Towers Half-Empty, Small Banks Not on the Hook

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Three Trends Impacting New York City Commercial Real Estate

The New York City commercial real estate market saw a 43% drop in investment sales to $12.8 billion in 1H 2023, according to Ariel Property Advisors. This decline is attributed to shifts in office tenant behavior, tighter multifamily regulations, and higher capital costs.

Letting go and holding on: Office occupancy rates in NYC lingered around 50% of what they were pre-Covid, causing the dollar volume of transactions to decrease by 48% YoY. While some major landlords relinquished their assets, others held onto properties with robust fundamentals. A notable example of resilience is SL Green’s strategy for 245 Park Avenue: holding on and securing new investments at a slightly reduced rate than its original 2017 purchase.

Multifamily divergence: Multifamily investments saw a mixed performance. The dollar volume first reduced to $1.1 billion in 1Q 2023 but then surged by 242% in 2Q 2023. Performance diverged based on whether assets were free market, rent stabilized, or affordable housing. While free market properties benefited from NYC’s favorable circumstances, rent-stabilized buildings witnessed price reductions. In contrast, affordable housing captured 34% of total multifamily investments, with mission-driven investors finding it attractive.

Land transactions: Land sales in NYC diminished by 30% YoY in 1H 2023, with reasons ranging from the expiration of the 421a tax abatement program to escalated construction costs and slower condo sales. Yet, some developers, like Rockrose, identified opportunities in this decline, particularly in areas of Queens where rezoning has occurred.

➥ THE TAKEAWAY

Smart money comes back: Looking ahead, private lenders may fill the void left by regional banks under greater regulatory scrutiny. Mortgage maturities are likely to prompt further repricing of office and rent-stabilized multifamily assets, offering discounted investment opportunities. Positive signs, such as a new tax relief program for developers announced by the governor and strong economic indicators in NYC, suggest that abundant smart capital will likely return significantly within the next six to 18 months.

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*Disclosure: This post contains sponsored content. Past performance is not indicative of future results. This information should not be used as a basis for an investor’s decision to invest. Weighted Net IRR is defined as the average annualized, compound rate of return using equity contributions and distributions as they occurred on specific dates during the investment period. An investment in commercial real estate is subject to risk, including the risk that all of your investment may be lost.

Small Banks Aren’t Holding 70% of US CRE Debt

Contrary to popular belief, local and regional banks do not hold 70% of US CRE debt, as previously reported. They hold a much lower percentage, around 32%.

The rumor mill: This persistent misconception has caused concern over the financial stability of small and midsize banks, particularly in light of the challenges faced by CRE due to hybrid work and higher interest rates. However, data from the Federal Reserve reveals that while small banks hold the majority of CRE loans among domestically chartered commercial banks, most US CRE debt is owed to other lenders.

The real numbers: As of March 2023, domestic depository institutions held 47% of CRE debt, corresponding to approximately 32% of the total debt held by banks outside the top 25. This is significantly less than the previously propagated 70% figure. While still a substantial amount, no other class of lender comes close to the banks in terms of CRE debt.

Concentration at smaller banks: In comparison to the 25 largest banks, smaller banks have a higher concentration of CRE loans as a percentage of total assets. Banks in the $100M–$10B asset range, commonly known as community banks, have the highest concentration. These banks typically serve smaller cities or specific communities. Their loans are often directed to a variety of properties, like retail, warehouses, offices, hotels, campgrounds, marinas, mini-storage facilities, and vacation rentals.

Shifting market dynamics: The share of CRE loan originations from local and regional banks has more than doubled since late 2018, increasing from 15–31%. This growth is primarily attributed to deal activity shifting to smaller markets typically underserved by other lenders. Smaller banks took advantage of economic shifts that caused distress in big urban office markets, rather than being negatively impacted by them. Additionally, most of their loans originated after 2019, meaning relatively few will mature soon.

➥ THE TAKEAWAY

Half-empty promises: Though smaller banks have significant CRE debt, the problem of half-empty downtown office buildings impacts more than just small banks. Economic shifts and a decline in CMBS are contributing factors. Small banks are adapting and finding opportunities in smaller markets, but their dependence on CRE lending poses challenges in the current interest rate environment. Addressing occupancy issues in downtown office buildings is a broader challenge throughout the sector.

Blackstone’s Massive Presence in Austin’s Commercial Property Scene

In the bustling city of Austin, where live music meets tech innovation, Blackstone (BX) has quietly claimed the title of the city’s largest commercial property owner, boasting a portfolio of approximately 9M SF of commercial assets.

Industrial ambitions: A key area of expansion for Blackstone has been the industrial sector. Through its subsidiary, Link Logistics, the firm is working on notable projects like a $28M complex in Round Rock and Settlers Grove, a warehouse project worth $38M. In Travis County, close to Tesla’s massive manufacturing hub, Blackstone is creating an expansive industrial park spanning 127 acres.

Class is in session: In 2022, Blackstone didn’t just ring the bell; it bought the whole school—or at least the student housing. With a strategic $13B acquisition of American Campus Communities, the firm effectively enrolled in the student housing game, adding over 200 properties nationwide, six of which are cozily situated near the University of Texas at Austin.

➥ THE TAKEAWAY

Big picture: While Blackstone stands as Austin’s unofficial landlord-in-chief, the city’s commercial real estate roster is far from a one-player show. Other major players include Cousin Properties and Simon Property Group. Notably, the top local entity is HPI Real Estate Services & Investments, which manages 3.6 million square feet within Austin. This mix of local and international stakeholders highlights Austin’s dynamic growth and attraction in the real estate world.

📖 Read: Find out why Extell, one of NYC’s biggest developers, is in a heated legal battle over 18 inches of real estate space—and what air conditioners have to do with it.

▶️ Watch: Ozmo, Skyline Robotics’ window-washing robot, partnered with Platinum and The Durst Organization to clean major Manhattan buildings.

🎧 Listen: In this episode of Bisnow Reports, Van Leeuwen Ice Cream co-founder Ben Van Leeuwen discusses the brand’s expansion, handling inflation, and how US consumer habits align with high-end ice cream.

Median incomes for new lease signers increased by 17.1% between 2020 and early 2023, reaching about $77,000. The rent-to-income ratio rose slightly from 22.8–23.1%, returning to 2011 levels. Final 2023 numbers are expected to be slightly lower as income growth outpaces rent growth.