2023: The Year of Warehouses And Recovering Construction?

Good morning, and happy Friday. A recent report from the American Institute of Architects anticipates the potential for an uptick in construction this year. The biggest developer of logistics properties remains bullish on warehouses and industrial. Meanwhile, NYC property values are expected to rise, buoyed by single-family homes.

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📖 Read: Hindsight is 20/20, but that doesn’t mean postmortems aren’t useful. The Joint Center for Housing Studies (JCHS) examines three household growth studies analyzing demand between 2019–2021.

🎧 Listen: Did you attend the CRE finance industry conference? If not, the TreppWire Podcast has you covered as they discuss takeaways and predictions for the multifamily market.

📱 Watch: 2022 wasn't just a rollercoaster ride for CRE, but also the entire US economy. In this video, CoStar MD and chief US economist, Christine Cooper, details what could be on the horizon in 2023.

AIA Thinks New Constructions, Including CRE, Will Rise in 2023

There’s no denying that nonresidential spending currently faces some challenges. But if the American Institute of Architects (AIA) is to be believed, we may see an uptick in construction this year.

Calm before the storm: According to a recent report from the Institute, construction is projected to grow up to 6%, with 3% going to the commercial sector. The 2024 projection, however, isn’t as optimistic. By the end of next year, spending is expected to slow down across sectors, save for education construction. The AIA’s Construction Consensus Forecast panel expects nonresidential development to fall to just 1% while CRE spending is anticipated to drop to 1.4%.

The year that was: Nonresidential spending did pick up at the end of 2022, with gains close to 10% on a YoY basis. While the bump was chalked up to increased material and labor costs, the AIA is optimistic because of numerous headwinds for the industry. Last year, commercial and industrial sectors grew by more than 15%, facilitated by reshoring efforts from US companies.

➥ THE TAKEAWAY

The year that will be: Projects that began in 2022 will move towards completion this year. Builders and contractors also disclosed backlogs that averaged nine months in late 2022, meaning there’s still plenty of work to be done. Analysts are quick to note that these backlogs could be cleared if economic conditions cause clients to cancel or delay projects. But, for now, the outlook remains optimistic.

STORAGE LOCKER

Bull in a Warehouse: Prologis Optimistic about Logistics Demand

While the office sector hasn’t been doing so hot, the market for warehouse space is a completely different story. According to the world’s largest developer of logistics properties, Prologis (PLD), demand remains healthy and few signs point to a slowdown.

A pretty good year: Prologis disclosed that their revenues rose 37% YoY to $1.75B in Q4 2022. They closed out 2022 with $6B, $1.2B more than in 2021. Warehouse rents gaining 5% in Q4 and 28% since last year may have had something to do with it. Over 99% of the company’s portfolio is leased or under negotiation, putting the logistics giant in a good position for 2023. That said, their 565 MSF pipeline is expected to shrink.

Taking some precautions: In October 2022, Prologis announced they would halt production of new warehouses with no signed tenants in anticipation of an economic downturn. This correlates with Cushman & Wakefield’s report that new leases for US industrial space fell 28.2% from Q3 to Q4 2022. At the same time, warehouse demand peaked as vacancy rates neared 3% nationwide.

➥ THE TAKEAWAY

Eyes on the prize: The eventual completion of projects that broke ground during the pandemic’s logistics squeeze should drive vacancy rates back up as the economy slows down. That could be a temporary setback that leads to another shortage in 2024 or 2025, pushing demand right back up. Fortunately, multiyear industrial contracts give owners a degree of protection from sudden market swings.

I ♥ NY

Single-Family Homes Increase Overall Property Values in NYC

It’s a good time for anyone who owns residential property in NYC. While the city has faced a slower recovery, the value of its 1.1M properties is expected to rise 6.1% this year, propped up by single-family homes.

Staten Island, huh? Declining office occupancy continues to weigh on retail and hotel values. But the rising value of single-family homes (the majority of NYC’s residential properties) has more than made up for it. Values rose 8.3% citywide, up $765B in total. Of the five boroughs, Staten Island saw the biggest gains (12.1%). Values for co-ops, condos, and apartment buildings also went up 1%.

Tempering expectations: Despite the gain in single-family home prices, home sales volumes have crawled along over the past five quarters, dropping 17% from Q3 2021 and 2022. If the trend continues, we may be looking at a 5% decline from 2022 to 2023. The good news is that transactions are still projected to stay above their pre-pandemic target of roughly 51,000 sales annually.

➥ THE TAKEAWAY

The bigger picture: Officials anticipate vacancy rates will rise further in 2023 due mostly to office vacancies (especially in Midtown). Last November, the vacancy rate reached 22%, which is likely to drag down asking rents to their lowest levels in 10 years. Thank goodness for those single-family homes, which should drag average property prices in NYC up 4.4%, or another $286.8B.

• Stuck in the muck: Rent-to-own startups are dealing with rising demand while grappling with a difficult market and shrinking asset values.

• Across the pond: European investors have been slashing allocations to real estate with one-third planning to cut investment over the next two years.

• Toga! Toga! 2022 was a record year for student housing transaction volumes, with an annualized total reaching $18.9B.

• I'll allow for it: The highest court in Washington State is allowing Albertsons Companies (ACI) to pay a $4B dividend ahead of its deal with Kroger Co (KR) after all.

• Downward slope: Despite the holiday season, retail sales fell by 1.1% in December. This marked retail’s single biggest monthly decline of 2022.

• Blame the weather: Landlords in NYC are preparing for a new emissions law that could affect up to 3,700 properties and incur penalties that add up to over $200M annually.

• Hidden gems: Land prices in the Ohio River corridor and Appalachian Basin have surged as investors speculate about the return of manufacturing to America’s heartland.

• Build and they will come: Find out how Pearlstone Partners and Lincoln Property Company revitalized Rainey St. until it became Austin’s fastest-growing neighborhood.

• Party foul: Infamous retailer Party City (PRTY) has finally filed for chapter 11 bankruptcy. The company aims to exit bankruptcy in four months after reducing its debt load.

• Opening the coffers: Virginia is considering a $120.5M grant to Amazon (AMZN) as it works on its Arlington HQ. The 10-year plan would be contingent on jobs created by the company.

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• All-in-one: NYU has opened a new facility containing dorms, athletics facilities, theaters, and classrooms at Mercer and Bleecker St.

• Anchoring: Ares Management is now the anchor tenant at Anderson Towers in LA after signing a 12-year, 206 KSF lease as the buildings undergo a $100M renovation.

• It’s alive! Square Mile Capital secured $373M to fund the construction of their Southline project, a 370 KSF life science facility in South San Francisco.

• Makeover montage: Looking outside major TX metros, Akram Group has plans for a $12.5M renovation of the Spectrum Center in Addison, TX.

• 200 Below: Popular retailer Five Below (FIVE) plans to open 200 new stores in 2023 while converting 400 of its stores to the “Five Beyond” format.

• Toto, I’ve a feeling we’re still in Kansas! Lifestyle and retail company Urban Outfitters Inc. (URBN) has chosen Kansas City as the location for their new $60M, 604 KSF fulfillment center. 

• What a shocker: Texas-based Amperage Group has announced it will invest in EV charging for multifamily developments, paying for both construction costs and charging equipment.

• Meta dump: After months of speculation, it's official: Meta Platforms Inc. is dumping nearly half a million square feet in San Francisco, listing one of its two offices for sublease

📈 Chart of the Day

Building materials prices went down last year after surging from 2020 to 2021. Hopefully, this trend will increase US housing stock—as long as the demand is there.

😎 Offering-MEME-Orandum

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