📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

W.P. Carey Retreats from Office Market as Remote Work Prevails

After fifty years in the net lease business, real estate veteran W.P. Carey is exiting the office sector to fortify its industrial property portfolio.

W.P. Carey Retreats from Office Market as Remote Work Prevails

After fifty years in the net lease business, real estate veteran W.P. Carey is exiting the office sector to fortify its industrial property portfolio.

Together with

Good morning. Salt Lake City is experiencing a surge in apartment construction. A closer look at the CRE market this year suggests we might be returning to historical averages rather than experiencing an outlier crisis. Meanwhile, real estate veteran W.P. Carey is exiting the office sector to fortify its industrial property portfolio.

Today’s issue is brought to you by Reap Capital.

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Market Snapshot

S&P 500
GSPC
4,402.20
Pct Chg:
-0.9%
FTSE NAREIT
FNER
689.53
Pct Chg:
-0.5%
10Y Treasury
TNX
4.399%
Pct Chg:
0.7%
SOFR
1-month
5.31%
Pct Chg:
0.2%

*Data as of 9/23/2023 market close.

RISING STAR

Apartment Construction Surges in Salt Lake Amid Housing Crunch

salt lake city skyline

A recent RentCafe report reveals a spike in apartment constructions in Salt Lake metro since 2020, anticipating 4,525 new units this year, amid a U.S. housing shortage elevating rents and home prices.

New apartment units constructed in the Salt Lake City metro area

RENTCAFE

Tight market: According to analysis from Yardi Matrix, the Salt Lake metro has experienced a 20.8% increase in new apartment constructions between 2020 and 2022. In 2021 alone, Salt Lake County had about 148,500 rental units, of which only 2% were vacant, rendering it the tightest apartment market in the county’s history, as per a report by the University of Utah Kem C. Gardner Policy Institute.

Supply shortage: The pandemic saw the completion of 1.2 million units, moderating rent growth across the U.S. However, major construction is concentrated in 20 metro areas, including Salt Lake, housing about 41% of U.S. renters. A RealPage survey shows three-quarters of renters can't afford to buy in their areas, and with 89% of units built between 2020 and 2022 being high-end, affordability remains a significant concern for many.

Affordability concerns: Affordability isn’t the sole determinant in renting preferences. Many, at their current life stages, prefer the flexibility associated with renting, as expressed by RealPage’s chief economist, Jay Parsons. Looking forward, around 1 million rental units are anticipated to be completed by 2025. However, obstacles such as tightening bank lending standards and escalating costs in construction materials, labor, and land could potentially decelerate the developers' momentum.

➥ THE TAKEAWAY

A nation of renters? The focused development in Salt Lake and other metro areas is a noteworthy response to the prevailing housing shortages and price inflations, addressing the nuances of renter needs and market demands. While the influx of high-end apartments may not align with the affordability needs of many renters, it underscores a broader trend in consumer preferences and market responses in the evolving real estate landscape, highlighting the balance between supply dynamics and varied renter inclinations.

TOGETHER WITH REAP CAPITAL

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MARKET TRENDS

Assessing 2023's CRE Landscape: Not as Bleak as It Seems?

The CRE market has experienced a 50% drop in YoY activity this year, but a closer look suggests it might just be a return to long-term averages rather than an outsized crisis.

Reversion to the mean: A recent Green Street report showed a 50% drop YoY in 2Q23 CRE transactions to $137 billion from 2022’s $306 billion. This sparked concerns, portraying 2023 as a tumultuous year for CRE. However, considering a wider context, this perceived decline aligns with the 10-year average transaction volume of $130 billion, marking a 5.4% increase and suggesting a reversion to standard market conditions rather than a significant downturn.

Numbers don’t lie: CRE transaction volumes have seen notable fluctuations over the past decade. Annual volumes ranged from $212B in 2013, peaking at $685B in 2021, and registering $526B in 2022. This data suggests that the market in 2022 and 2023 is aligning more closely with the historical average, reflecting a normalization in transaction volumes.

➥ THE TAKEAWAY

Predicting the future: While 2023 CRE activity appears lackluster compared to the record-setting 2022, a deeper dive suggests the markets may simply be returning to more typical long-term norms. The future of the CRE market hinges on whether interest rates return to pre-pandemic levels or settle at a longer-term mean, impacting market stability and predictability.

