Shifting Power in Condo-Hotel Projects

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Good morning. In today’s briefing: condo owners’ aspirations for a luxurious lifestyle turn into legal battles over amenities, the rise of self-storage, and the paradox of increased hiring but reduced working hours for private-sector employees in the US.

Today’s issue is brought to you by Greysteel, a leading middle market real estate firm for private and institutional investors.

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This Landmark Ruling Could Shift Power in Condo-Hotel Projects

In 2008, Rasikaran and Jhansi Boaz bought a condo at the Carillon Miami Wellness Resort, previously Canyon Ranch, drawn by its luxurious amenities. However, they soon found themselves in a protracted legal battle with Z Capital Group, the commercial owner, over property control, maintenance, and assessments.

The lawsuit: The dispute largely revolves around the level of control Z Capital exercises over the Carillon Miami Wellness Resort, including maintenance, assessments, and overall property management. A landmark ruling in January saw a Miami judge side with the condo owners, stating that Z Capital’s authority was an overreach, reducing residents to mere long-term hotel guests. This ruling could potentially unsettle the balance of power in the condo-hotel sector, as it may limit commercial lot owners’ control.

The wider implication: If the ruling sets a precedent, it could trigger a shift in the sector, reducing the control of commercial lot owners and potentially discouraging investors. The Carillon case isn’t isolated, and many condo-hotels give commercial lot owners control over maintenance and assessments, creating a ‘quid pro quo’ system that could now face a challenge.

The potential domino effect: This ruling provides a beacon of hope for other condo-hotel residents unsatisfied with their commercial lot owners’ management. However, this increased resident control could lead to financial complications, especially as commercial lot owners often have mortgages on shared facilities. Moreover, residents might find themselves responsible for managing complex amenities – a daunting task for those unprepared for it.

➥ THE TAKEAWAY

Coexistence and future predictions: While the fight for control continues, the ultimate goal is to find a balance where commercial interests and residents share decision-making power. However, some experts believe this co-management model could prove challenging, particularly for upscale establishments requiring frequent and meticulous maintenance. As this landmark case unfolds, the future of condo-hotels remains uncertain, potentially triggering a radical shift in how these properties are managed and controlled.

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Self-Storage Property Demand On The Rise Nationwide

As commercial real estate cools, self-storage continues to heat up and be a favorite asset class among investors. Why? The resilient sector solves a uniquely American problem: what to do with too much stuff.

More stuff, please: Over the past three years, self-storage occupancy rates have shot up to as high as 96%. During the pandemic, people had to figure out how to make functional home offices or gyms by transforming existing living space. These transformations led to significant decluttering, with extra stuff stashed away in storage rather than thrown away, contributing to higher demand for storage facilities.

More space, please: The high demand for self-storage space has given landlords pricing power, with rents going up 8–9% every six months before the pandemic to as much as 35% now. Customers tend to store their belongings in one facility for more than a year, and the lack of mobility makes them less sensitive to price increases despite being concerned about costs initially.

Shortage of supply: Self-storage’s recent success is also due to little construction due to high development costs, supply chain difficulties, and labor shortages. The available square footage for self-storage only rose by 15% from 2016 to 2019 (around 5% per year). However, as bottlenecks ease, this is expected to change.

➥ THE TAKEAWAY

Who needs bigger homes? The self-storage business has shown resilience and remains a sound investment option for CRE. While bottlenecks may ease and construction gradually increase, the demand for self-storage means investors expect the sector to continue performing well. And as long as Americans keep buying stuff, they will need storage space—even if rents do keep going up over time.

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Around the Web

📖 Read: In “Never Eat Alone,” Keith Ferrazzi provides a detailed guide for successfully connecting with people in one’s network. He emphasizes both the practical steps and the necessary mindset required for productive outreach.

🖥️ Watch: CBRE CEO Robert Sulentic analyzes indicators of strain in commercial real estate and discusses the unlikelihood of office building occupancies returning to pre-pandemic levels.

🎧 Listen: In this episode of The Treppwire Podcast, listen to the team dive into inflation, the CPI, the Fed Funds Rate, and what the second half of 2023 should have in store for CRE.

