Rent Growth Continues to Fuel Inflation Concerns

The Federal Reserve wants to see cooler inflation before cutting interest rates.

Jordan B. & Han-Gwon Lung
April 16, 2024

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Good morning. Rents are still rising, impacting inflation and the Federal Reserve’s decision to lower rates. Meanwhile, Manhattan investment sales had their best three-month stretch since 2022 to start the year, driven by wealthy foreign buyers, while the overall NYC market remains sluggish.

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Market Snapshot

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5,061.82

Pct Chg:
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FTSE NAREIT

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690.28

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10Y Treasury

TNX

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SOFR

1-month

5.32%

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*Data as of 4/15/2024 market close.

Pumping Up Inflation

Nationwide, Rent Growth Continues to Fuel Inflation Concerns

Despite a general slowdown, rent prices, especially upon lease renewal, continue to climb, complicating the Federal Reserve’s strategy to temper inflation and adjust interest rates.

Too damn high: After a spike in rental costs due to high demand from pandemic lockdowns and soaring home prices, rent growth is finally cooling. However, economists say that the decline needs to be steeper. March’s shelter inflation, which includes home and apartment rents, was recorded at 5.7%, substantially higher than the average rate between 2015–2019 of around 3.3%. This figure contributed to the unexpected rise in the March consumer-price index, complicating the Fed’s strategy to reduce short-term interest rates.

Renewal vs. Asking Rents While asking rents for vacant apartments have stabilized, renewal rents, which are what tenants pay when renewing leases, continue to rise, with a 4.6% increase noted in January. This stubborn trend is particularly pronounced in cities like Indianapolis and Miami, where renewal rents have increased by over 7%.

Single-family impact: The single-family housing market is experiencing continued growth in both sales and rentals. According to property research firm Attom, the median rent for a three-bedroom house is outpacing wage increases in over half of the 341 counties studied. Attom’s Chief Executive Rob Barber explains that this trend is largely driven by a shortage of available homes for sale, which has elevated rental demand and enhanced landlords’ profitability.

➥ THE TAKEAWAY

Looking ahead: Economists predict a continuing decline in shelter inflation, with expectations that it will drop below 4% by year’s end, closer to historical norms. Jay Parsons from Madera Residential points out that the upcoming spring and summer leasing seasons could further reduce landlords’ ability to raise rents due to an increase in vacancies and a peak in new housing supply, likely leading to cooler renewal rates.

📊 What’s your take on the current rent growth and its effect on inflation?

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✍️ Editor’s Picks

Corporate shuffle: Texas led all 50 states in HQ relocations from 2018–2023 with 209 moves, peaking at 137 in 2023, per CBRE.
Fear and Greed: Take our 3-minute Fear and Greed survey to help us gauge investor sentiment in Q1 2024. Participants can win one of thirty $10 gift cards. (sponsored)
Changing of the guard: Lone Star Funds founder John Grayken, a secretive billionaire, appoints Donald Quintin as CEO to oversee $87B with a 20% target return.
Investor frenzy: Investors reached record-high home purchases at nearly 29% of all sales in 4Q23, thanks in part to fewer non-investor purchases.
Funding fantasies: The Chicago White Sox’s Jerry Reinsdorf is eyeing The 78 for a new stadium as the MLB team seeks ticket tax funding for development.
Layoffs are coming: Tesla (TSLA) prepares to lay off over 10% of its workforce, with about 14K employees impacted, as part of ongoing cost-cutting measures.
Property protection: Freddie Mac (FMCC) strengthens its underwriting standards, requiring increased property inspection samples and lease audit documentation for multifamily loans.

🏘️ MULTIFAMILY

Renting in reverse: Luxury apartment rents hit historic lows in 2024, with upscale properties seeing -0.3% growth, set to continue into 2025.
Webinar: The Calvera Income and Growth Fund is under contract for its first acquisition in Dallas. Register for the LIVE webinar today to receive the deal summary. (sponsored)
Tower boom: Albion Residential secured a $102M loan for a Music Row project with two towers, totaling 850 units, with construction starting soon.
Inclusive luxury: A 27-story, 290-unit luxury building in Fort Lauderdale set aside 71 units for workforce housing, aiding local residents.
Frisco expansion: A Hillwood Development Corp. affiliate expands with a $1.8B Frisco apartment development with VanTrust Real Estate and Rudman Partnership.
Miami’s newest gem: The Perigon, a 17-story luxury condo in Miami Beach’s Mid-Beach neighborhood, offers 73 units starting from $4.5M.

