor is accused of bank fraud linked to inflated prices and fake purchase agreements.

• Why Trader Joe's won't trade: Unlike its peers, Trader Joe's doesn't offer online shopping, focusing instead on its in-store experience, which continues to draw customers.

Most publicly traded commercial real estate investment trusts (CRE REITs) are currently experiencing substantial discounts to their net asset value, with office REITs being the most heavily discounted at -57.7%. Out of the top 10 REITs with the largest overall discounts, eight of them belong to the office sector. On the other hand, casino REITs are the only type of CRE REITs that are trading above their net asset value, with a modest premium of +2.3%.

Single family rental expenses are growing faster than revenues: 6.5% vs 8.0%.

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 always looking for their next investment, product, or tool.