Hines: Two CRE Signals to Watch in 2023

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In today's edition: With market readjustments and uncertainty on the horizon, Hines suggests keeping an eye on two key signals in CRE. New data reveals that Boston office space availability has reached a two-decade high. Meanwhile, Indianapolis beats out Miami in December to top the nation in rent growth.

Looking Forward: Two CRE Signals to Watch in 2023

As markets grapple with uncertainty and prepare for further readjustments in the new year, a new report from Hines points out trends to watch as the current market cycle continues.

Transaction volume: The first signal to keep an eye on in 2023 would be changes in transaction volume. Hines emphasizes that while the relationship between volume and price growth is directly correlated, it’s still not predictive. Stabilizing volumes could indicate that prices have bottomed out and might rebound if volumes rise.

Traditional debt: The second factor to pay attention to is the increasing availability of traditional debt. According to the Fed’s Loan Officer Survey, 50% of respondents experienced tighter underwriting standards for CRE loans, including 57.6% for construction and land development, 52.9% for non-farm and non-residential, and 39.7% for multifamily. All these categories are up from a year ago, when banks had looser lending standards.

➥ THE TAKEAWAY 

Keeping cool under pressure: Certainly, every cycle has its quirks. With that in mind, savvy investors still have a lot of dry powder waiting to be deployed. The stabilization of transaction volume and subsequent increase during past cycles have been a good sign that prices found a bottom and should begin to rise if volume continues to rebound.

Additionally, the rising availability of traditional debt is another sign that the market may be improving. It is important to keep an eye on regional transaction volumes as it will give an indication of whether specific markets are likely to offer an opportunity.

BEANTOWN BLUES

Boston Office Space Hits a 20-Year Availability High

After experiencing a recent economic boom, the city of Boston now has more available office space than even during the dot-com bust of 2001, according to Colliers.

Worker ghost town: Rents have plummeted to $66.60 per SF, marking Boston’s third straight red quarter, and the lowest office rents have been since 2019. At the same time, 3.4 MSF of sublease space is available due to tech company layoffs. Smaller, short-term leases are much more attractive as businesses collectively need less space than before.

Across the river: While vacancies outside the city still occur, the situation is less dire in Cambridge, MA, and nearby suburbs because former offices are being converted to life sciences facilities. And as more buildings are turned into labs or residential properties, office availability could drop, prompting a boost in the office market—though this has yet to be seen.

➥ THE TAKEAWAY 

A solid foundation: While the office situation seems dire, Boston on the whole is still better off than many other US cities. The office market was buoyed in 2022 by major leases from Eaton Vance and Harbourvest Partners. More importantly, researchers noted that the forces responsible for Boston’s boom—colleges, wealth, and quality of life—are bound to remain in place.

OUT OF NOWHERE

Indianapolis Had Strongest December Rent Growth, Topping Miami

While rent prices have started slowing down across the nation due to lower demand and economic uncertainty, one Midwest city is outpacing even the Sun Belt.

Sea change: The Indianapolis metro area experienced 7.4% rent growth in December, beating Miami’s 6.8%. Indianapolis has also managed to maintain its position as rents fall faster in other markets. This downward trend is likely to continue according to CoStar’s national director of multifamily analytics, who expects vacancies to rise above 7% while rent growth slows down even more

Build it and they will come: While rent growth may be sluggish in Miami, apartment construction continues to surge. Currently, there are 28,383 units under construction, or a whopping 15.6% of the existing 181,094 units. By comparison, in Indianapolis, 5,245 units are being developed, expanding existing inventory by 3.2%, while Cincinnati (ranked third for annual rent growth) is expected to increase its stock by 4.2%

➥ THE TAKEAWAY 

The bigger picture: Out of the 40 largest US markets, Las Vegas and Phoenix were the only two that saw rents drop in December. Seattle suffered the biggest decline in Q4 compared to Q3 at 2.6%. Prices aren’t totally in freefall, but if vacancies go above 7%, it’s possible that cities like Indianapolis could be outliers in 2023.

• Spine-tingling: Universal Parks & Resorts (UVV) division has plans to develop two new attractions: A family resort in Texas, and a horror experience in Las Vegas.  

• Facing the music: A sharp rise in European interest rates is putting the market through its first cyclical shift since 2008. The non-bank sector now faces a major trial..

• Changing perceptions: Nadeem Medhji, head of Blackstone’s (BX) Real Estate Americas, details how an investment from UC changed the perception of the BREIT fund.

• Finding your center: Experts from Marcus & Millichap (MMI) and M&T Bank (MTB) detail how agency lending could have a  greater impact in 2023 than in previous years.

• On the road again: Logistics investors have turned their focus towards “first-mile” assets as supply-chain disruption pushes them to improve BTB logistics.

• Give me shelter: Experts offer insights into numerous homelessness crises in America’s densest cities, as well as causes and potential solutions in 2023.

• Manifest destiny: After decades of staying out west, legendary CA burger chain In-N-Out announced plans to finally expand eastward, starting with Tennessee. 

• Can't stop this train: The industrial market in Southern California continues to grow despite the economic slowdown.

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• Here comes the sun: Apollo Global Management (APO) has gained control of the Chicago Board of Trade building in the city’s iconic “Loop” and plans to overhaul the space.

• Here fishy, fishy: Aquaculture-tech company ReelData AI announced that it closed $8M in series A funding, led by Buoyant Ventures.

• Wide tracts of land: DIV industrial announced plans to develop a 1.7 MSF industrial campus, the largest of its kind in the area.

• Casualty of war: The Chetrit Group may have to default on a $481M loan that covered 43 properties that they now hope to sell, according to Trepp.

• Superstore: Burlington Stores (BURL) has agreed to lease a 30 KSF property at Springfield Town Center in Springfield, VA, to the Pennsylvania Real Estate Investment Trust (PRET).

• Sugary sweet: Transwestern Investment Group has acquired a 912,522 SF industrial property, currently leased by PepsiCo’s Quaker Sales & Distribution Inc.

• Cutting down costs: AT&T (T) has listed over 260 KSF of office space for sublease at their office park in San Ramon, CA.

• Back to business: Stephen Ross has received approval to develop the biggest office tower in West Palm Beach. The project will span 466 KSF.

According to CoStar, as businesses continue to adjust their strategy around returning to the office, many are opting to lease smaller spaces in an effort to curb costs—often by subleasing their larger locations.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.