Editors’ Weekly News Roundup, April 17th – 21th
Three of the five major property sectors were the basis of the past week’s five best-read stories, with retail and hospitality missing from the lineup but generating strong readership nonetheless. The week’s top story detailed the first meaningful deceleration of going-in cap rate expansion in the apartment sector since the Federal Reserve began its aggressive program of rate increases a year ago.
The headline summed up the trend CBRE identified in a new report: Multifamily Cap Rates Have Begun to Stabilize. Offsetting this positive trend was a mixed bag of other trends: unlevered IRR targets, exit cap rates and rent growth also decelerated in 2023’s first quarter. Separately, MSCI Real Assets reported that multifamily has led recent declines in commercial property pricing.
A story that first appeared in the Wall Street Journal became last week’s second most-read story on Connect CRE. Life Companies Shun Office Building Owners with Loans Coming Due detailed the latest roadblock for office landlords: a formerly reliable source of finance is drying up.
Insurance firms have become increasingly wary over the sector’s rising vacancy rates and falling rents, reflecting the growing popularity of remote work and return-to-office rates that are still around half of pre-pandemic levels. Given the inherent conservatism in life companies’ underwriting when it comes to commercial real estate finance, it’s not surprising that they would now consider a historically reliable property type to be too high-risk for their comfort.
Although it’s now late April rather than the Ides of March, Julius Caesar’s agonized question to his friend Brutus amid his assassination—”Et tu, Brute?”—comes to mind nonetheless. Here, the question might be “Et tu, industrial?” as the high-flying sector runs into macroeconomic headwinds.
The past week’s third most-read story, Industrial Space Demand Drops Sharply in Q1 as Tenants Reconsider Inventory Needs, told about a year-over-year drop in net absorption, a vacancy rate that’s still below the market average and the longer-term outlook. “While a potential pullback in consumer spending poses downside risks for 2023, onshoring of high-tech manufacturing will likely be a key driver of U.S. absorption from 2024-26,” according to Lee & Associates.
You could also say that the long-term prospects for multifamily are bright, but for the moment, the sector is experiencing its share of turbulence. California Apartment Vacancy at Highest Level Since 2021, taken from a report by ApartmentList, attributed the two-year high to an influx of new product coupled with waning demand. It was the week’s fourth most-read story.
Also seeing a decline, albeit a small one, are rents, with Northern California cities experiencing the biggest drops. Nonetheless, the statewide average monthly rent is still about $250 higher than it was three years ago.
The past week saw headlines about two of commercial real estate’s heaviest hitters, and the news wasn’t good. Brookfield defaulted on a $161-million loan tied to Class B office properties, mainly in the Washington, DC metro area, while reports on Blackstone’s first-quarter results cited a 58% year-over-year decline in distributable earnings from its real estate segment. With all of that, and the current volatility in the financial sector, it’s reasonable to ask whether CRE is facing a return to the Great Recession.
Connect CRE’s Amy Sorter asked that question and reported the results in the week’s fifth most-read story, Are We Headed Toward Another 2008? Experts Say No. For one thing, the circumstances surrounding the capital markets crash were more financially problematic than what we’re seeing today.
For another thing, Tower Capital’s Adam Finkel told Connect CRE that the current scenario is more akin to “a crisis of confidence that will pass,” as opposed to the virtual shutdown of the credit markets 15 years ago. For still another thing, Gottslaw’s David M. Gottlieb pointed out, “Lenders learned many lessons from that time, resulting in more equity and tougher underwriting standards.”