Falling Construction Starts to Tighten Industrial Markets in 2024

Good morning,

Falling construction starts to tighten industrial markets in 2024; rapid rent declines hit southern cities; more office dislocation ahead; and an NYC update. Let’s delve into today’s topics.

📈 Market Update

🚧 Falling Construction Starts to Tighten Industrial Markets in 2024

The Fed's interest rate hikes have slowed the record pace of new industrial construction, but the lag time means ample new supply will still complete in 2023. By late 2024, slowing starts will result in the lowest quarterly completions in over a decade. Major markets like Atlanta have seen starts fall far below historical absorption, suggesting available industrial space will tighten significantly in 2024 if demand recovers. The impending supply pinch underscores the need for tenants to plan ahead.

👎️ Rapid Rent Declines Hit Southern Cities

Several urban apartment submarkets across the South that saw exaggerated rent growth in 2022 are now experiencing significant pricing corrections, with downtown Salt Lake City, central Nashville, and midtown Atlanta posting the steepest annual rent declines nationwide. Massive amounts of new supply in these markets have quickly eroded pricing power. Though most urban cores are still seeing positive rent change, the rapid shifts highlight the vulnerability of overheated apartment markets to sudden downturns.

⚠️ More Office Dislocation Ahead

TCW Group CEO Katie Koch predicts significant additional correction is still needed in the struggling office sector, with a third of space likely to be removed. With $1.5T in commercial mortgages maturing soon, she warned of major refinancing hurdles. Koch believes an economic downturn is unavoidable given high rates, and sees commercial real estate continuing to underperform until excess office supply is resolved.

🌆 NYC Update

Dumbo Office Loan Default Highlights Credit Crunch:
The recent default on a $180M loan for Dumbo Heights, an office campus owned by RFR and Kushner Companies, underscores the major hurdles landlords now face when refinancing office assets. With values slipping below debt and lenders requiring more equity, many properties face a sizable financing gap. The Dumbo portfolio appears to be struggling with high vacancy, likely driven by WeWork scaling back its leased footprint.

Wells Fargo Bets on Hudson Yards With $550M Buy:
In one of Manhattan's largest deals this year, Wells Fargo is spending over $550M to acquire the former Neiman Marcus space at Related's 20 Hudson Yards. The bank plans to convert the 3-floor, 400K sf property into office space for its own use. The large outlay for a Hudson Yards address underscores that newer towers still attract major tenants, despite remote work trends. It also marks a reversal from the oft-seen office-to-residential conversions in the market.

✍️ Further Reading

• World’s Biggest Warehouse Developer Looks To Expand Beyond Commercial Real Estate (CS)

• AI Drives Growth in Data Centers Beyond Usual Markets (CS)

• Miami Moves into the Top Tier of Most Valuable Housing Metros (GS)

• Net-Zero Life Science & Tech Campus to Rise in Boulder (CPE)

• BGO Industrial REIT Buys Stake in Midwestern Portfolio for $130M (GS)

• It's Still Not Clear If Multifamily Has Hit Bottom (GS)

• Brookfield Backs Ballast in Buying Veritas’ $800M in Apartment Loans (RD)

• Trump NY Fraud Trial on for Next Week After Delay Bid Denied (BBG)

• U.S. Home Prices Increased in JulyU.S. Home Prices Increased in July (WSJ)

📊 Chart of The Day