Higher Interest Rates Slow Leasing Demand

Good morning,

Higher interest rates slow leasing demand; $100B of dry powder awaiting opportunity; no respite in sight for China’s housing downturn; and struggling developer StoryBuilt’s $2B portfolio hits market. Let’s delve into today’s topics.

📈 Market Update

⚠️ Higher Interest Rates Slow Leasing Demand

The commercial real estate market is showing signs of slowing demand as the effects of higher interest rates take hold. Though new supply remains elevated, net absorption turned negative in Q3 2023 for the first time outside of the pandemic since 2009. This suggests tenants are pulling back expansion plans due to higher borrowing costs. Landlords may need to brace for higher vacancies, longer lease-up times, and muted rent growth compared to the robust gains of 2021. The tepid absorption is a key indicator that rising rates have filtered into property markets, making it a zero-sum game for attracting new tenants.

🫰 $100B of Dry Powder Awaiting Opportunity

On the other hand, uncertainty in the market breeds opportunity. Major opportunistic and value-add fund managers have started selectively deploying the hundreds of billions in dry powder they've accumulated. Though transaction volumes remain muted, fund managers see emerging opportunities, like Blackstone's record $30B fundraise and TPG's $1.5B data center JV. Despite economic uncertainty, leading firms are finding pockets of value, particularly in sectors like industrial, multifamily, data centers, and life sciences. Investors believe the challenging environment will prove fruitful for experienced managers that can acquire quality assets and enhance value. The increased investment activity could provide a floor for prices and liquidity for the market to find its bottom.

📉 No Respite in Sight for China’s Housing Downturn

The downturn in China's property sector has claimed one of its biggest victims yet, as Country Garden defaulted on debt and warned it expects to miss future offshore bond payments. Once considered China's most stable developer, Country Garden saw sales plunge 81% in September. The mounting turmoil in China's housing market will likely prolong broader economic woes, hurting consumer confidence and government land revenues. Though Chinese authorities have tried stimulating demand through easier mortgages and subsidies, monthly sales continue falling sharply.

🏘️ Struggling Developer StoryBuilt’s $2B Portfolio Hits Market

The $2B commercial and residential development portfolio of Austin-based StoryBuilt is up for sale after the company went into receivership this summer. The 28 properties across high-growth Sun Belt markets like Austin, Dallas, Denver, and Seattle include shovel-ready development sites and partially completed projects, providing turnkey opportunities for buyers. Though mounting supply has cooled some markets, the sale enables qualified developers to enter at potential discounts. With joint venture partners on many assets, the receivership offers stakes in major projects.

✍️ Further Reading

• Higher Bond Yields Likely to Extend Fed Rate Pause (WSJ)

• It’s Official: Rent Control is About Wrecking Apartments (RD)

• Times Square Goes From Deserted to Bustling (WSJ)

• Pickleball Kingdom Plans To Open 20 Centers Across New Jersey (CS)

• Work Shift: Can Work Resorts Lure People Back to the Office? (BBG)

• Office Shows Biggest Uptick in CMBS Special Servicing (CPE)

• Housing Groups, Mortgage Lenders Urge Powell to Halt Fed Hikes (BBG)

📊 Chart of The Day