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  • Manhattan's Annual Rent Growth Hits Lowest Point Since 2021

Manhattan's Annual Rent Growth Hits Lowest Point Since 2021

Plus: Signature Bank's $33B CRE loan book is up for auction with bids projected to be 15-40% below the original face value.

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Good morning. NYC apartment rents may have peaked, but don't expect a significant price drop anytime soon. Delinquent commercial real estate loans in the US have surged to their highest level in a decade. Meanwhile, Signature Bank’s $33B loan portfolio is officially up for grabs.

Today’s issue is sponsored by BV Capital.

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Market Snapshot

S&P 500
GSPC
4,347.35
Pct Chg:
-0.8%
FTSE NAREIT
FNER
655.01
Pct Chg:
0.5%
10Y Treasury
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Pct Chg:
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SOFR
1-month
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*Data as of 11/09/2023 market close.

REVERSING COURSE

Manhattan's Annual Rent Growth Hits Lowest Point Since 2021

The rental landscape in New York City is undergoing a significant shift, with Manhattan experiencing a rent decline for the second consecutive month. This marks a departure from the rampant rent growth seen in recent years.

By the numbers: In October, the median rent in Manhattan dropped to $4,195, reflecting a 3.6 percent decrease from September and only a 4.6 percent increase compared to the same period in the previous year. This annualized uptick is the lowest reported since September 2021 and is a stark contrast to the 20 to 30 percent increases witnessed in much of 2022.

Beyond the Big Apple: Brooklyn and northwest Queens, known for affordability, saw rents drop significantly in October. Brooklyn's median rent fell to $3,490, down 5.7% from September and slightly down from the same month in 2022. This marked the first time in two years that Brooklyn rents didn't see a year-over-year increase. In Queens, the median rent in October was $3,198, an 18% decline from the peak in August, although still higher than pre-pandemic levels.

Inventory trends: While there was a month-over-month decrease in rental inventory in Brooklyn, Manhattan, and Queens, each borough experienced a substantial year-over-year increase of 30-40%. This surge in available properties has exerted downward pressure on rental prices, leading to a gradual decline since the summer. Experts suggest the market reached a saturation point in August, causing a temporary slowdown. Nevertheless, current data indicates a more stabilized market.

➥ THE TAKEAWAY

Are the tables turning? The overall slowdown in New York City's rental market mirrors a national trend. Jay Parsons, Chief Economist at RealPage Analytics, noted that September marked the 18th consecutive month of slowing annual rent growth. October's annualized increase of 0.1 percent matched the uptick seen in September, suggesting the possibility of a plateau in rental trends that may persist through the winter months.

A MESSAGE FROM BV CAPITAL

Diversify Your Financial Portfolio Through Passive Real Estate Investing

At BV Capital, we believe that multifamily ground up construction investing presents a significant opportunity for investors today.

Demand for multifamily housing is still high (especially in Texas) and supply isn’t catching up as new constructions starts are falling.  Multifamily construction starts are considerably down over the past two-year average.

  • Houston starts fell by 79%

  • Austin starts fell by 74%

  • Dallas – Fort Worth starts fell by 64%

And this is where opportunity lies. Those who can get a deal financed and bring product to market will be able to capitalize on rising rents due to constrained supply.

This lack of supply will force rents higher which if managed properly will grow a property’s Net Operating Income (NOI) which raises the property’s exit valuation and thus increases investor returns.

Contact us to learn about BV’s multifamily construction offerings.

*Past performance is not indicative of future results.

TRENDING IN CRE

  • Scratch my back: AllianceBernstein offers funding to banks in exchange for access to Rolodexes and a share of fees, blurring the line between asset managers and lenders.

  • Taxing to the rescue: Seattle, Santa Fe, and Boulder voters pass new taxes for affordable housing and homelessness policies amidst rising housing costs.

  • Vacant to vibrant: NexPoint Advisors plans to transform the vacant 1.6 MSF former EDS campus into a $4B life sciences and medical center, potentially generating 2K jobs in the first phase.

  • Moving on up: The federal government decided to move the FBI HQ to a new development in Prince George's County, MD, citing factors such as cost, transportation access, and sustainability.

  • Capital awakening: With transaction volumes down, price discovery missing, and valuations off, the question of when CRE markets will pick up remains.

  • Controversy unearthed: Miami's Historic & Environmental Preservation Board designates a Brickell site as an archaeological landmark, but construction of a luxury high-rise may still proceed, despite protests over the site's importance.

  • Out with the old: The General Services Administration plans to dispose of 23 properties nationwide, including 2 in DC, potentially saving $1B over 10 years.

