Good morning. Residential rents continue to be high across the nation, leaving renters with limited options other than to cut expenses. Office properties have lost their appeal, even for major office players. Meanwhile, Howard Hughes Corp. has closed $1.3 billion in financing deals to navigate any economic challenges. 

Read: Believe it or not, vacancy is vitally important. Without enough availability, renters and homebuyers have few options and often find their housing needs unmet. 

Watch: The self-proclaimed King of Miami Real Estate sits down with Henry Stimler of Newmark (NMRK) to share his predictions for 2023. 

Listen: Deconstruct breaks down NY Gov. Kathy Hochul’s State of the State address for 2023. Spoiler alert—affordable housing is priority #1.

Rising Rents & Little Assistance: Double Whammy For Renters

Despite declining populations, markets like Cleveland, OH, keep seeing rising rents. And as families continue to stretch their budgets, housing insecurity is becoming a problem nearly everywhere across the country.

Unprecedented times: As mobility skyrocketed during the pandemic, young people left expensive cities to get more space elsewhere. We keep hearing about the massive rent growth in FL and TX cities, but in places like Cleveland, rent increases are lasting even longer. 

Slim pickings: Despite the nationwide cool-down in rent growth, renters need help finding housing they can afford. Unfortunately, even when they do find housing they’re eligible for, it’s not always a win. Many multifamily properties are in terrible shape thanks to landlords who bought cheap housing stock and didn’t spend much money on upkeep.

Help wanted! Not only are low-income renters being forced into marginal areas, but many middle-income renters are also struggling to afford housing as inflation runs rampant and an impending recession looms larger than ever. To make matters worse, most pandemic relief programs have already run out of funds.

➥ THE TAKEAWAY 

Band-Aid solutions: Delayed eviction proceedings, rent control laws, and accessory dwelling unit programs are nice-to-haves but do little to tackle the root issue: insufficient housing. While the housing affordability and supply issue has quietly snowballed in size, the cracks are starting to show.

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SAY IT AIN'T SO!

Office Landlords Pivot to Other Property Types

As more companies keep embracing (or just accepting) remote work trends, some of the biggest office developers are moving away from their bread-and-butter properties into other types of real estate. 

Actions speak louder: Many investors claim to be bullish on the office sector’s long-term prospects, but their actions say otherwise. Boston Properties (BXP), which owns more office assets than any other public company, is heavily developing residential, lab, and life science spaces. Empire State Realty Trust (ESRT), which owns the Empire State Building, is adding multifamily to its portfolio for the first time ever. 

End of an era? Despite calls for in-person collaboration, Americans have rearranged their workplace habits away from brick-and-mortar offices—perhaps for good. Naturally, shares of publicly traded office firms have slumped as long-term growth prospects look bleak. Jamie Dimon tried his best, but many employees are simply switching jobs instead of returning to their offices.

➥ THE TAKEAWAY 

Cash flow is king: Building highly amenitized, state-of-the-art office spaces requires significant capital investment. Which is why it’s so much easier to just convert offices to residential apartments instead. By comparison, apartments require less capital expenditure and offer attractive near-term rental upside. The data seems to agree, with close to 500,000 units set to be completed in 2023, the most since 1986.

DEATH OF EASY MONEY

Howard Hughes Secures $1.3B Financing for Potential Economic Challenges

Real estate developer Howard Hughes Corp. secures $1.3 billion in financing to prepare for potential economic challenges, amid predictions of rising interest rates for US corporations.

Prepare for the worst: Howard Hughes has recently completed a range of financing deals to support their office, retail and residential projects across the country. These deals include refinancing existing loans, obtaining new loans, and borrowing for construction. With these recent deals, Howard Hughes has cashed in big time, boosting their liquidity to a cool $800M, allowing them to have a solid financial position as they head into 2023.

Debt reduction: The round of refinancing deals has reduced the company's debt to be paid in the next two years to less than $155 million and shortened the average maturity of their debt to 7.5 years. Although Howard Hughes did not disclose the interest rates on its new loans, it's likely that the refinancings will mean the company will have higher interest payments due to the overall increase in borrowing costs since the Federal Reserve began raising rates last year.

➥ THE TAKEAWAY 

Why it matters: The Federal Reserve has increased the short-term benchmark federal funds rate seven times since March 2022 as part of its strategy to fight inflation and it is currently in the range of 4.25% to 4.5%. The Fed has suggested that rate hikes may continue in the coming year, leading many large corporations to borrow more money in case the rates spike even higher and to pay back money they already owe, as stated by Winnie Cisar, global head of strategy at CreditSights.

• HOA violation: Board members of the Hammocks HOA in South Florida were accused of siphoning $2M from HOA members. And they wonder why nobody likes HOA boards! 

• Zero bids: Sky-high interest rates could make 2023 the Year of The Withdrawn Listing. More and more properties are stuck in debt limbo with no buyers in sight.

• Take a seat: After complaints from this year’s anticipated attendees, the 2023 REBNY Gala will once again be a seated dinner affair. 

• No more red tape: They look great on paper, but NY lawmakers will need to change zoning and building codes to encourage more highly sought-after office-to-residential conversions.

• NIMBY again: Gainesville, FL residents voted to initiate the process to reinstate zoning that will prevent building 2, 3, or 4-family homes, after removing single-family zoning in October.

• RIP cheap money: 2022’s interest-rate chaos marked the end of cheap money, impacting every area of finance from NFTs to real estate. And to think that in 2021 rates were 2.25%…

• Moving in: NY-based Common and Berlin-based Habyt are merging to become one of the world’s biggest providers of co-living space for young people. 

• Long live the King: TOMS King, a franchisee of 90 Burger King locations (QSR), declared bankruptcy. The news comes amid a stretch of sluggish sales and traffic.

• City for sale: In Q4 2022, all major real estate asset classes averaged double-digit price drops in Manhattan. But in better news, there will soon be a casino in Times Square (probably).

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• Bye, Chicago: Citadel is planning a 51-story office tower at 350 Park Ave in NYC, with a target completion date in 2032.

• Deal of the day: Tishman Speyer (TSO) sold the 10-building Springs Center in Shanghai to a RMB fund for $1.1B.

• King of the North: Northmarq just brokered the sale of a 68-unit, 3-building portfolio in Northridge, CA, for $55.5M.

• Trophy office: Newmark (NMRK) brokered the sale of Ontario Airport Tower, a 6-story, Class A office building in SoCal, for $39M.

• Selling like hotcakes: Healthcare Realty Trust (HR) sold over 34 properties totaling $1.1B, with another $100M under contract.

• Island time: The Jamaican consulate has signed a 20-year deal for 42.5 KSF in Murray Hill, owned by Somerset Partners and Meadow Partners.

• Lap of luxury: Billionaire investors Vladislav Doronin and Len Blavatnik secured $277M in construction financing to build an 18-story beachfront tower in Miami.

• Sale-leaseback: VICI Properties has acquired the real estate assets of four PURE Casinos in Alberta for C$271.9 million ($200.8 million) from PURE Canadian Group.

• Exceptional returns: Calvera Partners has sold Terrace Cove, a 304-unit apartment complex in Austin, TX, reflecting the resilience of the Austin market.

This chart shows how rental demand essentially evaporated in the 2nd half of '22. Both Q3 and Q4 recorded the weakest numbers since 2013. The Dec 2022 numbers were especially low. While December is always slow, Dec 2022 was the slowest month in at least 12 years.

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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.