The World’s Mega-Rich Are Betting Big on American Renters

A rising number of the super-rich are placing their bets on the US rental market as falling prices in the apartment sector make it increasingly attractive.

The World’s Mega-Rich Are Betting Big on American Renters

A rising number of the super-rich are placing their bets on the US rental market as falling prices in the apartment sector make it increasingly attractive.

TOGETHER WITH

Good morning. Atlanta faces an office market downturn amidst rapid growth. A rising number of cash-rich investors are placing their bets on the US rental market. Meanwhile, NYC unveils extensive zoning regulation overhaul to combat a growing housing crisis.

Today’s issue is brought to you by Pace Loan Group—a national lender offering CRE owners non-recourse, long-term, fixed-rate C-PACE financing.

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Market Snapshot

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CAUTIONARY TALE

Atlanta's Office Market Struggles Despite a Thriving Economy

Even a Booming Economy Can’t Save Atlanta’s Office Market

Atlanta’s CRE turmoil shows that even Sunbelt cities with thriving economies can’t escape the office-sector meltdown. ELIJAH NOUVELAGE/BLOOMBERG NEWS

Even with rapid growth and a booming job market, Atlanta’s office market is in steep decline, showcasing rising vacancies, plummeting values and rents, and project delays—a warning for Sunbelt cities anticipating swift office market recoveries.

Office oversupply: Atlanta's office vacancy rate has surged from 11.5–14.7%, and a record 9.1MSF of sublease space is adding to the pressure. AT&T, the fintech giant NCR, and McKinsey are among the companies adding to the sublease market or downsizing altogether. Atlanta grapples with an influx of sublease space while also adding 18.1MSF of new office space since 2017, which is on top of an additional 320MSF already available.

Business travel blues: The oversupply of office space is also impacting the city's hotels, mainly those reliant on business travel and conventions, as declining demand and occupancy rates have been observed in the past four months. The decrease in business travel is partly due to the shift to remote work, which has reduced the need for in-person trips, posing challenges to Atlanta's office and hotel sectors despite the city's recent economic growth and job additions.

Tech slump: Job growth in Atlanta is slowing down, partly due to the tech industry slowdown, with companies like Microsoft (MSFT) and Google (GOOGL) scaling back expansion plans. High interest rates discourage corporate relocations to Sun Belt cities like Atlanta, as workers hesitate to give up low mortgage rates for higher ones. High rates have also led to foreclosure and mortgage defaults, further impacting the city's real estate market.

➥ THE TAKEAWAY

Urban shift: Atlanta's return-to-office rate has stalled at around 50–60% of pre-pandemic levels, with a significant percentage of companies allowing employees to work remotely, primarily due to traffic concerns. While some developers remain optimistic about Atlanta's office demand, others are shifting their focus to residential and hotel projects. Other cities anticipating the revival of office with the resurgence of stronger economic growth may look to what's happening in Atlanta as a warning of what's ahead.

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INVESTMENT STRATEGY

Global Tycoons Turn to US Multifamily Buildings in Billion-Dollar Bets

Amancio OrtegaPhotographer: Iago Lopez/AP Photo

Chicago’s 727 West Madison tower, a luxurious edifice, now belongs to Amancio Ortega, the billionaire founder of Zara. He isn't alone.

A rising number of the super-rich are placing their bets on the US rental market as falling prices in the apartment sector make it increasingly attractive.

Shifting market: Over the last decade, investments by the ultra-wealthy in multifamily housing have surged. Why is that? The enduring appeal is partly due to their attractive return rates and promising rent increase prospects, stemming from an ongoing supply shortage in the housing market. This trend marks a strategic shift from pre-pandemic times when investments were predominantly focused on office properties, offering stable income through long-term leases.

Billionaire bets: A prime example of this trend is Chicago’s luxurious 727 West Madison tower, which has a new owner, billionaire Amancio Ortega, founder of Zara, who purchased the property for $232 million. This deal follows similar investments, such as Israeli billionaire Eyal Ofer’s acquisition of a 57-unit building near Manhattan’s Gramercy Park. Additionally, wealthy families from Latin America and firms backed by global investors like David Rubenstein are also exploring opportunities in the multifamily building sector, seeking to capitalize on the current real estate market dislocations.

Rental housing > office spaces: The shift towards remote work and a rise in office vacancies post-pandemic have prompted wealthy investors to pivot from office properties to rental housing. This move has been accelerated by a commercial property downturn, marked by a 57% YoY drop in global investment to $142 billion in Q2. While institutional players are cautious due to heightened borrowing costs and falling values, wealthy investors are seizing opportunities with the capability to leverage cash payments or secure financing through strong banking relationships.

Attractive gap: Amidst the rise of remote work and office vacancies, wealthy investors are shifting from office properties to rental housing. A 57% YoY drop in global property investment in Q2 further accelerated this shift. While some institutions are cautious due to heightened borrowing costs and falling values, affluent cash-rich investors see opportunity, especially with sustained housing demand that boosted median rents significantly in recent years.

➥ THE TAKEAWAY

Shaping the future: The convergence of falling apartment prices and increasing rental demands is painting a lucrative picture for the world’s richest to strategically bolster their real estate portfolios. This shift in investment preference signals a newfound confidence in the long-term profitability of the multifamily housing sector amidst the ongoing commercial property slowdown. Moreover, the broadening of rental-housing deals globally hints at the unfolding of a multifaceted investment landscape, potentially redefining wealth accumulation strategies for the mega-rich in the coming years.

