CPI Hits 3.5%, No Rate Cuts Soon

The consumer price index rose 3.5% in March largely due to rising rents and housing costs.

Jordan B. & Han-Gwon Lung
April 11, 2024

Together with

Good morning. Inflation worries rose as the Consumer Price Index climbed above the Federal Reserve’s target rate in March. Meanwhile, KKR plans to acquire a large industrial park in Houston for $234M.

Today’s issue is brought to you by Viking Capital. Explore their latest investment opportunity in one of Austin’s booming submarkets.

Market Snapshot

S&P 500

GSPC

5,160.64

Pct Chg:
-0.95%

FTSE NAREIT

FNER

707.63

Pct Chg:
-3.98%

10Y Treasury

TNX

4.55%

Pct Chg:
-0.01

SOFR

1-month

5.32%

Pct Chg:
0.0%

*Data as of 4/10/2024 market close.

INFLATION REPORT

March Inflation Hits 3.5%, Deflating Hopes For A Rate Cut

Economists around the country gasped at the latest Consumer Price Index (CPI) data for March, which revealed creeping inflation isn’t going away just yet.

By the numbers: In March, the Consumer Price Index (CPI) surged by 3.5% YoY, exceeding the Fed’s target of 2%, and rose by 0.4% MoM. The CPI release, combined with a strong jobs report, has raised concerns about the potential delay in anticipated interest rate cuts.

Consumer pressure: The agency said rising gas, rent, and mortgage costs accounted for over half of the monthly increase in the inflation index. Energy prices notched up by 1.1% from the previous month, adding pressure to household budgets. The shelter segment also registered significant increases, contributing to the broader inflationary pressures. This combination signals tough times ahead for consumers trying to keep up with essential spending.

Higher for longer? In JPMorgan Chase’s latest annual report, Jamie Dimon’s letter to shareholders said 8% interest rates are still possible. A higher rate environment from persistent inflation means further delay in recovery for CRE. However, it also creates investment opportunities for distressed assets.

➥ THE TAKEAWAY

Looking ahead: Peachtree Group CEO Greg Friedman suggests the Fed might delay its initial rate cut, possibly affecting further reductions this year, keeping interest rates high. This stance is to determine if 3% is the new normal over 2%. Meanwhile, the commercial real estate sector faces challenges from sustained high rates, adjusting asset values, and creating new investment chances.

When Do You Predict the Federal Reserve Will Cut Rates?

TOGETHER WITH VIKING CAPITAL

New Investment Opportunity in Austin – San Antonio Corridor

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Location: New Braunfels, Texas; part of the Texas Innovation Corridor. Ranked as the third fastest-growing city in the U.S.
Growth: Population increased by nearly 40% in five years, driven by major employers, entertainment centers, and strong demographics.
“No vacancy”: The New Braunfels submarket boasts the highest occupancy in the entire Austin- San Antonio MSA.

Viking Capital is excited to offer a prime investment opportunity in Austin’s booming submarkets, driven by high tenant demand in manufacturing and education, a multifamily housing shortage, and value-add potential. Join their webinar on April 17th at 7 PM ET to learn more.

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✍️ Editor’s Picks

Audit scandal: KPMG’s Netherlands unit fined a record $25M for exam cheating, involving hundreds of professionals, including senior leaders.
Cruise control: Carnival (CCL) puts its Miami HQ for sale to capitalize on soaring Florida real estate, downsizing to 300KSF.
Leaping into the fray: Blue Owl Capital enters real estate finance with its $170M Prima purchase managed by Jesse Hom, handling $10B assets.
Casino colossus: NYC casino license winners won’t be chosen until late 2025, delaying the Big Apple’s multibillion-dollar gaming palaces until at least 2026.

🏘️ MULTIFAMILY

Multifamily meltdown: Multifamily housing distress slow to materialize, disappointing rescue funds. Yardi Matrix notes delays in borrower exits and bailouts.
Waves of disruption: State Farm (STFGX) will drop coverage for up to 69% of insured customers in affluent LA areas, affecting 2% of all outstanding CA policies.
Not so affordable: The majority of income-restricted NYC apartments built under the Affordable New York program cater to earners who make above $128K a year.
Navigating challenges: Shoreham Capital has acquired numerous multifamily properties at a steady pace for 24 months, but continues to face wide price gaps.
Unmasking rent fraud: Application fraud lowers income or increases expenses by 10% for most operators, according to a new report.

