Apartment Rents Cool Amid Huge Wave Of New Supply

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Good morning. Apartment rents continue declining due to the largest influx of new supply in nearly four decades. The recent hiring of Doug Harmon and Adam Spies by Barry Gosin of Newmark has shed light on the firm’s expansion plans. Meanwhile, Downtown Chicago grew significantly post-COVID.

CRE prices may be declining, but a boom in the U.S. Farm Belt tells a very different story. If you want to diversify and add institutional-quality farmland to your portfolio, check out today’s sponsor Farmtogether.

🎧 Listen: Why do American urban apartments mainly serve non-families despite the housing shortage? This Odd Lots episode explores the regulations and incentives that deter developers from creating family-friendly housing.

📖 Read: Warren Buffet’s annual letter to Berkshire Hathaway’s shareholders is out. Discover the Oracle of Omaha’s insights for 2023.

💼 Talent: This week Bullpen is sharing some particularly interesting new contract roles, including an M&A position spanning US and European markets.

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RECORD-SETTING YEAR

Rents Set to Plummet Due to Biggest Apartment Stock Delivery Since 1986

Apartment rents are falling across the country, and have been over the past six months. Strap in, because the decline shows no signs of slowing, especially since the biggest delivery of new apartments in nearly 40 years is anticipated to hit the market this year.

Hitting the slopes: In January, renters with new leases paid a median rent 3.5% lower than they would have in August. It’s also the first time in the last five years that rent has fallen for six months straight. The weakening market was (expectedly) influenced by pandemic demand, which raised rents by 25% in just two years, leaving tenants maxed out on how much of their paycheck they could contribute to housing.

Slapped with supply: Pricing issues are about to be compounded by the biggest supply delivery since 1986. Almost 500K apartments are getting listed in 2023 as developers hoping to cash in on high rents finally finish their constructions. While high mortgage rates have dissuaded many aspiring homeowners and a bevy of new apartments will give renters more options, it’s going to be difficult for landlords to justify raising rents the way they did in 2021 and 2022.

➥ THE TAKEAWAY

If you build it, will they come? The flood of housing has already begun leaving its mark. According to RealPage, the number of tenants who renewed leases in January fell to 52%, its lowest level since 2018, implying better deals are already out there. Housing costs were also up 7.9% in January YoY according to the Consumer Price Index. But the impact of rent declines generally lags behind CPI. Annually, rent growth is positive but decelerating, and the effects of the supply increase are only now being felt.

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READY, SET, POACH

Harmon And Spies Are Just The Beginning For Newmark

One of the biggest stories to rock CRE this past month was the sudden departure of Cushman & Wakefield’s (CWK) all-star brokers, Doug Harmon and Adam Spies, to rival firm Newmark (NMRK). Now that the dust has settled, a clearer picture of how Newmark CEO Barry Gosin pulled it off is emerging.

Their own devices: In 2021, the duo’s contract with Cushman expired, rendering them free agents wondering about future opportunities. During their CWK tenure, Harmon and Spies elevated the firm to a position of dominance in the investment sales space. It’s possible they saw an opportunity with Newmark to do the same in their NYC backyard, compared to CWK, which is based in London and Chicago.

Gosin’s great gambit: Luring talent away from rival firms is a familiar strategy for Newmark CEO Barry Gosin, who poached staff from Rob Griffin in 2015 and CBRE in 2016. It’s an unpopular play with the firm’s shareholders, who wish Gosin would cool it with the spending and focus on the company’s bottom line. But it appears he’s committed to poaching, announcing during NMRK’s Q4 earnings call that he plans to focus on growing by cutting their share-buyback program.

➥ THE TAKEAWAY

Eyeing new marks: The duo’s departure has left Cushman in a difficult situation, as the firm has no one to handle institutional deals like Harmon and Spies. Some view the poaching as detrimental, worried that “all that power consolidated in one place” could hurt others. Gosin could care less about the critics, however, and is likely taking aim at other rival firms that are tightening their belts.

BIG, WINDY CITY

Downtown Chicago Has More Residents Than Before COVID

Although the streets may appear empty on a Friday morning, downtown Chicago’s population has actually surpassed its pre-pandemic levels.

Doing damn well: According to a report from the Chicago Loop Alliance, the Loop district has seen nearly 9% population growth since 2020. And the 46K residents are expected to grow another 17% by 2028. The data is compelling, especially considering Windy City has had a slower pandemic recovery than most US metros.

According to a study from the University of California, Chicago’s recovery is at 50%, trailing NYC, Houston, and even smaller cities like Boston. Regardless, 95% of downtown properties are occupied, above the pandemic floor of 87%, surpassing 2019 levels.

