White House’s $45B to Fast-Track Office-to-Housing Conversions

Plus: The U.S. industrial real estate market is stabilizing after high demand.

White House's $45B to Fast-Track Office-to-Housing Conversions

Plus: The U.S. industrial real estate market is stabilizing after high demand.

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Good morning. The Biden administration earmarks $45 billion to turn empty offices into affordable homes. The U.S. industrial real estate market is stabilizing after high demand. Meanwhile, Austin developers secured a deal for a major subdivision on 775 acres in Buda.

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Market Snapshot

S&P 500
GSPC
4,137.23
Pct Chg:
-1.2%
FTSE NAREIT
FNER
612.97
Pct Chg:
-2.0%

;

10Y Treasury
TNX
4.821%
Pct Chg:
-0.4%
SOFR
1-month
5.30%
Pct Chg:
0.0%

*Data as of 10/27/2023 market close.

FEDERAL PUSH

White House Unveils Plan For Residential Conversion Push

The Biden administration unveiled a $45 billion strategy to combat the U.S. housing shortage by repurposing empty office buildings into affordable residences. Yet, a closer look reveals some nuances.

Details of the initiative: Outlined in a Biden administration fact sheet, the focus is on generating housing that is not only affordable but also energy-efficient, close to transit, and job opportunities. This move aims to reduce the greenhouse gas emissions from buildings, which account for nearly 30%. However, initial evaluations suggest that the plan mainly repurposes existing programs without introducing additional funding, resulting in intensified competition for the same resources.

Key elements of the proposed plan are detailed below:

  • The Transportation Department has provided new guidelines on utilizing over $35 billion from TIFIA and RRIF programs for transit-oriented developments, especially focusing on housing developments near transportation.

  • The Department of Housing and Urban Development highlighted the use of the $10 billion Community Development Block Grant fund for enhancing housing supply. They are also inviting applications for the $85 million "Pathways to Removing Obstacles to Housing" program which supports conversion strategies.

  • The General Services Administration is emphasizing its Good Neighbor Program to sell surplus federal properties suitable for residential conversions.

  • The Department of Energy has introduced a toolkit offering guidance on tax deductions and credits applicable to residential conversions.

  • The Treasury Department is informing about tax deductions related to multifamily construction.

  • A comprehensive guidebook has been released by the White House detailing federal programs across seven agencies available for commercial-to-residential conversions.

National office vacancy crisis: Nationally, office vacancies have surged to about 25%, with cities like San Francisco experiencing even higher rates. This has led to a decline in property values and increased mortgage defaults. While many buildings are available at discounted prices, the challenge lies in financing. Increased borrowing costs and uncertainty among companies about space requirements contribute to the financial strain.

➥ THE TAKEAWAY 

Zoom out: The U.S. government, a major holder of office space, sees potential in repurposing underused assets. With the Biden administration steering resources to this initiative, the goal extends beyond tackling the housing crisis to revitalizing urban cores and possibly reducing living and commuting expenses. Yet, the efficacy of this strategy hinges on securing fresh funding, casting uncertainty over the transformative impact on the commercial-to-residential conversion scene.

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DAILY HEADLINES

  • Work from meh: As workers return to offices, the demand for home offices in real estate listings has significantly declined compared to its peak during the pandemic.

  • HQ in foreclosure: Autotrader has left its longstanding headquarters at 3003 Perimeter Summit in Atlanta, with the building recently being acquired by its lender

  • Firing back: WeWork has issued a cease and desist letter to competitor Codi over its "WeWont" marketing campaign, accusing them of misusing WeWork's intellectual property and other violations.

  • What’s acceptable? The concept of Minimum Acceptable Housing emphasizes that housing needs are deeply personal, with criteria varying widely among individuals; what's ideal for one might not be for another.

FROM BOOM TO BALANCE

Industrial Real Estate Shift: Big-Box Spaces Cool Down as Smaller Suites Heat Up

The U.S. industrial real estate sector, after years of hot demand, is showing signs of cooling, although experts describe this as a normalization.

Tenant cautiousness: Despite occupancy rates holding strong at about 97%, major industrial REITs such as Prologis and First Industrial Realty Trust note that tenants are becoming more cautious, especially concerning large capital expenditure commitments like leasing new warehouses.

Big-Box takes a hit: According to Stag Industrial CEO Bill Crooker, larger industrial spaces (over 200K SF) are facing reduced growth or even declining rents, in contrast to smaller suite sizes (less than 150K SF), which are still in demand. This is a significant shift from the previous year when these big-box industrial spaces were highly sought after, driven by a boom in e-commerce.

Regional variances: Certain U.S. regions with a significant presence of big-box industrial spaces, such as Indianapolis, Columbus, and South Dallas, are more affected by this slowdown. Conversely, areas with fewer big-box spaces and more smaller suite sizes continue to perform well. Prologis, a major player in the U.S. industrial market, reported a decline in Q3 net earnings and a slight dip in occupancy.

Smaller markets and tenants still thriving: Companies investing in smaller markets or those catering to local tenants are witnessing better results. EastGroup Properties, which focuses on smaller tenants, reported a 22% increase in net earnings per share. The company's leadership remains optimistic about their rent growth prospects in the upcoming year.

➥ THE TAKEAWAY

Big picture: Despite the challenges, the general outlook for industrial REITs remains positive. This positivity is driven by robust rent growth experienced over the past two years, allowing most REITs to continue performing well. The strong rent growth during the pandemic has provided a cushion for industrial landlords, ensuring that operations remain steady even as the market undergoes adjustments.

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FROM BOOM TO BALANCE

MileStone and Buda Seal Tentative Deal on 775-Acre Persimmon Project

Austin-based developers have finalized a deal with Buda city officials to advance their plan for a large subdivision on a 775-acre tract.

The background: The Persimmon development became a focal point in discussions surrounding the area's growth. MileStone Community Builders and the city had faced disagreements on matters like the size of lots and the number of homes. MileStone leveraged a new state law, enabling them to potentially bypass the city and develop with their utilities. This strategy appears to have accelerated the decision-making process.

Tentative agreement: In the new agreement, the number of homes has been capped at 2,300, down from the original 2,800. The updated terms also stipulate no for-rent multifamily lots, diverse lot sizes, and provisions for the local school district and emergency services. The terms include more public park space and a provision for an aquifer storage and recovery well site. The agreement is still pending ratification from the Buda City Council.

➥ THE TAKEAWAY

Why it matters: The tentative agreement between MileStone Community Builders LLC and the city of Buda could significantly advance the Persimmon development. If approved, Buda will not only annex the property but also facilitate utilities and infrastructure funding. With options to independently handle water and wastewater provisions, MileStone is strategically positioned to transform the area with thousands of new homes rising South of Austin.

📈 CHART OF THE DAY

Source: Axios

From 2005 to 2022, Tampa Bay's older renter households (55+) fluctuated notably, peaking at 32% in 2022. Meanwhile, the U.S. saw a steadier rise to 30.2%. This suggests Tampa Bay might be increasingly appealing for older renters compared to the national trend.

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*Disclaimer: Nothing on this page should be regarded as investment advice, either on behalf of a particular security or regarding an overall investment strategy, a recommendation, an offer to sell, or a solicitation of or an offer to buy any security. Investment opportunities on the RealtyMogul Platform are speculative and involve substantial risk including risk of loss of invested capital. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any real estate investment. Please carefully review all disclosures and disclaimers on the RealtyMogul website. All information and any calculations used herein is based on information from inception through August 31, 2023. 1

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