Weekly CRE News Roundup: Housing Formations, NYC Hotels, & the Fed
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.
Happy Friday! Welcome to our commercial real estate news roundup, where we detail and discuss some of this week's most notable happenings in the commercial real estate industry.
In case you missed it, here's last week's edition, where we covered the state of suburban rents versus urban, continuously receding office space occupancies, and how Manhattan rents have begun to stall in what is usually a peak growth season.
Did you know? In the movie Star Wars Episode IV: A New Hope, the set of Luke Skywalker's Tatooine home was built in the country of Tunisia, where you can still visit it to this day (no Millennium Falcon needed).
On today's agenda:
- Experts are optimistic about the future of housing demand as new household formations rose significantly in Q2 2023.
- New York City's hotel industry is on the rebound as daily rates surpass pre-pandemic levels, fueled by new hotel development and Airbnb restrictions in the city.
- The Federal Reserve decided against hiking interest rates again in their September 20th meeting, hinting at another possible rate hike in late 2023.
Let's get started.
#1 – Rising Household Formations Drive Demand for Multifamily Housing
Recent data illustrates that new US household formations grew by about 1.2 million in Q2 2023, but as the market stands today, aspiring homeowners are still being priced out of the market. And this time, unlike what we saw in 2022, higher borrowing costs are at fault.
The year 2022 saw accelerating home prices keep would-be homeowners out of the market; this year, it's mortgage rates, as the average rate on a 30-year, fixed-rate mortgage hovers between 6% and 7%.
This complete and utter lack of affordability is driving younger audiences to the multifamily market to rent instead of buy. According to recent data, multifamily absorption surged to nearly 100,000 in H1 2023, with a significant portion occurring in Q2 2023.
Multifamily deliveries for all of 2023 are also predicted to surge by over 50% year-over-year, but again, the accuracy of these predictions depends on whom you ask. Harvard apparently believes that new household growth will slow in coming years, and some are predicting that the return of student loan repayments will plunge housing demand even further.
New mortgage applications are also declining, dropping to a five-year low in Q2 2023, thanks to rising interest rates and prospective homebuyers carrying more debt than savings. And while national homeownership rates did rise this year, such growth only occurred in about 9 of the nation's primary markets.
Ultimately, it looks like multifamily is still where it's at as younger, debt-ridden individuals still have to choose between living with family or renting. Much remains to be seen in the Fed's fight against inflation. Lately, it looks like the market has two choices: deal with inflation, or deal with a recession.
#2 – NYC Hotel Rates Surpass Pre-Pandemic Averages
The hospitality sector in New York City was among one of the hardest hit at the onset of the COVID-19 pandemic as visitor spending plummeted significantly. But now, the industry is primed for a comeback as NYC hotel room rates increased in August 2023 by nearly 17% over 2019's averages to approximately $260 per night.
Tourism spending on lodging in the city seems to have skyrocketed thanks to new hotel development and Airbnb restrictions. NYC also expects its number of visitors to increase to about 63.3 million in 2023, close to their 2019 number of about 66 million.
As a result, NYC hospitality revenue is anticipated to grow to nearly $400 million in 2024, a number not seen since 2008.
This growth is primarily fueled by both domestic and international leisure travel as business bookings still remain low. Surprisingly, visitors from Western Europe seem to be the primary demographic contributing to this recovery.
All in all, constraints on the supply side of things coupled with growing travel demand are to thank for this boost in economic growth. NYC hotel owners are optimistic about the future and anticipate significant revenue increases in the years to come.
#3 – "Pause Now, Hike Later?" Signals the Fed
In their September 20th meeting, the FOMC decided to pause their barrage of interest rate hikes, with Chairman Jerome Powell retaining his strict stance on doing whatever is necessary to reach the Fed's target inflation goal of 2%.
Needless to say, the majority of the market expected as such. While the Fed hinted at another possible rate hike in late 2023, with its post-meeting projections summary indicating that 12 of the 19 board members foresee the possibility of another hike, the commercial real estate sector, in particular, is still restructuring in response to previous rate increases.
The higher cost of capital is forcing many to consider alternative sources of financing, such as crowdfunding and direct lenders. This is nothing new, but the extent to which this practice continues will significantly affect the state of the overall banking sector in the US, specifically the regional subsector, as new commercial loan originations plummet, commercial mortgage-backed securities waver, and messy refinancing continues.
Where does the commercial real estate market go from here? The industry expects the complete effects of these continuous rate hikes to surface in early 2024.
Should the Fed hike again in late 2023, per their signalling, segments of the CRE market that have been slower to adapt to this changing landscape, like the office space sector, may create contagion that further complicates this already-complicated situation.
Commercial property owners, as they're doing now, will have to absorb cashflow cuts to remain competitive and fill space. Should this lead to more distressed commercial real estate loans and messy refinancing, who knows what the rest of 2024 might look like.
Other Goings-On Around the Industry
Some other notable happenings in the industry for this week include:
- Texas Housing: More residents are leaving the City of Austin, thanks to its hot housing market, and moving to San Antonio, instead.
- Behind the Curtain: Are rising interest rates really to blame for the nation's recent CRE trouble? Historical data may support both sides of that argument.
- Trouble in Washington: Thanks to falling office space occupancies and other issues, brokers in the greater Washington, D.C. area are finding new ways to close lease deals.
- The Grass Is Not Greener: China's office space market continues to grapple with staggeringly high vacancies thanks to a sluggish economy.
- Migrant Crisis: NYC is in the midst of a migrant crisis that's straining its budgets and stressing its commercial real estate sector.
Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.
Other recent articles
Article Search
Share
All Article Categories
