Sharp Rent Declines Hit Majority of Texas Apartment Markets

Good morning,

Sharp rent declines hit majority of Texas apartment markets, Denver next to pursue office-to-housing conversions, and the taking of Madison 625. Let’s delve into today’s topics.

📈 Market Update

🤠 Sharp Rent Declines Hit Majority of Texas Apartment Markets

An increasing number of apartment operators in Texas have resorted to cutting rents. In July, 53 out of 113 submarkets across Austin, Dallas, Fort Worth, San Antonio, and Houston saw YoY rent declines. This represents a significant increase from just 24 submarkets with rent cuts in June. The trend has accelerated rapidly in recent months.

Austin Faces The Steepest Drop:
The steepest rent cuts statewide occurred in Austin, where nearly every submarket logged declines. After large rent hikes of 20-30% in 2021-2022, the market is now correcting. The deepest annual declines in July were 7.2% in Northwest Austin and 6.6% in Cedar Park. Other Austin submarkets saw drops around 6%. While apartment demand remains strong in Austin, massive new supply is being delivered faster than the market can absorb. Over 13,300 new units were completed in the past year, increasing stock by 4.6%. An additional 32,000 units are slated for delivery soon, signaling more rent cuts ahead.

Strong Underlying Economic and Demographic Trends Remain:
Though rent cuts have become common in major metros with abundant new supply, this trend may not last long and investors still see opportunity. The Texas job market remains a key driver of apartment demand, accounting for 20% of all US job growth recently. Domestic migration to Texas also continues at record levels. As a result, though substantial new supply has strained pricing, underlying demographic and economic factors suggest rent declines could be temporary.

🏗️ Denver Next to Pursue Office-to-Housing Conversions

Faced with high office vacancy rates, Denver is joining other major cities in converting outdated and underused offices into much-needed housing. Working with architecture firm Gensler, Denver identified 20 potential conversion candidates, including the city's tallest building, Republic Plaza. Gensler will further assess 16 of the buildings, which could add over 5,000 housing units downtown if converted. While discussed for years, conversions remain rare - only about 260 nationwide since 2016. But with tenants downsizing and favoring newer offices, alternative uses for older buildings are increasingly attractive. As the city's office glut persists, converting dated towers into housing could help meet civic goals around housing supply and sustainability.

🏙️ The Taking of Madison 625

The contentious fight over the ground lease under SL Green's 625 Madison Avenue office tower in Manhattan finally ended this week when Marc Holliday's firm and its partners took control of the site through foreclosure. The saga pitted Holliday against billionaire investor Ben Ashkenazy, who purchased the land under 625 Madison in 2013 for $400 million but soon pushed for exorbitant rent hikes up to $80 million annually. After buying a piece of Ashkenazy's mezzanine debt in 2018, SL Green used that leverage when an arbitrator set ground rent at a steep $20.25 million, wiping out SL Green's office investment. The REIT's shrewd debt purchase ultimately allowed it to take over the parcel from Ashkenazy via foreclosure auction this week, ending a decade-long standoff between two of real estate's most prominent figures.

✍️ Further Reading

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• Billionaire Stephen Ross’s Related Buys West Palm Beach Site for Condos (BBG)

• Outdoor Dining Is Set To Become a Permanent Fixture in New York (CS)

• Utilities Too Are Driving Up Multifamily Operation Expenses (GS)

• CLO Market View: Issuance Down, is Arbitrage to Blame? (Trepp)

• “Everybody Was Doing It.” Miami Agent Sentenced to Prison for PPP Fraud (RD)

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