🏭 Industrial

Warehouse controversy: Midwest Industrial Funds aims to annex 225 acres for a $185M TIF district in Geneva, irking residents with tree removal for 2.5MSF of warehouses.
Phoenix rising: Phoenix secures a record $65B investment from TSMC with 6K high-tech jobs, sparking growth across multiple CRE sectors in the city.

🏬 RETAIL

Prime properties: Luxury brands LVMH and Chanel eye 745 Fifth Avenue, part of Manhattan’s high-end retail scene, where going rents are $2,163 PSF.
State of malls: Dive in to see where customer behaviors are changing, why malls are returning to pre-COVID levels, how experiences are driving traffic, and much more. (sponsored)
Grocery revolution: Whole Foods Market (AMZN) is launching new 7KSF–14KSF Daily Shop stores in urban areas, adapting to changing consumer behavior.
Publix power moves: Jamestown acquires Tamarac Town Square, the fifth Publix-anchored shopping center in South Florida, for $22.5M (84% leased).
Real estate shake-up: Macy’s (M) board adds real estate experts after a bid by Arkhouse Management and Brigade Capital to acquire it for $6.6B.

🏢 OFFICE

Apple bites into Coral: Apple (AAPL) signed a 42KSF lease in the Plaza Coral Gables, choosing it over other Miami locations.
Tower transformation: Costco (COST) purchased a North Dallas office tower for $14.25M at $72 PSF, planning a $13M renovation project.
Workspace revival: San Francisco’s office market, currently 36.7% vacant, sees search demand peak—but returning to pre-pandemic norms may take years more.

🏨 Hospitality

Refinancing success: A San Antonio resort secures a $240M loan to refinance $235.5M debt, with $4.8M in closing costs, showing strong post-pandemic revenue growth.
Eventful insights: St. Louis led the nation with 24.3% YoY event growth, driven by sports and associations, surpassing even Las Vegas and Seattle.
Canadian conquest: Hilton (HLT) expands in Canada with its Motto brand, planning to triple the brand’s lifestyle presence in 5 years as it targets major Canadian cities.

STRATEGIC ACQUISITION

KKR Invests $234M in One Of Houston’s Largest Warehouse Deals

KKR & Co Inc. (KKR) is set to acquire the 1.8MSF industrial park known as Park 8Ninety in Missouri City for a whopping $234M. The deal is reported to be the market’s second-largest warehouse deal to date.

Park overview: KKR is acquiring the 127-acre complex developed by Artis Real Estate Investment Trust (ARESF), featuring 13 single and multitenant buildings. A key attraction is Park 8Ninety’s full occupancy status, with notable tenants such as Comcast, Rexel, Texas AirSystems, and VWR International. The sale, brokered by BMO, worked out to around $128 PSF.

The market: Houston’s industrial market, where the park is located, experienced a record-breaking delivery of 32.4MSF in 2023. However, this surge in supply led to a temporary rise in vacancy rates to just below 8%. Despite this, experts anticipate lower vacancy rates as strong absorption balances out the market.

Historical context: For KKR, the acquisition represents a strategic expansion into Houston’s industrial market, driven by the region’s favorable demand-supply dynamics. This historic deal echoes only one prior transaction—the sale of a majority stake in the Greens Port Industrial Park 14 years ago. The acquisition positions KKR as a key player in the growing industrial landscape.

➥ THE TAKEAWAY

Future growth opportunities: KKR’s acquisition of Park 8Ninety highlights the firm’s confidence in the industrial sector’s potential for growth and stability. The move into Houston aligns with KKR’s strategic portfolio diversification, leveraging the region’s strong demand fundamentals and limited supply.

📈 CHART OF THE DAY

Data on U.S. public equity REITs reveal strong and consistent occupancy rates across the four traditional property types, except for office spaces. According to T-Tracker, industrial, apartment, and retail spaces have maintained occupancy rates above 95% for 34, 12, and 10 quarters in a row, respectively. Moreover, for all property types, T-Tracker’s occupancy rates surpassed those reported by CoStar, indicating that U.S. public equity REITs tend to have higher occupancy rates compared to the broader commercial real estate market.