Looking at the Loop: A lot of those leaving Chicago’s business district in 2020 were families with children preparing to leave anyways. COVID just sped up the process. But as rents fell, new residents began arriving. Since the average Loop resident earns more than the average Chicagoan, this trend makes perfect sense. Loop incomers are 25–34 years old on average and 80% live alone or with just one other person.

➥ THE TAKEAWAY

Come one, come all: The Loop plans to incorporate 5K new housing units by 2028. If this comes to pass, it could bring the total district up to 54K residents. Of course, these estimates assume we avoid a major recession. But if the Loop was able to weather a global pandemic this well, then who knows what the future could hold for the Windy City.

✍️ Editors’ Picks

• Can’t beat the trust: Data startup CREXi had 14 counterclaims against CoStar thrown out by a judge after failing to prove their rival stopped brokers from sharing data with other firms.

• Reevaluating REITs: Institutions are shifting their REIT allocation strategies as private fund valuations are on their way back down, while public funds are catching up.

• New look at NYC: The Real Estate Board of New York (REBNY) notes that average ‘visitation’ rates for office space surpassed 60% of pre-pandemic levels, compared to 48% in 2021.

• Peek behind the curtain: Activist investor Blackwells Capital accused management firm AR Global of self-dealing by over-charging for Global Net Lease (GNL) and Necessity Retail REIT, hurting both REITS while benefitting themselves.

• Good or bad news? According to the Bureau of Economic Analysis (BEA), personal income rose 0.6% to $131.1B in January. This is great, but it could also give the Fed more reason to keep hiking interest rates.

• Condos are key: In 2022, Florida passed several laws impacting how condos are maintained, inspected, etc. Some associations are feeling the strain, opting to terminate and sell properties to increase the inventory of available land in the state.

• Doomsday prepping: After the release of the Fed’s 2023 stress test scenarios, Trepp has projected that potential CRE prices and portfolio losses could fall up to 40% this year.

• Dauntless diversification: Fashion brand Tommy Bahama is partnering with hotel developer Lowe to create the Tommy Bahama Miramonte Resort & Spa in Indian Wells, CA.

• Changing the game: Investor Onay Payne started a real estate division at investment firm Lafayette Square. Her approach: a remote-first strategy that emerged from the pandemic.

• Flocking to Florida: In the recent wealth report from Henley and Partners tracking the top 10 US cities and towns where people with $100M+ were investing in second homes, 3 out of 10 were in Florida, with Miami taking the top spot.

💼 Talent Collective

In partnership with Bullpen

Looking for a new role? CRE Daily has partnered with Bullpen to bring hand-selected, CRE freelance jobs to our readers. Join today for access to the below roles, as well as several other freelance openings.

• Associate, Mergers & Acquisitions

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• Director, Development

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• Marketing Specialist

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Looking to hire? Connect with Bullpen 

🤝 Deals & Dealmakers

• Money in the bank: Fifth Wall raised $1.5B in new funds in 2022, including a Real Estate Tech Fund, a European Fund, and a Climate Fund, making it the third highest venture firm globally, with a total of $2.9B raised since 2016 according to SEC Form D filings.

• Settling on self-storage: After partnering on a $300M venture last year, Nuveen Real Estate has invested further into MyPlace, a vertically integrated self-storage platform created by the founder of Simply Storage.

• Moving shop: Engineering giant Amentum has made the decision to migrate its headquarters from Maryland to Virginia, which is expected to create 157 new jobs in the state.

• Breaking ground: Terreno Realty has closed a deal to purchase an industrial property in Hialeah, FL, for $173.6M. The project is expected to wrap up in 2025 and would include 10 industrial distribution buildings totaling 2.2 MSF.

• Hitting their targets: Target (TGT) has joined rival Walmart (WMT) in fortifying their logistics network, investing $100M into expand next-day delivery services. This includes adding six new ‘sortation center’ facilities.

• Getting the ball rolling: RXR Realty has acquired a 1K-acre mixed-use development site in Apex, NC, for $91M, with plans to allocate 750 KSF for life sciences, logistics, and education.

• Garden state of mind: Greek Development received a $50M refinancing loan to expand Logan North Industrial Park, a warehouse property in Logan Township, NJ. The loan replaces existing construction financing from Wells Fargo (WFC).

• Blue skies: JetBlue (JBLU) has broken ground on a $4.2B plan to develop a new international terminal at JFK. Construction will begin after a deal between the Port Authorities of NY and NJ and JFK Millennium Partners closes.

• Taking their shot: After development at Pier 70 in San Francisco stalled, Boston-based life sciences developer King Street Properties is partnering with Brookfield to finish the $3.5B project.

📈 Chart of the Day

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