Weekly CRE News Roundup: Multifamily Rents, US Treasury, & Atlanta, GA
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, and welcome back to another edition of our weekly commercial real estate news roundup, where we walk you through some of this week's most notable happenings in the industry.
In case you missed it, here's last week's edition, where we discussed the nature of Blackstone's student housing investments, rising office space vacancies in New York City, and slowing multifamily construction.
Did you know? The world's smallest commercial building is the "Smallest Shop" in London, measuring only 1.2 meters by 3 meters. It was used as a shoe-shining stall.
On today's agenda:
- Multifamily rents in Austin, TX fell significantly thanks to new construction, and it looks like Miami, FL could be next.
- The surging 10-year US Treasury is putting commercial real estate investors in a tight spot as property values decline and the cost of debt rises.
- Atlanta, GA's multifamily real estate market is showing resiliency despite a significant drop in quarterly CRE sales.
Let's get started.
#1 – New Multifamily Construction May Torpedo Miami, FL Rents
South Florida, historically a real estate bellwether, is under scrutiny as it faces potential challenges in the market. The region has a track record of experiencing booms and busts, and its economy relies on tourism and speculative industries.
The region is currently witnessing a surge in new multifamily rental units under construction, which could impact rents similarly to what happened in Austin, Texas.
However, Miami's market differs in that it remains an attractive destination for wealthy newcomers, benefiting from the absence of income taxes and offering a haven for overseas investors.
The deep-rooted immigrant community and improving trends in household incomes also contribute to its unique real estate landscape.
While there are concerns about oversupply, Miami's geographical constraints limit the extent of potential overbuilding, making it more akin to San Francisco in this regard.
The market may become increasingly divided, with high-end rentals experiencing price declines, but a complete crash would likely require significant macroeconomic setbacks.
#2 – 10-Year US Treasury Surges to Rates Not Seen Since 2007
The US 10-year Treasury rate has surged to levels not witnessed since June 2007, with a reading of 4.79% on October 6 and 4.66% on October 10, sending ripples through the commercial real estate (CRE) industry.
Borrowing rates for medium- and long-term loans have surged over 400 basis points in 18 months, leading to a 20-25% drop in refinance proceeds for all asset classes.
As a result, all CRE sectors are feeling the financial squeeze. Due to these higher rates, borrowers with maturing debt are now looking at cash-neutral or cash-infusion refinancing.
If the rates persist at this level, CRE values are expected to decrease in the coming year as cap rates adjust and financing capital is hampered by debt service constraints, reducing available proceeds.
The 10-year Treasury rise notably impacts multifamily trading volume, pushing assets to price at 2019 and 2020 levels. However, some experts see this as a necessary shift towards returning to historical averages for commercial and multifamily mortgage rates.
While it presents challenges for borrowers, real estate investors have historically achieved appropriate risk-adjusted returns in higher-rate environments.
The current economic landscape is causing a decline in CRE transaction volume, particularly in markets like South Florida, where the 10-year Treasury's increase has made investments appear less attractive.
Still, some maintain that real estate investment remains a smart choice for those with a long-term perspective. It's worth noting that certain sectors, like retail, which have a low supply, are more resilient.
Overall, the 10-year Treasury rate surge is a sign of tightening interest rates after a period of loose monetary policy. Real estate investors must adapt to these changes and avoid treating the market like day trading.
The widening treasury spreads signal challenges ahead, encouraging investors to sell before conditions worsen.
#3 – Atlanta, GA Overall CRE Market Slows Down, Multifamily Breaks Through
In Q3, Atlanta's commercial real estate (CRE) market experienced a significant slowdown, with total deals amounting to around $2.69 billion, marking a 50% decline from the 5-year average.
This deceleration can be attributed to rising interest rates and stricter lending standards. Despite these challenges, specific sectors within Atlanta's CRE market showed varying performance levels.
While macroeconomic challenges such as higher interest rates and tighter lending requirements have hindered overall CRE activity, Atlanta's multifamily sector had a robust Q3, achieving $1.2 billion in sales volume.
This performance positioned Atlanta second only to New York regarding multifamily investment. However, this was still a substantial drop from the peak of $8.6 billion in 4Q21. Out-of-state investors played a significant role in driving multifamily investment, with national firms accounting for nearly 90% of buyer volume in Q3.
Industrial property sales in Atlanta experienced a notable decline in Q3, amounting to $650 million, a $350 million drop from Q2. Despite this decline, Atlanta ranked third nationally in industrial sales volume, trailing behind Los Angeles and California's Inland Empire.
The largest transaction involved the acquisition of a 1-million-square-foot distribution center from Clarion Partners for $72.4 million, representing a 32% increase in value since its 2017 purchase.
Atlanta's retail sector faced a sharp decline in trade volume, reaching its lowest point since Q2 2020, with only $447 million in deals, down 57% from the same period in 2022 when it peaked at $1.5 billion.
The most substantial sale involved a 2-property portfolio of grocery store-anchored shopping centers, totaling $37.87 million, with First National Realty Partners acquiring them from Bandera Ventures.
Atlanta's office sector experienced the lowest trade volume at $361 million, slightly below the previous quarter. The sales volume for the first three quarters of 2023 was 75% lower than the same period in 2022.
The largest trade of the quarter involved a $175 million debt assumption transaction of Three Ravinia, one of Atlanta's tallest suburban office buildings, purchased at a 17% discount from the previous sale in 2016 by Orlando-based Estein.
Other Goings-On Around the Industry
Some other notable happenings in the industry for this week include:
- Debt Investing: As commercial real estate property valuations fall, the appeal of debt investing grows
- Pay Up: Loan maturity for a multi-million dollar office space complex in Dallas is fast approaching, and refinancing troubles, coupled with a legal battle, put the asset at risk.
- Slowing Down: New multifamily construction starts are down 41% year-over-year.
- Welcome to Mee-Ah-Mi: Miami's post-pandemic office space boom is most certainly over, but the market isn't necessarily in trouble, either.
- Rising Delinquencies: Commercial mortgage-backed security (CMBS) delinquencies are rising again, reaching nearly 5.20% in September.
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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