🌐 AROUND THE WEB

📖 Read: Glenbrook, straddling the CA-NV border along Lake Tahoe, boasts the country's most expensive mountain homes, driven by an exclusive, low-density, and property tax-friendly environment.

🎧 Listen: In this episode of GreyCast, Don Peebles, entrepreneur, author, philanthropist, and political activist, discusses his remarkable career, impactful projects, and vision for a fairer real estate industry.

OFFICE SPINOFF

W.P. Carey Retreats from Office Market as Remote Work Prevails, Shifts to Industrial Holdings

After half a century in the net lease business, a veteran in the real estate arena, W.P. Carey, has decided to steer clear of the office sector. Instead, they're focusing on strengthening their industrial property portfolio.

Shedding assets for a new REIT: In a bid to realign its interests, W.P. Carey is on the move to liquidate 87 of its office properties by the onset of next year. The rest of its significant office assets, spanning 9.2M SF and predominantly leased to individual entities, will branch out into a separate, publicly-traded REIT, christened "Net Lease Office Properties." This includes high-profile properties like the KBR headquarters in Houston and Blue Cross and Blue Shield's expansive campus in Minnesota.

Reason for the shift: The world of commercial real estate is witnessing a waning interest in the office sector, mainly attributed to dwindling lease demands and the subsequent drop in property valuations. This slump has led many banks in the US to bolster their reserves, anticipating potential loan defaults. W.P. Carey's CEO, Jason Fox, emphasized the move’s intent to enhance portfolio quality, stabilize earnings, and positively impact the credit profile.

What’s next? W.P. Carey envisions its future largely tethered to single-tenant industrial and retail spaces, notably in the US and Europe, citing better tenant retention and minimal capital expenses. The transition is already underway, with office revenue shares plummeting from 30% to 15% since 2015. Notably, the new REIT will be overseeing 59 office structures, constituting 10% of W.P. Carey’s annual base rent. On the financial front, the whole operation is expected to bolster W.P. Carey's reserves by around $1.15 billion.

➥ THE TAKEAWAY

Big picture: W.P. Carey’s strategic shift is indicative of a wider trend in the REIT sector, with entities adjusting their portfolios to align with evolving market needs and dynamics. The focus on industrial and retail properties represents a reassessment of long-term value, likely influenced by the transformations in work and commerce structures. With remote work and other elements modifying the real estate scenario, industry leaders like W.P. Carey are proactively adapting to maintain relevance.

✍️ DAILY PICKS

  • Foreclosure fears: Distressed CRE loans are surging nationwide, particularly in cities like Chicago, Denver, Philly, and San Francisco, with the delinquent or specially serviced CMBS 2.0 loans rising to 6.8% in August, up from 4.5% in June 2022.

  • Landing on foreclosure: The Landings at Northpoint, a troubled apartment complex in Houston's Greenspoint area, is set to be sold at a foreclosure auction after facing multiple lawsuits, unpaid vendor liens, and financial difficulties.

  • Opportunity knocks: Despite declining CRE values and borrower struggles, Apollo Global Management co-president James Zelter believes there's an opportunity in restructuring and refinancing.

  • Strange surge: Despite higher mortgage rates, applications for home loan refinancing rose by 13% in the past week, while applications for purchases rose 2% but are still down 26% YoY.

  • Billionaire battle: Billionaire developer Jeffrey Soffer and hospitality group Trinity Investments engaged in a high-stakes battle to acquire South Florida's Diplomat Resort.

  • Surrendered to lender: A Manhattan office tower owned by Somerset Partners and Meadow Partners is expected to sell below its previous valuation as it’s handed over to Fortress Investment Group due to difficulties in attracting tenants.

  • Landlord rebellion: A Berkeley landlord has filed a class action lawsuit challenging Measure MM, a law requiring annual apartment registration fees, claiming it violates the state's constitution.

  • Hotel hurdles: Investor interest in San Francisco hospitality has waned due to higher capital costs, lower demand, ongoing pricing challenges, and recent distressed hotel headlines.

  • Storage solutions: A CrownPoint Group JV plans to develop a 135KSF self-storage facility in Newark, NJ’s Ironbound District that will operate under the Extra Space Storage brand.

📈 CHART OF THE DAY

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