Multifamily Construction Boosts US Housing Optimism in 2023

Good morning. Another Monday, another adrenaline-fueled weekend to keep the banking world from imploding. The US housing market is attempting to rebound. Meanwhile, sale leasebacks surged to an all-time high in 2022.

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U.S. Housing Starts Surge in February Thanks to Multifamily Construction Surprise

Looks like the US housing market is finally coming out of hibernation. In February, new home construction saw its first increase in six months, with multifamily projects taking the lead. This uptick could be a promising sign that the housing market is starting to stabilize.

Starting to stabilize: US housing starts rose 9.8% last month to reach a 5-month high, surpassing Bloomberg's economist forecast. Starts were at an annualized rate of 1.45M. Applications to build, a future construction indicator, increased by 13.8% to 1.52M units, supported by permit gains for both single-family and multifamily projects.

Budding optimism: The rise in multifamily homebuilding could signal the end of the housing market slump. Homebuilder sentiment, supply chains, and home purchase applications have improved. But, high mortgage rates and material costs still pose challenges. Financial turbulence may lower borrowing costs but also tighten lending standards. In February, single-family homebuilding rose 1.1%, multifamily construction by 24%, and single-family permits increased.

➥ THE TAKEAWAY

Completions surge: The number of finished homes increased by 12% to 1.56 million, marking the swiftest growth rate since 2007, primarily due to the rise in multifamily projects. This surge could positively impact Q1 GDP, which was previously expected to decline due to lower home construction outlays.

Sale Leaseback Volumes Break Record in 2022

SLB Capital Advisors, a consultancy firm specializing in sale-leasebacks and M&A-related real estate deals, reported that the number of distinct sale-leaseback transactions in the US reached 874 in 2022, surpassing the previous record of 789 in 2021.

Record highs: In 2022, the number of sale-leaseback transactions reached a new high, exceeding the previous peaks achieved in 2019 and 2021 by 11%. Furthermore, the total dollar volume of these transactions reached a record-breaking $31.4 billion, a 14% increase from the 2019 volume of $27.6 billion.

From the horse’s mouth: Scott Merkle, Managing Partner of SLB, attributed the robust dealmaking in 2022 to record M&A activity, buyers' willingness to invest, and the lower cost of sale-leaseback transactions relative to other capital sources. Despite a significant increase in high yield bond and corporate debt costs, the cost of sale-leaseback transactions, measured by cap rates, rose only 100-150 basis points.

➥ THE TAKEAWAY

Big picture: Sale leasebacks are gaining appeal in corporate funding for 2023, and are expected to play a bigger role in private equity and corporate capital allocation. They offer benefits in terms of multiple arbitrage and cost of capital, often more affordable than debt and the weighted average cost of capital, making them crucial for corporations and private equity investors.

• Shotgun merger: Swiss rivals UBS and Credit Suisse are joining forces in a government-brokered deal worth $3.25B. UBS got a good deal as they bought Credit Suisse for less than half of its Friday market value. The agreement also includes some sweet government guarantees and liquidity provisions.

• The conversion puzzle: Almost everywhere you look, developers are converting office buildings into apartments, which could solve the problems of office gluts and housing shortages in major cities. But the process has its challenges.

• Open Tribes: There is a growing trend among investment platforms, asset managers, and sponsors to cater to the increasing interest of retail investors in private real estate assets.

• Studio expansion: Fox Corp. has proposed a project called "The FOX FUTURE Studio Lot Project" to the City of LA, which involves expanding the historic Fox Studio Lot. The project's estimated cost is $1.5B, which is expected to generate $9M in annual tax revenues.