US Workweek Now Shorter Than Ever Despite Recent Hiring Spree

Despite the recent hiring surge, the average workweek for private-sector U.S. employees has fallen to just 34.3 hours in May, below the 2019 average, according to the Labor Department. Not great during a potential recession, as it could indicate that employers are cutting hours in preparation for layoffs.

Contradicting trends: What’s weird is that the shortened workweek is happening in the middle of an ongoing hiring spree. On one hand, layoffs fell by 13% in April compared to 2019 averages, and the decrease in weekly work hours could still be a cause for alarm, according to some economists. On the other hand, Nomura Securities Chief Economist Aichi Amemiya says this trend could also be due to the reluctance of employers to let go of talent they need in case business picks back up in the near future.

Supply and demand: Companies with fewer orders are cutting hours in an attempt to avoid layoffs based on the challenges of re-hiring and retaining talent, which can often cost an arm and a leg. The fear of letting go of key staff makes employers like American Fleet reluctant to implement layoffs in the current labor market. This situation has been further exacerbated by a shortage of labor in many industries, particularly for lower-paying jobs requiring in-person attendance.

Shifting work-life priorities: Another key factor to consider is that worker priorities have evolved since the pandemic, causing many to work less than they used to. For example, the average weekly overtime of American factory workers fell from 4.1 hours in 2022 to 3.6 hours by May 2023, a development that might reflect changing work-life balances. Surveys also indicate that the work-life reset affected everyone simultaneously, further contributing to the phenomenon of fewer working hours nationwide.

➥ THE TAKEAWAY

A reshuffled workforce: Although the decrease in weekly work hours could be an indication of a possible recession, it could just as easily have nothing to do with that. Even though reduced hours might seem ominous, it could be the result of unusual post-pandemic circumstances. The rise of remote work has eliminated commutes and a lot of unpaid downtime that people used to get away with in the office, making it easier for employees to accomplish the same number of tasks in less time. It could be the case that the 40-hour workweek was never as necessary as we thought it was.

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• Billionaire defies Senate: Billionaire Harlan Crow signals his intent to defy a Senate subpoena in a test of the power and limits of Congress.

• Risky business: Investor interest in riskier B-piece notes in the CMBS sector is rising due to a drop in new issuance and tightening credit standards.

• Renting New York: High-end rentals in NYC are on the rise due to high rates, leading to a tight market and a surge of online listings. 1-BR rents for lux rentals range from $8K to $40K right now.

• The Closer: Former New York Mets pitcher Matt Harvey has joined CRE firm Newmark as MD of its multifamily debt origination and advisory unit, according to the New York Post.

• In the name of research: Tishman Speyer secures a $750M construction loan for phase 1 of the 900 KSF Harvard Enterprise Research Campus in Allston, MA.

• Facing the music: CRE borrowers face default as billions in debt comes due on low-occupancy properties, with $1.5T due within three years.

• Crowdfunding Hollywood: Crowdfunding firm FundRebel plans to acquire its first Hollywood multifamily project, Nine Hollywood, for $67M, featuring 270 units and 63 KSF of ground-floor retail.

• Banking on change: In Q1, American banks experienced a significant drop in uninsured deposits by $597B, a 7.8% quarter-over-quarter and 15.2% year-over-year decrease.

• Industrial market moderates: U.S. industrial net absorption fell 37.6% in 1Q23 whilst asking rents for U.S. industrial property rose.

• Back to the Amazon: Amazon’s back-to-office mandate sees 51% of daytime workers back in its HQ, contributing to the highest levels of office foot traffic since the pandemic hit.

• From NY to Miami: NY-based real estate finance company, Dwight Capital, opens a new office in Miami-Dade County, serving borrowers, brokers, and investors with room for 30 employees.

• Spotting the ‘Gotcha’: CRE leases often contain non-starters like “pass-through,” “relocation,” “escalation,” and “automatic renewal,” clauses that can lead to fees and even eviction if not understood.

• Sunset in Florida: Florida’s housing market frenzy is finally waning as single-family home prices flatten for the first time since 2011 and inbound moves slow down.

Nearly 4 in 5 homeowners have a mortgage interest rate below 5%, and nearly 1 in 4 have a rate below 3%. With rates close to 7% now, it’s no surprise most homeowners aren’t selling, worsening the U.S. housing shortage.

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