Good morning. In today’s email: The country’s largest online real estate marketplace has made some rather unsurprising predictions about the 2023 housing market. There’s a gloomy forecast (with a happy ending) for office space demand amidst growing fears of a recession on the horizon. Meanwhile, a decades-old shopping mall outside NYC is getting a $650M residential makeover that’s been years in the making.

🎧 Podcast of the Day: On today’s episode of Bisnow Reports, NYU professor Arpit Gupta discusses what he and his colleagues are calling the “Office Real Estate Apocalypse,” estimating that office spaces could lose $450B in value nationwide.

PLACE YOUR BETS

What Zillow Thinks Will Happen to The Housing Market in 2023

Zillow (ZG), the leading online real estate marketplace, has released its predictions for the 2023 US housing market. Zillow’s forecast, based on the most recently available real estate data and trends, is mostly what you’d expect:

Bet on the Midwest: In 2021, the housing markets in the South and West were projected to be the strongest. Moving into 2023, Zillow is still betting on the Midwest because of its affordability. Average mortgages remain below 30% of income across states like Ohio, Pennsylvania, and smaller metro areas in Illinois. Rent is also more affordable, probably because there’s more inventory in the Midwest compared to other parts of the country. 

The more the merrier: Zillow predicts that joint home purchases (made together with friends or family) will start trending due to rising housing costs. In fact, a Spring 2022 Zillow survey found that 18% of homebuyers made their home purchase with a friend or relative other than their spouse. The survey also showed that 19% of prospective homebuyers intended to purchase their home with a friend or relative within the next 12 months. 

➥ THE TAKEAWAY 

Peering into the future: Zillow also had quite a few things to say about how the housing market might shift throughout 2023. On one hand, the company is projecting that home values will remain flat and rent growth should return to historical norms. On the other hand, there may be a surge in the number of first-time landlords if rent continues to grow faster than home values. Zillow also suspects that we will see far more new multifamily constructions next year, especially if the government continues incentivizing affordable housing construction.

GLOOMY FORECAST

NAIOP Releases Rather Grim Office Space Projections

Given the looming concern of a recession in 2023, the Commercial Real Estate Development Association (NAIOP) projects that net office space absorption in the fourth quarter of 2022 is forecast to be 7.1 MSF, with absorption in 2023 forecast to slow to 8.1 MSF.

Where we are now: The national office market absorbed 6.6 MSF in Q2 and Q3 2022, and NAIOP anticipates 7.1 MSF in Q4. But vacancy rates have hit 17.1%—the highest level since Q3 1993 over 30 years ago. And as new office space construction outpaces absorption, there is still quite an appetite for high-quality office buildings—despite continued weakness across the sector. 

The threat of recession: In a recent survey conducted by the National Association for Business Economics and the Wall Street Journal, over 60% of economists said they believe the US will enter a recession within the next 12 months. Amid such economic uncertainty, commercial tenants have grown far more cautious, adopting smaller, newer, and more flexible property footprints. 

➥ THE TAKEAWAY 

Darkness before the dawn: Considering the latest economic trends and predictions, it’s no surprise that NAIOP believes 2023 will only see 8.1 MSF of net office absorption for the entire year. The good news is that they also think the situation will get better by the following year. Predicted net US office absorption over the first three quarters of 2024:  13.3 MSF.

The Long Death—And Resurrection—of An Old White Plains Mall

A $650M multifamily development project set to replace an old 1970s mall in White Plains, NY, has been years in the making. Now, at long last, the project will finally break ground. 

The death of shopping malls: Competition from e-commerce and newer shopping centers have driven many older malls out of business around the country. Due to their prime locations and large footprints, however, old malls often attract enterprising developers looking to revitalize tired properties. But converting a shopping mall into multifamily housing can be a nightmare. That’s why 20% of malls that closed since 1992 are still standing, without any redevelopment plans in store. 

What’s the plan, Stan? The project will break ground this Thursday in its first phase, which will cost $350M and include two of four planned residential buildings. Phase One is set to be completed in early 2025. They’ll have to buy out the remaining tenants to start Phase Two. The full development will encompass 860 multifamily units and 80 KSF of retail and commercial space.

➥ THE TAKEAWAY 

Finally getting underway: City officials have wanted to tear down the White Plains Mall and build much-needed (and profitable) housing in its place for a very long time. The 170 KSF mall was built in the early 1970s and sat on prime real estate two blocks from the Metro-North station, a half-hour train ride from Manhattan. But in the era of e-commerce, none of that matters anymore.

📰 Editors' Picks

• Right and wrong: As pandemic restrictions were lifted and other economic factors shifted, some predictions for 2022 from CRE experts have turned out to be correct, while others were way off. 

• Deadly returns: Life insurance companies are experiencing the worst returns for commercial real estate loans in decades, with  returns down 11.8% this year.

• The smaller, the better: Demand for smaller retail centers skyrocketed last quarter as absorption surged 20% to 8.1 MSF. Interesting plot twist.

• This is where it’s at: Florida and Texas nabbed the most new residents of any states in the country, according to a study from Forbes Home. 

• Fast-food wage war: Restaurant and trade groups have petitioned to halt California’s FAST Recovery Act, which could raise the minimum wage for fast food workers to $22 an hour.

• NYC high rollers: Next month, state officials will begin accepting proposals for new casinos in NYC. And six big-time developers have already unveiled their ambitious projects. 

• Art Basel comes to Miami: Four things this writer learned from Art Basel at Jungle Island: 1) 9pm is still too early, 2) the party never ends, 3) always plan ahead, and 4) go with the flow.

🤝 Deals & Dealmakers

• Desert deal of the day: Liv Communities has just sold a four-property, Class A senior housing portfolio in Phoenix, Arizona for $255M. 

• Match made in data heaven: Data center operator Aligned, which is backed by a unit of Macquarie Group Ltd., is negotiating a $1.8B acquisition of its Latin America-focused rival, Odata. 

• Milestone acquisition: The portfolio price for Milestone Group’s $300M acquisition of an 870-unit apartment complex in Fairfax County Virginia will increase by 30% in four years. 

• Office space savior: Silverstein Properties is raising $1.5B to redevelop out-of-commission NYC office towers into apartment buildings, which the city sorely needs.

• EDENS groceries: Three grocery-anchored shopping centers in LA County have been purchased by EDENS for $137M to expand their retail portfolio. 

• I know what I’m ordering: Mid-to-large private equity firms have set their sights on build-to-rent and single-family rental (SFR) homes in the coming year.

 📈 Chart of the Day

In the five years following the pandemic, investor interest in Sun Belt markets skyrocketed as regional economies and housing markets recovered after the Great Recession.

Since the end of 2021, however, multifamily rent growth in Sun Belt markets has decelerated at a much faster pace than the national average.

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.