Shelter Costs are Driving Inflation, But Relief May be Coming

Good morning,

Shelter costs are driving inflation, but relief may be coming, Brookfield sees strong growth, robust fundraising, and Hawaii wildfires deal major blow to Maui. Let’s delve into today’s topics.

📈 Market Update

📉 Shelter Costs are Driving Inflation, But Relief May be Coming

Housing costs have accounted for over 90% of the increase in July’s CPI report. Rents and home prices have risen sharply; however, there are signs the housing market is cooling and price increases are moderating. Private sector data on rents, home prices, and vacancies point to shelter inflation plunging in the coming months. The Labor Department’s shelter index lags real-world trends, so indicators suggest the housing component could turn negative by mid-2023.

The Takeaway:
Sharply declining housing inflation would provide cover for the Fed to halt its series of aggressive interest rate hikes. The central bank will proceed cautiously, given lingering inflation; the path forward remains data-dependent. Falling shelter costs are a double-edged sword for CRE; rent prices decreasing will hurt NOI, but interest rates play a huge role in markets ability to stabilize.

💰️ Brookfield Sees Strong Growth, Robust Fundraising

The Toronto-based alternative asset manager reported a 3% increase in distributable earnings to $527M in Q2. Fee-bearing AUM grew 2% to $440B, with a goal of reaching $1T by 2027. Brookfield expects to raise $150B this year, including $100B for private funds and $50B via insurance channels. This bucks the trend of slowing fundraising in the alternatives sector.

Brookfield continues an aggressive pace of acquisitions, announcing around $50B in deals across renewables, infrastructure, and other sectors in H1. This includes the $2.8B purchase of Duke Energy’s solar and wind portfolio. Asset dispositions also remain strong at $15B in H1.

Brookfield Sees Opportunity:
CEO Bruce Flatt believes the current environment with high interest rates and volatile markets provides the best investment conditions since 2009. He cites Brookfield’s experience, large-scale capital, and lending relationships as key advantages to acquire assets at discounted values.

Despite macro challenges, Flatt says RE fundamentals remain strong, with rising rents and constrained new supply. Brookfield’s portfolio has shown resilience, with double-digit rent growth in US logistics and 99% office occupancy in Brazil, South Korea, and Dubai. Flatt sees “tremendous opportunity” to acquire RE and other assets at favorable prices given ongoing market turmoil.

🧯 Hawaii Wildfires Deal Major Blow to Maui

Wildfires on the island of Maui in Hawaii have caused major destruction in the popular tourist town of Lahaina in West Maui. At least 36 people have been killed and 270 structures damaged, including hotels, restaurants, shops, and homes. Major losses include two hotels, Best Western Pioneer Inn and The Plantation Inn. With 2.1M visitors annually, the fires have dealt a huge economic blow by devastating many irreplaceable properties.

The damage will significantly impact tourism and hospitality in the near future as the Hawaii Tourism Authority is advising visitors to postpone trips. Hotels and businesses that survive will also see increased property insurance costs. The hospitality industry is expected to face challenges in the rebuilding process due to labor and supply shortages on the island.

✍️ Further Reading

• Sky High Rents: Manhattan Prices Hit New Record (CNBC)

• The Rent May Finally be Too Damn High (RD)

• Flexible Work Will Survive Despite Gloomy Signals from WeWork and Zoom (BBG)

• What Happens to Real Estate if WeWork Goes Bankrupt? (RD)

• First American City to Tame Inflation Owes Its Success to Affordable Housing (BBG)

• Is the AirBnb Dream Dead? (BBG)

• Banks Increase Their CRE Loan Charge-Offs (GS)

• Knightvest Still Sees Deals in Texas Multifamily (RD)

• Corporate Relocations Are Up, But Experts Paint a Complex Picture (CPE)

• Big Brokerages Look Beyond Real Estate Deals to Help Survive Slowdown (CS)

• Starwood to Start Pitching New Distressed RE Fund (BBG)

📊 Chart of The Day