LOOMING CRISIS

US Banks Face Mounting Pressure as Overdue Commercial Property Loans Reach 10-Year High

Delinquent commercial real estate loans in the US have surged to their highest level in a decade, presenting a growing challenge for building owners.

Rising delinquencies: Over the course of the third quarter, the volume of past-due loans for properties rented to others increased by 30%, amounting to a staggering $4 billion rise to reach $17.7 billion. This information, sourced from industry tracker BankRegData, highlights a $10 billion increase in delinquent loans within just a year. Despite this surge, it's worth noting that only 1.5% of commercial property loans are currently past due.

Concerns in the office sector: Experts in the industry predict that the number of properties facing financial pressure is likely to continue rising, particularly within the office sector. Bill Moreland of BankRegData has described the state of commercial real estate lending as "getting ugly fast." The impact of this trend extends beyond numbers, as property prices are expected to decrease while loan delinquencies continue to rise.

WeWork's influence: The data from the third quarter does not account for the recent bankruptcy filing by WeWork, a major player in the office space rental industry. WeWork's Chapter 11 filing, which allows for lease terminations with minimal financial consequences, has added further strain on building owners. The fallout from WeWork's financial woes has affected major lenders like Wells Fargo, which saw a substantial increase in past-due property loans.

➥ THE TAKEAWAY

Zoom out: Despite the mounting delinquencies, banks have been cautious about declaring defaults or significant losses. Experts anticipate that delinquency rates will continue to rise for at least the next year, indicating that there may be more challenges ahead in the commercial real estate sector. While pain is expected, it will take time for delinquencies to translate into actual losses. Banks are actively exploring loan extensions and restructuring options to salvage assets and avoid drastic devaluation if they must reclaim properties.

QUICK HITS

📖 READ: Morgan Stanley analysts believe that ‘hot desking,’ which has been around for a while, is likely to be the next big threat to the office market thanks to remote and hybrid work trends settling in.

🎧 LISTEN: Richard Hill of Cohen & Steers (CNS) and MSCI's Jim Costello discuss the changing perceptions of the CRE market and the impact of the recent bank failures on lending activity and liquidity.

📊 EARNINGS: Starwood's (STWD) earnings fell 75% even as revenue rose 25%. Still, CEO Barry Sternlicht sees remarkable opportunities for private credit amidst reduced exposure to real estate by banks.

ON THE CHOPPING BLOCK

Signature Bank Fire Sale Could Cut Prices by 15% to 40%

Signature Bank loans could sell 40% below face value

Newmark’s Doug Harmon and Adam Spies (Newmark, Getty)

Signature Bank's $33B CRE loan book is officially up for auction, with bids expected to be 15–40% below the original face value of the loans.

Opening the book: The auction process will provide valuable insights into the state of commercial property values in New York City. It is anticipated to be one of the most significant sales of the year, allowing buyers and sellers to gauge prices and values based on the outcomes of the loan sale or alternative methods of loan resolution. Regulators have divided the commercial loans into pools for individual bidding, with particular attention on three pools secured by office, retail, hotel, and unregulated multifamily properties, representing approximately half of the loan book.

The major contenders: Firms like Blackstone, KKR, TPG, Goldman Sachs, the LeFrak Organization, and Marathon Asset Management are actively reviewing the bidding material for Signature Bank's portfolio. While most of Signature's loans remain in good standing, the prevailing discounts can be attributed to the significant rise in interest rates since the original transactions. The marketing of the debt is being handled by Newmark's Doug Harmon and Adam Spies.

Transparency in sales: Although the FDIC shut down Signature Bank eight months ago, there is a historical precedent for sharing sales figures. If the FDIC discloses the sales figures, it will provide valuable insights into the extent of the decline in valuations across various property sectors. This transparency will help gauge the current state of the NY property market.

➥ THE TAKEAWAY

Why it matters: Although the FDIC shut down Signature Bank eight months ago, there is a historical precedent for sharing sales figures. If the FDIC discloses the sales figures, it will provide valuable insights into the extent of the decline in valuations across various property sectors. This transparency will help gauge the current state of the NY property market.

📈 CHART OF THE DAY

Most Collateral Remained Above Water Despite Recent Price Drops

MSCI U.S. Mortgage Debt Intelligence database

Source: MSCI

Over the past year, the value of collateral for 81.5% of loans has declined. However, it's estimated that only 40% of these loans have seen a decrease in value since their initial origination. This can be attributed to the price appreciation that occurred during the loans' lifespan prior to recent corrections.

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