Fallout from Rental and Office Market Downturns

Good morning,

Fallout from rental and office market downturns, class B office loans face major test ahead, and surging apartment construction tests demand in fast-growing Carolinas. Let’s delve into today’s topics.

📈 Market Update

👎️ Fallout from Rental and Office Market Downturns

Major segments of CRE like office and multifamily are facing distress, with dropping property values, rent delinquencies, and banks increasingly exposed through loans. WeWork is looking to renegotiate leases, LA developers have halted projects, foreclosures have hit Houston and New York, and rent stabilization laws continue to depress NYC building values. The downturns signal a challenging period ahead for investors and lenders.

Beige Book Highlights Continued CRE Weakness:
The latest Federal Reserve Beige Book showed continued signs of distress in markets across multiple districts, with weak office demand, rising vacancies, falling rents, stalled construction, banks pulling back on lending, and declining investment sales. The Beige Book highlights paint a picture of largely stagnant or contracting commercial real estate conditions. While some districts noted pockets of relative strength, the overall tone reflects ongoing headwinds for CRE stemming from higher interest rates, economic uncertainty, and shifting demand dynamics.

🏢 Class B Office Loans Face Major Test Ahead

Nearly one-fifth of all US office properties have loans maturing between 2023-2026, with Class B assets most at risk as demand shifts to higher quality spaces. Markets like Atlanta, Pittsburgh, and Denver have over 25% of Class B offices facing expiring loans, while major metros including D.C., Chicago, and L.A. have tens of millions of square feet soon requiring refinancing. With weak demand, high vacancies, and tight lending, a wave of distressed maturing loans could further destabilize office markets already grappling with pandemic impacts.

🏗️ Surging Apartment Construction Tests Demand in Fast-Growing Carolinas

The rapidly expanding cities of Charlotte and Raleigh have two of the largest apartment construction pipelines in the country as a percentage of inventory, with nearly 33k and 16k units underway respectively. This influx of new supply comes as demand has slowed over the past year, leading to negative rent growth. High levels of construction are concentrated in urban cores and suburban submarkets across both cities, likely pressuring rents further over the next two years until the recent decline in starts constrains new supply.

✍️ Further Reading

• Wall Street Fears a Too-Hot Economy as Recession Bets Plunge (BBG)

• Seized Signature Bank Loans Set Up $51 Billion Market Test (CS)

• Manhattan Office Leasing Grows for Fourth Consecutive Month (GS)

• Hotels’ Sudden Slump (GS)

• Taylor Swift’s “Eras” Tour has Helped Hotel Industry Avoid a Cruel Summer (RD)

• The Fall in Home Prices May Already Be Over (WSJ)

• Kroger, Albertsons To Sell 413 Stores, Eight Warehouses To Pave Way for Merger (CS)

📊 Chart of The Day