ZONING CHANGES

NYC Plans Sweeping Zoning Overhaul to Address Housing Crisis

Adams rolls out sweeping housing reforms, biggest NYC zoning changes in years

The changes announced Thursday hope to address the ongoing housing crisis. GETTY IMAGES/iSTOCKPHOTO

In a groundbreaking move, Mayor Eric Adams has unveiled a comprehensive overhaul of NYC's zoning regulations to address the housing crisis, aiming to create 100K new units in the next 15 years.

Parking-free future: As part of the changes, Mayor Adams has proposed eliminating the parking spaces requirement in new developments, making it easier for developers to construct buildings. By scrapping the mandate for new parking spots, the city aims to reduce construction costs and encourage developers to focus on housing, thus increasing the availability of residential units.

Sweeping reform: Another aspect of Adams' plan aims to promote mixed-use development by allowing the construction of additional floors above commercial spaces, maximizing space utilization in the city. The plan will also enable homeowners with large lots to build a second unit, providing opportunities for rental income or downsizing after retirement. Restrictions on the number of studios in larger buildings will be relaxed, and bans on single-occupancy rooms with shared facilities will be lifted, diversifying housing options.

Housing boost: City Hall aims to expand programs that enable developers to increase building sizes in exchange for reserving units for lower-income residents, streamlining housing development efforts. Instead of addressing housing shortages neighborhood by neighborhood, the plan seeks to extract more housing from every part of the city, streamlining the zoning process for a more widespread impact.

Supply shortage: NYC and its suburbs face a severe housing crisis, with a need for an additional 342K homes and apartments, a 50% increase from the 2012 supply-demand gap. The crisis has escalated due to 700K new jobs in the past decade as housing production lagged, resulting in average Manhattan rents exceeding $5K for available units. Some affluent neighborhoods are also losing housing units to consolidations faster than new ones are being built.

➥ THE TAKEAWAY

Transforming the future: The proposed changes to housing regulations in NYC, which may be approved by the Council next fall, aim to transform various aspects of housing development in the five boroughs. These changes, which have received support from City Council and pro-housing groups, are intended to increase housing supply and affordability across the city, following examples from other cities like Tokyo and Minneapolis.

AROUND THE WEB

📖 Read: Union Market District in DC has rapidly transformed into a vibrant, diverse neighborhood with new businesses and luxury apartments, though it faces challenges of gentrification and rising costs for long-standing residents and businesses.

▶️ Watch: Columbia Business School professor Stijn Van Nieuwerburgh joins CNBC’s Power Lunch to discuss the urban doom loop, driven by a sharp decline in office demand, which is straining city tax revenues and putting pressure on banks.

🎧 Listen: On this episode of The Fort, Chris sits down with serial entrepreneur Nick Huber to discuss his journey building a holding company to support 11 different businesses while reflecting on the motivation to make his father proud.

✍️ DAILY PICKS

  • Downtown dilemma: San Francisco's once valuable downtown properties face a crisis as iconic landmarks grapple with soaring vacancies, mortgage defaults, and declining revenue.

  • Office ETF: VanEck has launched the VanEck Office and Commercial REIT ETF (DESK), the first ETF focused solely on the office sector.

  • Ponzi scheme: NY attorney, Robert Wisnicki, has pleaded guilty to charges related to a $19M real estate Ponzi scheme, along with conspiracy to commit money laundering.

  • Cost-conscious: Discount grocery chains like Aldi, Lidl, and Dollar Tree (DLTR) are expanding rapidly, benefiting from increased cost-consciousness and economic pressures.

  • $1B mall makeover: Lloyd Center, a historic 1.2MSF mall in Portland, will be redeveloped into a mixed-use complex featuring residential, entertainment, office, and improved transportation.

  • Big bet: Brookfield (BN) is exploring an $800M apartment deal in San Francisco, potentially acquiring troubled loans tied to apartments owned by Veritas.

  • Branching out: Atlantic Union Bank sold 25 branches to Blue Owl Capital in a $45.8M sale-leaseback deal to generate capital and address rising interest rates.

  • Eco-friendly leasing: Landlords facing sustainability mandates and fines are exploring green leases to determine cost-sharing structures with tenants and encourage energy-efficient upgrades.

  • Redefining real estate: CRE economist Dr. Joshua Harris advocates replacing traditional A-B-C asset categories with a new luxury, commodity, and infrastructure classification.

  • Transit turmoil: The NYC Dept. of Transportation decided to abandon plans to revamp bus infrastructure on Fordham Road, opting to only repaint the existing curbside bus lane.

  • Plastic pain: Credit card losses are rapidly increasing, reaching 3.63%, and are expected to rise further, with Goldman Sachs foreseeing a peak in late 2024 or early 2025.

  • Office attendance: The traditional work ID, once merely a tool for access to the office, has evolved into a device for monitoring employees’ time spent in the workplace.

📈 CHART OF THE DAY

troubled office market

A CoStar News Analysis reveals that in 2022 and 2023, office properties linked to distressed loans in commercial mortgage-backed securities have experienced a sharper decline in value compared to the devaluations witnessed in 2008 during the Great Recession, based on Morningstar Credit data.

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