Weekly CRE News Roundup: Las Vegas Multifamily, NYC Multifamily, & CRE Architects
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! It's another edition of our weekly commercial real estate (CRE) news roundup, where we walk you through some of this week's most notable commercial real estate events.
In case you missed it, here's last week's edition, where we discussed ongoing CRE distress, falling mortgage applications, and multifamily bright spots in the US economy.
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On today's agenda:
- The multifamily sector in Las Vegas is signaling a healthy recovery as job growth and relatively stable occupancies benefit the city.
- NYC's multifamily sector, on the other hand, continues to struggle against rising interest rates and falling transaction volumes.
- CRE Architects have been reporting significant drops in business lately, signaling more long-term concern for the commercial real estate sector.
Let's get started.
#1 – ¡Viva Las Vegas Multifamily!
After a somewhat sluggish year, Las Vegas seems to be on the path to a mild recovery. The city's rental market has been in the doldrums for some time and has shown signs of improvement.
Positive Rent Growth: For the second consecutive month, rent growth has escaped the clutches of negative territory, edging up by 0.2% over the trailing three-month period ending in June, reaching $1,475 per month. This boost can be attributed to the thriving upscale Lifestyle sector. However, it's worth noting that occupancy experienced a year-over-year dip of 110 basis points as of June, landing at 93.1%.
Surging Employment: As of May 2023, Las Vegas' unemployment rate was recorded at 5.6%, showcasing a 30-basis point improvement from January. While this is a positive development, Las Vegas still lags behind the state's unemployment rate of 5.4% and the national rate of 3.7%, according to the Bureau of Labor Statistics data. Over the course of the 12 months ending in April, employment growth surged by 5.5%, equivalent to 45,700 jobs, surpassing the U.S. rate of 2.9%. In this period, two sectors witnessed job losses in financial activities and other services, totaling 1,300 job cuts.
Year-Over-Year Perspective: Las Vegas multifamily has seen the delivery of 1,067 new units in the first half of the year, with an additional 10,298 units under construction. However, it's noteworthy that the number of new projects has halved compared to the previous year. Investment in the multifamily sector took a nosedive, with just $238 million worth of multifamily assets changing hands through June. The price per unit witnessed a substantial year-over-year decline, dropping by 25.7% to reach $184,407.
#2 – NYC Multifamily, However, Is Not So Lucky
It can't all be cupcakes and roses, though: Continual increases in interest rates have continued to disrupt the multifamily real estate market in New York City, causing a decline in transactions throughout the third quarter of the year.
Notable Reductions: Data provided by Ariel Property Advisors, based in New York, and reported by Crain's, reveals 227 multifamily transactions totaling $1.6 billion in sales from July to September. This transaction volume marked the least active quarter of the year and demonstrated a 40% reduction in deals compared to the same period the previous year. The decline in dollar volume was even more significant, with a 58% decrease compared to the previous year's third quarter. This not only represented the lowest quarterly dollar volume in the current year but also the lowest since the first quarter of 2021, before the Federal Reserve began raising interest rates in an effort to combat inflation.
A Silver Lining: During the last quarter, nearly 80% of closed deals were for properties with market-rate units or existing 421a exemptions. Rent-stabilized multifamily properties accounted for only 16% of the transactions, while affordable housing properties comprised a mere 4%. Despite the slowdown, Shimon Shkury, President of Ariel, highlighted the positive aspects of market-rate and 421 properties to Crain's. Relaxed regulations regarding rent increases, particularly for market-rate properties, appear to be increasing the appeal of these properties to investors.
Significant Acquisitions: The two largest deals in terms of dollar volume during the quarter included Pacific Urban Investors' $185 million acquisition of 130 West 15th Street in Chelsea and the NYU Grossman School of Medicine's $210 million purchase of 377 East 33rd Street in Kips Bay. The slowdown in the multifamily real estate market had been widely anticipated, given the Federal Reserve's decision to raise interest rates. Sales volume in the sector was $16 billion the previous year, but a deceleration began during the second half of that year.
This deceleration is likely to persist until the Federal Reserve decides to reduce interest rates, a move that may not occur in the near future.
#3 – Conditions Worsen for CRE as Architects Report Lagging Business
In September, architecture firms witnessed a significant downturn in their business, signaling potential challenges for the commercial real estate market in the upcoming year.
Reduced Billings: The AIA/Deltek Architecture Billings Index plummeted to 44.8, marking its lowest level since December 2020, a time when the COVID-19 pandemic was at its peak. Any score below 50 on this index signifies deteriorating business conditions, indicating a growing number of architecture firms reporting reduced billings. This index serves as a forward-looking gauge of demand for nonresidential construction activity, encompassing both commercial and industrial structures. Its primary aim is to forecast construction activity between nine to twelve months in the future.
Commitment Issues: Kermit Baker, AIA's chief economist, commented on the situation, stating, "While more firms are reporting a decrease in billings, the report also shows the hesitance among clients to commit to new projects with a slump in newly signed design contracts." Consequently, backlogs at architecture firms dropped to an average of 6.5 months in the third quarter, marking their lowest point since the fourth quarter of 2021.
Slow Recovery: The commercial real estate sector faces a dual challenge. The return to office has been sluggish, affecting not only office buildings but also the retail establishments and restaurants that depend on them. Downtown areas are grappling with the consequences of this slow recovery. Moreover, a sharp increase in interest rates has compounded the issue, leading to a standstill in investments and deal-making across various sectors.
Other Goings-On Around the Industry
Some other notable happenings in the industry for this week include:
- Industrial Gigs: The warehouse market is finding its place in the modern gig economy.
- Coworking Conundrum: The utilization of coworking space is starting to falter after a significant jump in Q2 2023.
- C-Suite? No Thanks: Apparently, a lot of CEOs are leaving their positions.
- Multifamily Oversupply: Economists predict that 2024 will be a quiet year for multifamily rents, thanks to oversupply.
- Multifamily Mortgages: According to recent data, multifamily mortgage debt is surging, reaching $2+ trillion by Q2 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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