Wall Street Landlords Slowed by High Prices and Rates Despite Strong Demand

Good morning,

Wall Street landlords slowed by high prices and rates despite strong demand, student loan repayments to begin in October, hotels leverage rebound in group meetings to lift rates, and stability and growth fuel interest in medical office buildings. Let’s delve into today’s topics.

📈 Market Update

🏡 Wall Street Landlords Slowed by High Prices and Rates Despite Strong Demand

Major SFR companies like AMH and Invitation Homes are facing headwinds acquiring properties due to high home prices, mortgage rates, and limited inventory. This has slowed their growth at a time when there is strong demand for suburban single-family rentals due to homeownership being out of reach for many. While rental rates are climbing, the companies have been selling some properties and building up cash, waiting for better buying opportunities. Despite acquisition challenges, it remains a favorable environment for renting out single-family homes given the favorable rent-to-own math in their markets.

Mortgage Demand Still Weak Despite Unexpected Jump in Refis:
While mortgage rates rose again last week, applications to refinance unexpectedly increased 13% but remain 29% below 2021 levels, likely due to borrowers trying to lock in rates before further hikes; overall purchase demand was up just 2% as limited supply and high prices continue challenging buyers.

🧑‍🎓 Student Loan Repayments to Begin in October

The restart of student loan payments on October 1 is expected to have a minor impact on consumer spending, given income-based repayment plans that reduce or eliminate payments for many borrowers. While consumers are facing headwinds like high inflation and interest rates, spending has remained solid thus far, but sentiment is declining. The average $260 monthly student loan payment across 43 million borrowers would only reduce spending by less than 1%, but it could be enough to tip weakened consumers and hurt sectors like retail and travel. Overall the economy remains resilient but risks are rising.

🛎️ Hotels Leverage Rebound in Group Meetings to Lift Rates

The ongoing recovery of conventions and tradeshows is allowing hotels to push group rates to record highs, with group ADR up 7% this year, while growth in transient ADR has stalled due to shifting demand patterns. The strong leisure travel rebound widened the typical discount for group bookings, but as group meetings return, hotels are raising those rates to close the gap with transient prices and cover higher costs before pushing individual rates higher.

🩺 Stability and Growth Fuel Interest in Medical Office Buildings

The stability and attractive fundamentals of medical office buildings are driving increased investment and lending activity, as seen in Kayne Anderson's $1.3 billion purchase of Synovus' medical office loan portfolio. Factors like long-term leases to creditworthy healthcare tenants, high occupancy rates, and adaptability make medical offices appealing amid distress in other sectors. Investors are transitioning into the niche healthcare sector due to its growth and essential nature as the population expands. The Southeast and Sunbelt markets are seeing more activity as hospital systems spread out geographically to provide localized care.

✍️ Further Reading

• Fed Set to Pause Rate Hikes, But Don’t Count Out Another Increase (BBG)

• CBRE Agrees To Pay SEC Penalty, Change Procedure To Avoid Violating Whistleblower Protections (CS)

• Oaktree's Wayne Dahl on Risks in the Credit Market (BBG)

• Cut and Run: Rent-Stabilized Landlord Sells at 44% Haircut (RD)

• Thought the U.S. Office Market Was Bad? Try China (WSJ)

• Dry Powder Circles Multifamily Deals (GS)

• Has 2023 Really Been That Bad for CRE? (GS)

📊 Chart of The Day