Miami is WeWork’s Saving Grace

In today’s email: WeWork (WE) is benefitting massively from Miami’s office boom driven by new residents looking for flex space. A college dropout turned billionaire real estate mogul shares his rules for winning the real estate game. Meanwhile, for the first time ever, Fannie Mae (FNMA) and Freddie Mac (FMCC) will most likely miss their lending allocations for the year.

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🎧 Podcast of the Day: After a record-shattering year in 2021, commercial brokerages including CBRE, Newmark and JLL are feeling the pain of a difficult macroeconomic environment. Find out how brokerages might recover next year on this episode of Deconstruct.

WYNWOOD WINS

How WeWork Became the Biggest Beneficiary of Miami’s Office Boom

In the 12 months through July 2021, over 700 people moved to Florida every day. While most major office markets in the US have been decimated by the pandemic, WeWork’s Wynwood location has held up pretty well, thanks to an influx of new businesses looking for flexible options.

Try before you buy: WeWork's Miami offices combined posted a 97% physical occupancy in the second quarter, WeWork’s highest occupied market globally. Flexible office space appeals to two large groups of tenants: those looking for temporary space before their offices are completed, and those flirting with the idea of relocating.

From the horse's mouth: “People were looking for a place to work and be productive coming out of COVID,” Nicholas DeMarinis, WeWork’s vice president and head of sales for the Atlantic territory excluding New York, said in an interview. “Miami is one of the first markets to have that kind of a return. Every company is looking for flexibility whether they need a dedicated office or someplace in between work and home for the day.”

Competition is high: Other flex office providers like Industrious, Knotel, and IWG are hot and heavy for Miami as well, citing the lack of class A office space in the city. With all this new demand, flex office vacancy rates have fallen to just 2.9% across South Florida.

➥ THE TAKEAWAY

Florida for the win: The reason many tenants relocate to Miami is, by their own admission, to get ‘the nicest office space possible.’ And with soaring demand and a lack of best-in-class supply, lenders are bullish on opportunities in South Florida, despite a looming recession. Demand for small offices is especially strong, with 1–2-person private office rates easily outpacing the national average, according to SquareFoot/Upsuite.

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From College Dropout to $2.9B Real Estate Mogul

Roy Carroll is the wealthiest person in Greensboro, NC, and has made a fortune buying low and rarely selling. In a rare public interview with Forbes, the billionaire recounts his formula for success, outlook for the market, and voyage to turning a father-son home construction business into a $2.94bn real estate empire.

Follow fundamentals: Caroll has built his fortune by sticking with a reliable game plan. Over time, that strategy allowed him to amass 13,000 apartments and 29 self-storage facilities. He said his philosophy of buying cheap and not selling continues to prove effective. Apartments, hotels and leased properties provide a steady stream of income. Carroll points out that while he doesn't have the pedal to the metal, he sees another opportunity on the horizon for developers with money in the bank.

From the horse's mouth: "We think there's going to be an economic correction that's going to occur...We're going to be ready to do some shopping maybe in the third or fourth quarter of 2023." Carroll used his company's war chest to capitalize on the recession that began in 2007, drove prices down and forced many developers to sell off their assets.

Simple, not easy: All of Caroll’s investment decisions stem back to a few simple rules: invest in yourself, save cash for the right time, don’t accept outside investors, and utilize lower leverage. If these rules sound reminiscent of Buffett's approach, they are. “Why sell the golden goose?”

➥ THE TAKEAWAY

Drawing parallels: Never time the market, right? Well, maybe you can. Unlike other markets, Caroll believes real estate’s slow pace is an advantage, allowing you to anticipate when the trainwreck is coming. He sees parallels between ‘07–‘08 and today’s environment and is hoarding cash accordingly.

Fannie and Freddie to Fall Short of Lending Allocations

In 2022, Fannie Mae (FNMA) and Freddie Mac (FMCC) were each allocated $78B to lend by the federal government. For the first time in their existence, Fannie and Freddie are most likely to miss their lending allocations for the year by over 25% (or by $20B).

No thanks: At the start of the year, Fannie and Freddie's loans hovered around the 3% range. Now, the same loans are in the 5.5–6.5% range. Unless borrowers desperately need financing, they are likely better off waiting.

Reached an impasse: With rates up, buyers need higher yields for the ink to dry on deals, and sellers aren’t willing to part ways with their assets at lower prices. Fannie and Freddie are also being conservative given current economic uncertainty, resulting in a slowdown in multifamily deal volumes.

➥ THE TAKEAWAY

The new problem: Reacting to the drop in mortgage demand, the federal government has reduced Fannie and Freddie’s 2023 allocation to $75B. While Fannie and Freddie certainly won’t abandon the market, the new question becomes how the two entities can cut back while still fulfilling the primary objective: financing affordable housing.

📰 Editors' Picks

• Don’t panic: Barry Sternlicht, CEO of Starwood (STWD), defends the REIT’s decision to limit investor withdrawals as a means to manage liquidity.

• Going green: The Biden administration is now requiring 30% of federally owned real estate to operate with net zero carbon emissions by 2030.

• Land of opportunity: Niche opportunities, like distressed assets, self storage, and manufactured housing, will thrive in 2023.

• Not on my watch: The Hotel and Gaming Trades Council has successfully blocked the conversion of the empty Paramount Hotel in Times Square into affordable housing.

• Burn the midnight oil: San Francisco is cracking down on Elon’s claim that staff beds at Twitter are simply a way to help ‘tired employees.’

• Keep the family close: Jonathan Landau, former CEO of Fortis Property Group, has left to start his own family venture focusing on assets in New York, South Florida, and Boston.

• Old money: The world’s richest family, valued at $300B, has holdings that include the Manchester City Football Club and a dozen or so palaces.

• Supersize me: To manage inflated grocery prices, 25% of consumers are spending even more at fast food restaurants.

🤝 Deals & Dealmakers

• Three’s company: RXR, Macquarie (MQBKY), and the Qatar Investment Authority provided $261M of preferred equity for a Manhattan multifamily portfolio.

• Trophy asset: The Moinian Group scored $185M to refinance Bezel Miami, the residential property inside the Miami Worldcenter.

• Logistics lovers: Dealmakers expect the onshoring trend to continue to drive demand for industrial assets and 3PL providers in 2023.

• Funding secured: Comstock Holdings (CHCI) has secured a $77.5M loan to refinance its mixed-use development in Reston, VA.

• Paving the way: Charlotte-based developer SunCap Property Group is building a 100 KSF facility in Raleigh, which has been pre-leased to a multinational company.

📈 Chart of the Day

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.