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Together with
Good morning. Warren Buffett backs homebuilders amid inventory issues and their expansion into build-to-rent areas. Amazon is rethinking its grocery strategy. Meanwhile, Goldman Sachs is taking a tough stance on its return-to-office policy.
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Today’s issue is brought to you by Redwood Living.
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Market Snapshot
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*Data as of 8/24/2023 market close.
INVESTMENT TRENDS
Buffett Backs Homebuilders with a Whopping $800M Investment
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The housing sector is undergoing a transformation, with a supply deficit favoring construction companies. Warren Buffett has recognized this trend, acquiring over $800M in homebuilder stocks—an optimistic sign for the property market.
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Betting big: Berkshire Hathaway, guided by the Oracle of Omaha, Warren Buffett, revealed an investment of $814M across three major home builders. This move by the iconic investor underscores how home builders are reaping the benefits of this tight supply environment, even amidst the backdrop of rising mortgage rates, which could potentially dampen home sales enthusiasm.
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Major stake: D.R. Horton emerged as a primary target for Buffett. Berkshire acquired six million shares in the company, with an estimated value of $726M by the end of Q2. This strategic investment now places Berkshire amongst D.R. Horton’s top 10 shareholders. Alongside this, Berkshire also showed interest in Lennar and NVR, buying over 152,000 and 11,000 shares, respectively.
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Shift in strategy: Simultaneously, while investing in these home builders, Berkshire Hathaway has shown restraint in the broader stock market. This selective approach, juxtaposed with a 12% revenue decline in its housing-affiliated subsidiaries, provides insights into the company’s current strategic focus. With an eye on U.S. Treasury bills and an impressive $147 billion in reserve, Berkshire seems to be adopting a cautious wait-and-see approach.
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Homebuilder landscape: The upward trajectory of the housing sector is undeniable. While the S&P 500 witnessed a commendable 16.5% rise, the specialized S&P Homebuilders Index reported a staggering 36.4% growth. Notably, stocks like D.R. Horton, Lennar, and NVR have showcased strong performances, reflecting the sector’s resilience despite challenges like supply chain disruptions and fluctuating interest rates.
➥ THE TAKEAWAY
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Why it matters: Buffett is showing confidence in homebuilders amidst inventory challenges and their deeper ventures into multifamily and build-to-rent sectors. With D.R. Horton pivoting towards rentals due to rising mortgage costs and Lennar pausing plans amid overbuilding concerns, Berkshire’s investment suggests a promising outlook for homebuilders and a potential multifamily market rebound.
TOGETHER WITH REDWOOD LIVING
Midwest: A Smart Move for Multifamily Investors
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When it comes to investing in multifamily properties, the Sunbelt isn’t the only option worth considering. Here are three reasons why a growing number of investors are shifting their focus to the markets in the Midwest.
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Population Surge: U.S. Census data show a significant rise in people moving from major metro areas to smaller cities or non-metropolitan regions. Cities like Cleveland have seen a high influx of new residents, creating strong housing demand, particularly for multifamily dwellings.
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Financially Stable Tenants: Midwest residents are often more financially literate and conservative, which means tenants, who may include professionals like teachers, nurses, or students, are more likely to make timely rent payments and renew their leases. This benefits investors in the long run.
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Livability Factor: The Midwest is known for its high-quality schools, less congestion, recreational options, world-class healthcare, and diverse, affordable housing, making it an attractive place to live. As a result, once people move here, they tend to stay, contributing to long-term stable occupancy for investors.
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*Disclosure: This post contains sponsored content.
GROCERY REVOLUTION
Amazon Announces Major Grocery Revamp Since Acquiring Whole Foods
An Amazon Fresh store in Schaumburg, Illinois. Photographer: Christopher Dilts/Bloomberg
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Amazon (AMZN) has undertaken its most significant transformation in the grocery sector since acquiring Whole Foods six years ago, reshaping its approach with store revamps, automated warehouses, and non-prime fresh-food delivery.
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Grocery evolution: Amazon is embarking on a transformation of its grocery business, including renovating stores, testing automated warehouses, and introducing fresh food delivery for non-Prime subscribers. The move also involves merging its various supermarket offerings under one online cart to capture a larger share of the $1.5T US grocery market. Led by former Tesco executive Tony Hoggett, Amazon is strategically entering the competitive landscape dominated by major players like Walmart (WMT) and Kroger (KR).
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Streamlining shopping: Beware, big box retail—the e-commerce giant plans to merge its online supermarket platforms (Whole Foods, Amazon Fresh, Amazon.com) into one unified online cart. This initiative aims to simplify the shopping process and provide customers with a seamless experience, counteracting the need for multiple checkouts.
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Bold ambitions: Amazon is bolstering its grocery efforts with a team of experienced retail executives, including former Tesco executive Tony Hoggett. The company faces competition from established giants like Walmart and Kroger. Hoggett envisions Amazon transforming from a niche grocer into a cost-conscious shopping destination consolidating consumer trips and spending.
➥ THE TAKEAWAY
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Expanding fresh food access: Amazon is expanding its Amazon Fresh offering to non-Prime customers across several metro areas, eventually aiming to make this service available nationwide. However, this expansion comes with delivery fees ranging from $7.95–$13.95, potentially influencing customer adoption. The company seeks to simplify purchasing processes by stocking more Whole Foods items in Amazon warehouses and offering a unified shopping cart.
