Good morning. Student housing returns are staying strong in the face of rising rates, attracting interest from institutional and foreign investors. Meanwhile, the government’s lax remote work policies are obliterating DC’s office market.

🎧 Listen: Alan Reay, President of Atlas Hospitality Group, sits down with Deconstruct to discuss the signs of distress in the hotel market across NY and Chicago, most notably in hotels suitable for business travel.

Institutional Investors Want a Share of Student Housing Returns

The student housing sector is still shining bright despite commercial real estate’s otherwise lackluster 2022. And despite rising interest rates, the sector is expected to attract more institutional capital this year, too.

Leading the charge: Last year, Blackstone (BX) paid $12.8B to buy Austin-based American Campus Communities, the biggest student housing landlord in the nation. This investment spurred institutional and overseas interest in student housing, in what would have otherwise been a down year for the sector thanks to the shaky interest rate environment.

Business is boomin’: According to JLL, overseas capital represented 6.7% of student housing deals between 2012–2016. From 2017–2021, that figure shot up to 20% as investors from the Middle East, Singapore, and Latin America threw their hats into the ring. Capitalizing on the growing interest, Landmark Properties (LPDC) announced a $2B deal with the Abu Dhabi Investment Authority to expand its US student housing portfolio.

The new playbook: The student housing sector is experiencing surging demand for off-campus housing, driven by schools like Louisiana State University, which recently allowed freshmen to live off-campus for the first time in the school’s history. Other colleges, like Arizona State University, are also partnering with private developers to build more on-campus housing.

➥ THE TAKEAWAY

Powder keg: Despite the 1.1% drop in US student enrollments last year, average rents and occupancy rates for the sector still enjoyed modest gains. Industry experts expect investment activity to soar once interest rate volatility is behind us, sometime later this year. Well, at least that’s the hope.

SOCIAL DISTANCING

DC’s Office Market Plummets as Remote Workers Keep Their Distance

Real-estate executives claim that the relaxed return-to-office policy of the federal government is negatively impacting the office market in Washington, D.C. as the majority of employees of the city’s largest employer are now able to work remotely most of the time.

Mind the gap: Per Cushman & Wakefield (CWK), just 5% of DC’s pre-pandemic workforce returned to the office in government-leased buildings. Compare that to the 50% return-to-office rate of all workers across 10 major US cities, per security company Kastle Systems. It’s no surprise that DC’s office vacancy rate has ballooned to 19.5% this year.

Bigger fish to fry: DC Mayor Muriel Bowser pointed out that federal employees account for a staggering 25% of jobs in the capital. Small wonder she’s pushing the Biden Administration to either take a stronger stance against remote work policies for government employees, or at least incentivize developers to convert government offices into more affordable housing.

Part of a pattern: Since 2010, government agencies have been dialing back their office footprints to cut down on costs. These days, federal agencies take nearly 30% less space on average when their leases come up for renewal. In other words, the wheels for remote work in federal offices were already in motion well before COVID. The pandemic simply pushed remote work into a higher gear.

➥ THE TAKEAWAY

Self-serving solution: The problem is that in a hot job market, government agencies see flexible remote work policies as a major selling point to attract top-tier talent. On top of reducing costs and increasing efficiency, federal agencies really have little incentive to actually coerce workers back to their desks.

• Unlocking productivity: By completing mundane tasks in minutes, ChatGPT3 is turning 10x brokers into 1,000x brokers by acting as a super-smart virtual assistant.

• Full-year forecast: The 2023 Forecast: National Apartment Research Report by Berkadia examines the key factors that will impact the apartment industry in the upcoming year.

• Exit plan: Kansas City Fed President urges Fed to quickly exit MBS market and clarify future bond purchases in monetary policy.

• More red tape: The LA City Council just approved legislation that enforces just-cause eviction protections, making LA the second-most-regulated US rental market.

• Supply shortage: Residents in Fort Myers, FL are facing a housing crisis as a result of the destruction of 5,000 homes by Hurricane Ian, leaving many families in tents.

• Closing the pay gap: Walmart (WMT) is raising wages for its US hourly employees to $14/hour, from $12/hour, starting next month, citing the tight labor market.

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• Flush with cash: Private REIT fundraising halted at the end of 2022, hitting a low of $1.1B in November. Even so, the total for 2022 was the 2nd highest ever recorded.

• Back to life: A JV between Lane Partners and Goldman Sachs (GS) secured $373M in financing for the construction of Southline, a 3 MSF life science campus in San Francisco.

• Full-service funding: Private equity group Garnett Station Partners has acquired a majority stake in Flagstop Car Wash to help the company fuel expansion plans.

• Another bite at the apple: Landstar Development Group bought another parcel of land in an ongoing development in outer Palm Beach for $56.7M.

• Deal of the day: A developer has bought the 45-story former headquarters of Humble Oil, a predecessor to Exxon, and plans to convert it into residential units.

• Big truck energy: General Motors (GM) is investing $918M in capital improvements across four U.S. manufacturing plants in its full-size truck, SUV, and EV divisions.

• Plant expansion: Eli Lilly said it would invest an additional $450M in its Research Triangle Park facility in North Carolina, as part of the state’s growing biomanufacturing industry.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.