Commercial Real Estate News / Insight / Weekly CRE News Roundup: Public Housing, Office REITs, & SEC Fines

Weekly CRE News Roundup: Public Housing, Office REITs, & SEC Fines

Published: 09-08-23 Category: Insight

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

A public housing building in the middle of town.

Happy Friday! Welcome back to another edition of our weekly commercial real estate (CRE) news roundup, where we walk you through this week's most notable happenings in the CRE industry.

Here's last week's edition, in case you missed it, where we discussed recent upticks in commercial real estate sales, the rising investment volume that the student housing sector is seeing, and the planned construction of NYC's first major production studio complex.

On today's agenda:

One county in Maryland is attempting to negate the stigmas associated with public housing by introducing multifamily units that combine both public and private housing components.
Office REITs are showing signs of improved performance, leading some to believe that the market has started to ease.
Private equity real estate firm Prime Group Holdings will pay out $20.5 million in SEC fines after failing to properly disclose brokerage fees.

Let's get started.

#1 – Montgomery County, MD Introduces "The Laureate" to Address Affordable Housing Concerns

Stigmas and negative associations surrounding public housing continue to plague the United States as a shortage of affordable rental units prices low-income tenants out of the market. But the powers-that-be in Montgomery County, MD are working on providing solutions to help those in need.

One such solution is the recently introduced Laureate, a multifamily housing complex that combines elements of both public and private housing: Approximately 70% of the complex's units are owned by the government, while 30% are reserved for those earning salaries that are below the area's median. Yet, the project targets young professionals with its flashy amenities and upscale sense of living.

This solution introduces the new idea of "social housing," where most of the unit's tenants aren't aware of who their landlord is, helping low-income earners navigate rising rents and stay away from private-sector solutions to the nation's housing crisis, such as Section 8.

The Laureate, funded by the county's Housing Production Fund that was introduced in 2021, also seeks to prove that regions facing housing deficits can provide affordable housing without exclusively depending on inclusionary zoning, which often deters developer interest.

Ultimately, Montgomery County's move to combine both public and private housing elements is a step towards enhancing lifestyles instead of profits, and other areas throughout the nation are starting to take notice.

#2 – Office REITs Show Improvement as Dividend Yield Spreads Plunge

Thanks to improved office REIT performance fueled by falling dividend yield spreads, some are starting to believe that the worst of the office space sector panic is behind us. Bloomberg's REIT Office Property Index gives us valuable insights into where the market stands, and where it's headed.

According to the index, perceived office space risk is easing, largely due to receding recessions fears and successful property transactions. The index hit significant lows in late May but has sinced regained about 25% of those losses, returning several hundred basis points against the 10-year Treasury yield and landing at about 1.74% as of August 31, 2023.

The late-May peak was reminiscent of where the yield spread landed after the financial crisis. As it stands now, it's not quite back to normal, but it's close.

Recession fears are dimming and successful office property transactions continue to close, fueling a broader economic recovery. But despite positive office REIT gains, such gains have historically proven to be a relatively poor indication of how the overall market stands, most especially when you account for REITs holding marquee, Class A properties in many of the nation's central business districts.

The real issue in calculating overall market health lies in identifying the challenges that less-transparent segments of the sector are facing. The yield spread may also not be the signal that it once was as firms project to cut dividends to preserve capital.

For the office space sector to truly recover, navigating high interest rates and successfully refinancing need to be priority. The current market may soon signal interest rate expectations to be anchored at current levels. If that is the case, we may see an ugly wave of refinancing in the months to come.

#3 – Investment Firm Prime Group Holdings to Pay $20.5 Million in SEC Fines

Prime Group Holdings, a private equity real estate investment firm based in Saratoga Spring, NY, has been recently accused by the Securities and Exchange Commission (SEC) of failing to disclose brokerage fees that it charged to its investors. The firm will pay out $20.5 million to settle the allegations: $6.5 million in penalties and $14 million back to investors.

The firms, which manages assets worth approximately $4 billion in total on behalf of their investors, specializes in buying and managing self-storage properties thanks to their relatively recession-resistant nature and strong performance throughout the COVID-19 pandemic.

Allegedly, Prime failed to disclose that millions in brokerage fees paid by its investors between 2017 and 2021 went to another firm owned by Prime's CEO.

Prime created a self-storage fund in 2017 that was worth about $700 million. The fund's strategy was to seek out smaller, mom-and-pop storage businesses and convince them to sell their properties to Prime.

Those who sought out and closed these deals were paid with money sent from the fund to another brokerage owned by Prime's CEO, with total compensation amounting to nearly $18 million between 2017 and 2021.

The SEC alleges that, according to Prime's documents, investors never knew about this payment structure or that potential conflicts of interest could arise as a result, citing Prime's disclosures to be, therefore, inaccurate and misleading.

Such disclosures are not uncommon for the SEC to find in the private-funds industry, and the commission recently proposed more rules requiring fund managers to exercise more transparency with their investors.

Other Goings-On Around the Industry

Some other notable happenings in the industry for this week include:

Buffet's Billions: The recently passed Jimmy Buffet secured a total net worth of approximately $1 billion thanks to both his music and real estate portfolio.
Chinese Real Estate: Experts are equating current real estate troubles in China to the 2008 market crash. Here's why.
NY Hotels: Surprisingly, New York City hotels saw a profitable summer behind rising occupancy rates and a growing tourism industry.
Construction Financing: Despite market challenges and economic turbulence, construction lenders are capitalizing on higher rates and debt yields.
NY Lobbying: Several high-spenders traveled to Albany in 2022 to discuss casinos, good cause eviction, and zoning.

Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.