🌐 AROUND THE WEB
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📖 Read: The Wharf Miami, an iconic open-air venue along the Miami River, is set to close and bid farewell with a lively two-day party, making room for the expansion of the Riverside Wharf development.
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▶️ Watch: In this episode of Bloomberg Markets, Aetos Capital founder and CEO Scott Kelley discusses the investment opportunities he sees in office real estate.
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🎧 Listen: In this episode of The Tape, an assortment of experts join Bloomberg to talk SEC rules, housing trends, trading desk competition, space missions, labor strikes, generative AI, and CRE opportunities.
RETURN-TO-OFFICE
Goldman Sachs Pushes For 5-Day Workweek Return
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Goldman Sachs (GS) is taking a tough stance on its return-to-office policy, intensifying efforts to enforce five-day-a-week office attendance; however, firms like Goldman, Citigroup (C), and JPMorgan (JPM) are grappling with employee reluctance to resume in-person work.
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Goldman’s office push: As a vocal advocate of returning to the office, Goldman Sachs is implementing a more robust approach to ensure its employees adhere to its 5-day weekly office policy. While revenue-generating staff have largely resumed full-time office work, the company faces resistance from employees in other departments. HR chief Jacqueline Arthur clarified that while some flexibility is allowed, the company reinforces its existing policy and urges employees to work in the office five days a week.
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Industry-wide trend: Peer firms such as Citigroup (C) and JPMorgan Chase (JPM) are also grappling with attendance issues, prompting them to track attendance and encourage managers to enforce their hybrid work guidelines. Citigroup employees were warned about potential consequences, including impacts on pay if they don’t adhere to attendance policies. JPMorgan communicated that managing directors must be present in the office every workday.
➥ THE TAKEAWAY
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Struggles persist: Goldman Sachs’ recent efforts highlight that even firms enthusiastic about returning to the office need help convincing employees, reflecting a broader trend in corporate America. As Goldman Sachs and other major financial players navigate the complexities of motivating employees to fully embrace in-person work, balancing flexibility and adherence to office attendance policies remains a central theme.
✍️ DAILY PICKS
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Shipping wars: The bankruptcy of trucker Yellow has triggered a bidding battle over its real estate, with Old Dominion Freight Line (ODFL) offering $1.5B for its network of 170 truck terminals.
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Urban rebirth: NYC’s ambitious plan to convert vacant offices into thriving residential is gaining momentum as Mayor Adams launches an “Office Conversion Accelerator” while navigating complex zoning changes and infrastructure challenges.
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Sales slump: As commercial real estate transactions dwindled, several major brokerages succeeded in mitigating the impact on their revenue.
Major loss: Bridge Investment Group sold One Concord Center in San Francisco’s East Bay Area for a significant loss compared to its previous price.
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Southern expansion: EQT Exeter is growing its industrial portfolio by purchasing Savannah’s Southeast Gateway business park, aiming to capitalize on its prime location near shipping gateways and major highways.
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Constructing AI: TrueBuilt, a construction proptech startup, secured $4M in seed funding to enhance its AI-driven pre-construction software for commercial builders.
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Suburban slump slows: Apartment rents experienced a YoY decline of 0.7%, marking the first drop since COVID began, while suburban rents show a smaller decline of 0.5%, urban centers saw a 7% drop, with some cities seeing a widening gap.
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Sandwich sell-off: Subway is set to be acquired by Roark Capital for $9.55B with an earn−out condition attached to part of the deal, ending a competitive auction.
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Office stats: A workplace sensor survey by XY Sense shows that 36% of office work points equipped with sensors are never occupied, with only 14% being used for 5+ hours a day—an overall office utilization rate around 50% of pre-pandemic levels.
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Change of heart: French retail giant Unibail-Rodamco-Westfield is delaying plans to sell its US malls, as their Class A malls are generating more revenue than before the pandemic.
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Loving life: Life science buildings account for a significant portion of the current office development pipeline, with their strong performance and potential for redevelopment supporting the overall office market despite rising rates and uncertainty.
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Price hike: Insurance costs for multifamily have surged by 33% YoY, reaching $180 per unit, posing challenges for property owners and developers while also affecting development proposals and valuations.
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Embrace change: Despite concerns that AI might lead to job displacement and negatively impact the CRE market, studies show it could actually increase worker productivity, stimulate economic demand, and drive greater demand for properties.
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Shareholder fury: A shareholder lawsuit is accusing Apollo Global Management of improperly paying $570M to cover the tax bills of its top executives as part of a restructuring effort.
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Averting bankruptcy: As WeWork (WE) faces delisting from the NYSE and mounting financial challenges, the coworking giant is assembling a team of restructuring experts to navigate its massive debts and attempt to avoid bankruptcy.
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Fund transparency: The SEC has new rules for transparency, accountability, and fairness in the private funds industry, requiring funds to issue quarterly fee and performance reports, disclose certain fee structures, and perform annual audits.
📈 CHART OF THE DAY
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CMBS Office Maturities Through July
Sources: Moody’s Analytics CRE, data via Moody’s Analytics CMBS
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In July, office loans reaching maturity surpassed $1.5 billion, making it the second-largest monthly total in 2023, just behind May’s whopping $2.1 billion. While May boasted a payoff rate nearing 50%, July’s payoff from the maturing loan balance was a mere 6%. However, when evaluated by the number of loans, July’s payoff rate rises to 35.7%. Regardless, it’s below the year-to-date average and marks the weakest performance of 2023.
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