Weekly CRE News Roundup: Suburban Rents, Office Occupancy, & Manhattan Renters
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Happy Friday, and welcome to yet 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.
In case you missed it, here's last week's edition, where we discussed public housing progress, how some office REITs are showing signs of improvement, and a private equity real estate firm's failure to properly disclose brokerage fees to its investors.
On today's agenda:
- According to recent data, price gaps between renting in cities and renting in the suburbs are shrinking significantly as suburban rents remain higher than some of their urban counterparts.
- Despite an anticipated post-Labor Day return to the office, occupancies in major metros are receding more than expected.
- Rental prices in Manhattan, after many months of record performance, stalled in August, what's historically been the most expensive time of the year to rent in the city.
Let's get started.
#1 – Sticky Suburban Rents Shift Rental Affordability in a New Direction
For decades, the general consensus was that, if you wanted to live somewhere with less access yet more affordable rents, you sought out the 'burbs. Recent price data, however, is painting a slightly different picture.
At the onset of the COVID-19 pandemic, suburban rents skyrocketed thanks to mass migration: Millions of individuals fled major cities and into suburban areas in search of larger living spaces and distance away from crowded metros. This influx of population growth sent suburban rents through the roof, increasing by 27% in March 2020 and outpacing urban rent growth by as much as 8%.
Throughout subsequent years, annual suburban rent growth tamed yet remained in the double-digits. Now, suburban renters find themselves stuck as rising interest rates, rising home prices, and rising multifamily housing rents keep them out of homeownership and in their rental units.
That said, it's still generally more affordable to rent in suburbs outside of major metros in states with less population density, like Tennessee and Iowa, than it is to rent in urban areas; on the other hand, suburbans rents in areas outside of cities such as Atlanta, Detroit, Portland, and Seattle continue to grow.
Finally, the nation still suffers from a shortage in available rental units, an issue that the COVID-19 pandemic exacerbated. This shortage is keeping single-family, suburban rents where they are as new construction races to completion: New data shows that approximately a million new apartment complexes are under construction in 2023.
#2 – Office Occupancies in Major Metros Continue to Recede Post-Labor Day
Major employers were expecting a heavier return to the office after Labor Day, but the data illustrates otherwise: Office space occupancies in major metros, including Dallas, Austin, Houston, & San Francisco, continued to decline.
Last year, office space occupancies rose to nearly 50% post-Labor Day; this year, occupancies grew by a measly 4.3% to 42.5%, signalling increased stressed on the already-battered office space sector.
Major metros in Texas, including Dallas, Austin, & Houston, all saw declines in occupancies the week after Labor Day, declining 2.1% down to approximately 52%, a drop that landlords in the state looking to maintain property values were not expecting, as Texas currently leads the nation in office occupancy.
San Francisco saw its own occupancy drop by 1.5% down to 40% the week after Labor Day; Los Angeles occupancies fell to about 48% by 1.2% in the same period.
On the other hand, occupancies in New York City rose slightly behind major return-to-office initiatives from employers such as META, BlackRock, and Zoom.
#3 – Manhattan's Rents Moderate in August Despite Historical Performance
August in the Big Apple is usually a busy season for renters as students return to school and others settle in for the upcoming holiday season, but August of 2023 proved to be somewhat of an exception: In July, median rent in Manhattan grew to $4,400, but that median remained unchanged in the month of August.
This steadiness suggests that renters continuously struggle to grapple with rising housing costs: Manhattan rents grew by 7.3% year-over-year and also by a staggering 35% since August of 2021, according to recent data.
New lease originations fell by about 14% in August, as well. That said, other areas surrounding the Borough of Manhattan are seeing their own unique trends. The average median rent in Brooklyn fell slightly to $3,850 in August, while the average median rent in Queens rose to $3,900 as the city attracted those being priced out of New York's more expensive regions.
The general consensus is that landlords in Manhattan may slightly reduce their rents in conjunction with stabilizing demand, but significant cuts are unlikely.
Other Goings-On Around the Industry
Some other notable happenings in the industry for this week include:
- On Second Thought… Developers in Los Angeles are second-guessing their ideas as lending standards tighten and profit margins become harder to widen.
- Uncle Sam's Cut: Foreign investors in the US CRE market looking to sell distressed properties may have to simultaneously grapple with the unique tax implications of doing so.
- Office Space Relevance: Much like shopping malls in previous decades and even today, outdated office space buildings are struggling to retain relevance.
- NYC Residential: Residential development in NYC must be incentivized to help the city continue to combat its affordability crisis.
- CRE Loan Distress: Out of the nation's top 20 metros, Chicago led the way in most distressed CRE loans in August 2023.
Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.
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