What Happens When Wall Street Owns the Neighborhood?

What Happens When Wall Street Owns the Neighborhood?

Big residential property investors are switching gears from buying to building new neighborhoods as purchasing existing homes becomes increasingly challenging due to high interest rates and limited availability.

Investor shift: Wall Street investors, traditionally involved in buying existing homes, are now focusing on constructing new neighborhoods. This shift is driven by the current economic climate where high interest rates and a record-high spike in home prices have made purchasing existing homes less feasible. Data from John Burns Research and Consulting indicates a decline in large investor purchases from 3% in 2022 to just 1% in the third quarter of 2023.

The new strategy: Despite owning 55% of U.S. apartment units, institutional investors are now eyeing single-family homes, attracted by stronger rent growth and longer tenant stays, especially for families with school-going children.

Efficiency in new developments: The traditional model of acquiring scattered individual houses is becoming inefficient and expensive. The focus is shifting towards "build-to-rent" communities, which are more efficient in terms of management and maintenance. This approach also allows for the design of homes with durability and cost-effectiveness in mind, such as wide hallways and hard-wearing materials.

The rise of BTR communities: "Build-to-rent" communities, though still a small fraction of the market, are expanding rapidly. The Urban Institute reports about 900 such neighborhoods nationwide, and the National Association of Home Builders estimates that around 10% of new housing construction is for these rental communities. As of June 2023, Phoenix, Dallas, and Atlanta rank as the top three markets for BTR properties under construction – and by a wide margin.

➥ THE TAKEAWAY

Why it matters: The change in strategy by Wall Street from purchasing existing properties to focusing on new constructions is poised to transform the suburban landscape in America. Initially, this could lead to less competition for individual buyers in the conventional housing market, possibly bringing some calm to the frenzied process of purchasing homes. However, it also heralds the introduction of a different kind of living space, characterized by efficiency and uniformity, which may diminish the distinctive charm and variety often seen in naturally evolved communities. This significant shift could alter the US housing market and the communal fabric of American suburbs.

Loan Modifications Were the Common Theme in 2023, Says CRED IQ

In 2023, the commercial real estate landscape witnessed a significant increase in loan modifications. As higher interest rates and a challenging lending environment prevailed, borrowers sought adjustments to their loans.

Key findings: CRED iQ conducted an analysis of all modifications within the securitized universe, covering CMBS, CRE CLO, SASB, Fannie Mae, Freddie Mac, and Ginnie Mae. A total of $13.6B across 441 loans underwent modifications in 2023, with the highest volume occurring in the second quarter. Single-borrower large loan (SBLL) deals accounted for nearly half of all modifications, closely followed by CRE CLO deals. The most modified property types were office loans, totaling $4.6B, and multifamily loans, amounting to $3.3B.

Notable modifications: Several major loan modifications stood out in 2023:

• The 831,000-square-foot office building at 375 Park Avenue in Manhattan, with $782.8 million in debt, extended its maturity date by one year.

• The $536 million Aon Center, a 2.8 million-square-foot office tower in Chicago, extended its maturity by three years with no change to the interest rate.

• The $219.6 million loan for Aven, a 563-unit multifamily building in Los Angeles, underwent two modifications: one in May to switch from LIBOR to SOFR and another in September, extending the maturity from March 2025 to March 2026.

➥ THE TAKEAWAY

Looking ahead: Compared to the previous year, 2023 saw a nearly twofold increase in the number of loan modifications. Extending the loan term emerged as the most popular modification type, and CRED iQ anticipates that maturity extension modifications will remain favored by borrowers in 2024. This trend is expected to continue, especially with $209.6 billion of CRE debt maturing across securitized sectors in the coming year.

San Francisco has seen a notable drop in office asking rents since 2020, and other markets may also experience similar declines in 2024.