Weekly CRE News Roundup: LA Rent Freeze, Shining Industrial, & Costly Concessions
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Happy Friday! Welcome to another edition of our weekly commercial real estate news roundup, where we walk you through some of this week's most notable events in the industry.
Here's last week's edition, in case you missed it, where we discussed the state of the global commercial real estate market, Manhattan's unusually high office space absorption rates, and San Francisco's journey to recovery.
On today's agenda:
- The city of Los Angeles is under some legal heat from The Apartment Association of Greater Los Angeles (AAGLA) for freezing rents on rent-stabilized units.
- The industrial real estate sector continues to surpass other asset classes in the US thanks to continued investment momentum and record-low vacancy rates.
- Office space landlords in major metro areas across the country are having to absorb costly lease concessions to keep units occupied.
Let's get started.
#1 – Multifamily Landlords in Los Angeles Want an End to the City's Rent Freeze
Densely populated coastal regions in the United States were among some of the hardest hit by the pandemic, and Los Angeles is no exception. Approximately 650,000 multifamily units in the city fall under the umbrella of this freeze that Los Angeles landlords are now challenging, claiming the policy as unconstitutional.
The city of Los Angeles instituted the rent freeze at the onset of the pandemic. According to the ruling, annual rent hikes between March 30, 2020 and January 31, 2024 are prohibited for qualifying properties. Now, as both residents and businesses emigrate away from California, the city's multifamily landlords seem to be stuck between a rock and a hard place. The AAGLA argues that the ordinance strips LA landlords of their due process rights that neither the state nor national constitution allows.
To make matters worse, shifting tax regulations and rising costs are taking a toll on Los Angeles apartment sales. Recent data suggests that transactions in LA's multifamily market have dropped by as much as 50% year-over-year. This, plus the combination of California's tax-heavy policies and tighter lending standards, puts LA landlords at even greater financial risk.
#2 – Industrial Real Estate Continues to Shine Amidst CRE Turmoil
The talk of the town, as of late, seems to be around the struggling multifamily, office space, and retail sectors, yet the industrial real estate sector continues to shine as a bright spot in the US economy.
In March of 2023, industrial real estate reported a national average vacancy rate of approximately 4%, about 30 basis points below those of other commercial real estate properties. Industrial transaction velocity remains equally as tight thanks to well-funded buyers scooping up properties in tertiary markets.
The national sentiment of economic uncertainty amidst tighter lending standards and inflation seems to be drawing investors away from residential properties and towards stable commercial buys. The rise of eCommerce, the prevalence of overnight shipping, and the growing popularity of flex space all give reason to place investment dollars in industrial assets.
According to recent data, industrial rents remain strong, propping up one of the most balanced bid-ask spreads in the commercial real estate industry. The industrial sector's trailing 12-month transaction velocity also remains the strongest compared to other property types.
#3 – Costly Lease Concessions Make Life Even Harder for Office Space Landlords
As if life for those who own office space couldn't possibly get more difficult, recent data shows that more metro landlords are having to bite the bullet and submit costlier lease concessions to keep tenants around and fill more units.
Lease concessions, including free rent periods, rent abatement, and tenant improvement allowances, are discounts or rent adjustments that landlords give to tenants as long as certain conditions are met. They usually make the tenant's life a little easier within a given time period, forcing the landlord to absorb any necessary costs that come with the concessions they've allowed.
While lease concessions most certainly have a time and a place, data shows that landlords of Class A office space in the nation's major metro areas are struggling to absorb these extra costs. This is most especially true for Manhattan's office space market. The same data also shows that lease concessions tend to be the costliest for office space going for at or below $100 per square foot.
All this is to say that, coupled with the ramifications of wavering lease terms and shrinking transaction volumes since the onset of the pandemic, tenants still retain negotiating power in today's office space market.
Other Goings-On Around the Industry
Here's some other notable news that's occurred this week:
- Downtown Office Conversions: Downtown districts around the country are planning to convert vacant office spaces into apartments, mixed-use projects, and other property types.
- Regional Mall Values Plummet: Nearly $14B in CMBS loans is coming set to mature, placing many regional malls squarely in its sights.
- Falling Foreign Interest: Foreign investor interest in the US housing market has fallen for the sixth straight year, though signs point to some renewed interest as pandemic-induced restrictions ease.
- Mixed-Use on the Rise: Many are finding solace in mixed-used properties as other CRE asset classes continue to grapple with tighter monetary policy.
- Blackstone Shifts Focus: The firm's renowned property fund, BREIT, is placing billions of investment dollars into data centers in anticipation of an AI boom.
Thanks for reading this week's CRE news! Until next week, do your research, stay diligent, and happy investing.
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