Rent Growth Slows Across Texas Due to Luxury Oversupply

Good morning,

Rent growth slows across Texas due to luxury oversupply; Regent Properties launches $500M credit platform targeting Sunbelt; Meta's costly London lease break highlights office market woes; and public REITs often deviate from private market value. Let’s delve into today’s topics.

📈 Market Update

⭐️ Rent Growth Slows Across Texas Due to Luxury Oversupply

While the major Texas markets of Austin, Dallas-Fort Worth, Houston, and San Antonio continue to see population growth, the increasing oversupply of new 4- and 5-star apartments has led asking rents for luxury units to decline over the past year, with the steepest drops in Austin (-5.7%) and San Antonio (-4.9%). This trend is largely driven by the high proportion of new construction focused on the high end - making up 85% of Austin's new supply. Rent growth for luxury apartments is projected to rebound by 2024-2025 as permitting declines, but the markets weighted toward newer and higher-quality stock may take the longest to recover previously achieved rent levels.

Austin and San Antonio Top National Vacancy Rate:
Austin and San Antonio currently have the highest vacancy rates among major US metros, driven by an influx of new luxury apartment construction that has outpaced demand. While Austin's 11.1% rate stems from massive supply additions, San Antonio's 11.3% vacancy results from a decline in occupancy despite continued new delivery. Both should see some stabilization as construction starts slow, but above-average vacancy levels are likely to persist through 2024 until absorption catches up with the substantial recent inventory growth.

📈 Regent Properties Launches $500M Credit Platform Targeting Sunbelt

Regent Properties has created a $500M credit platform to provide flexible financing for commercial real estate owners struggling to secure loans in the current restrictive environment. The Dallas-based investment firm intends to target opportunities across the Sun Belt by offering senior and mezzanine debt, preferred equity, and rescue capital for acquisitions, refinancing, renovations, and more. Regent believes the new platform will provide attractive protected returns for investors while serving the significant unmet financing needs in underserved CRE sectors.

🏙️ Meta's Costly London Lease Break Highlights Office Market Woes

Meta's agreement to pay £149M ($180M) to exit its London office lease 18 years early shocked observers, but was likely driven by high repurposing costs and desire to shed a headache rather than profound office market weakness. While concerning a top tenant scaled back, the large break fee may stem from difficulty converting the space and Meta's eagerness to be free. The burden of uncertainty now lies with landlord British Land to re-let the prime property at comparable rent, which would prove "prime is fine." Until then, the saga signals office challenges in London and beyond.

🔀 Public REITs Often Deviate from Private Market Value

While public REITs have traded at an average 1% discount to net asset value (NAV) since 2000, they have experienced wide premiums and discounts versus private market pricing over time. This divergence stems from NAV's backward-looking nature contrasting with REITs' forward-looking listed structure. With REITs strongly indicating future private market direction, public and private valuations can vary based on differing views of asset value trajectories. Understanding these dynamics helps explain why public REITs may not precisely track lagging NAV despite growing mainstream acceptance.

✍️ Further Reading

• Rising Interest Rates Mean Deficits Finally Matter (WSJ)

• Fed’s Bid to Avoid Recession Tested by Yields Nearing 20-Year Highs (BBG)

• Starting Bid For a Downtown LA Office Building? $53 psf (RD)

• “Airbnbust” Rocks New York’s Short-Term Rental Landscape (RD)

• NYC’s $23 Congestion Charge Stirs Debate in Every Neighborhood (BBG)

• Mortgage Rates Hit 7.49%, Highest Since 2000 (WSJ)

• Brookfield Lands 245 KSF Houston Office Lease (CPE)

📊 Chart of The Day