🏭 Industrial

Data dilemma: The numbers are in, and Atlanta is the fastest-growing data center market in the U.S., with a development pipeline up 211% since 2023.
Selling Houston: Artis REIT (ARESF), led by CEO Manji, plans to sell a 12-building, 1.8MSF Houston industrial property for $234.2M to an undisclosed buyer.
Warehouse wonderland: The Rockefeller Group and PCCP LLC secure $100.2M for a 656.9KSF industrial campus in Northeast Philadelphia.

🏬 RETAIL

Texan take: Japan-based Daiso secured an 8.5KSF spot in booming Pflugerville’s Stone Hill Town Center, part of a quickly growing Austin suburb.
Uniqlo revival: Uniqlo plans to open almost a dozen stores in the U.S., entering Texas and expanding in California after past challenges.
Scooped up: An unnamed Dallas buyer paid $11M for two retail buildings in Wake Forest with a Wegmans-anchored shopping center.

🏢 OFFICE

Billionaire bust: Billionaire Charles Cohen’s 750 Lexington Ave. property value has plummeted to $50M, down 83% from 2015, and is facing foreclosure.
Debt drama: Blackstone (BX) extended a $195M mortgage deadline for a 17-story San Fran building leased to Schwab until 2028. Guess they spent all their money on TD Ameritrade.
Mixed fortunes: JPMorgan (JPM) and Wells Fargo (WFC) are pessimistic about the near-term outlook for the office sector, with both banks shedding some CRE from their loan books.

🏨 HOSPITALITY

Small-ball strategy: Aimbridge Hospitality CEO Craig Smith aims to leverage the company’s scale while operating like a smaller firm, focusing on mentoring and retaining talent.
The price is right: Ashford Hospitality Trust (AHT) just sold the 390-key Hilton Back Bay hotel in Boston for $171M to a JV between Certares and Belcourt Capital Partners.
Flag fluctuations: In 2023, 1.1K hotels changed flags due to financial challenges, falling below the prior decade’s 1.4K-hotel average.

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INVESTMENT SALES

Deep-Pocketed Foreigners Drive Manhattan Investment Surge in Q1

The Manhattan investment sales market saw its best quarter since 2022, primarily driven by affluent international buyers, with the rest of the market remaining largely inactive, shows new data from Avison Young.

By the numbers: In Q1, NYC saw $3B in commercial property sales, with $2.2B of that in Manhattan alone. This marked the first time since late 2022 that Manhattan’s CRE sales exceeded $2B. However, nearly half of the quarter’s total stemmed from a single transaction: Kering, the parent company of Gucci, bought 715-717 Fifth Ave for $963 million.

Trophy assets aren’t selling: Office properties in Manhattan remain uncertain, with tenants favoring premium spaces over Class-B and C buildings. While high-end assets struggle, lower-tier property transactions have increased, indicating a drop in values. James Nelson noted that the number of office property sales doubled, but their total value fell from $394M to $188M year-over-year.

Multifamily impact: Meanwhile, political uncertainties are impacting multifamily and new development, leading to a 10% reduction in development site sales compared to the previous quarter. Multifamily properties made up 25% of Q1’s total sales volume but had the highest transaction count, including notable sales like Kushner Cos.’ $41M East Village portfolio and 120-125 Riverside Drive. Developers remain cautious, closely watching for new housing regulations that could affect the market.

➥ THE TAKEAWAY

Mixed outlook: Avison Young notes that current sales activity is mostly led by private sector deals, with foreign, high-net-worth individuals driving the mid-market and end-users dominating the high-end. However, these transactions are not reflective of the overall market, which is much quieter and projected to be 62% below the ten-year average if trends persist. James Nelson added that while there was hope that upcoming rate cuts might stimulate the market, recent inflation developments continue to deter a full-scale return of investors.

📈 CHART OF THE DAY

On average, distressed sales in 1Q24 made up a higher percentage of total transactions than they have in the past 10 years, with slight exceptions for industrial and retail. The good news is that relatively speaking, over an 18-year period, distressed sales made up a much higher percentage of total sales from 2008–2012 compared to today.