NYC Rent-Stabilized Apartments to Face Big Changes

Good morning. Rent-stabilized apartment owners in the Big Apple are in for a rude awakening as some face mortgage maturities and resets that could send them back big time. An analyst in the hotel industry expects group bookings at US hotels to increase in 2023, despite the possibility of an economic downturn. A maker of electric vehicle battery components is investing $3.5bn and creating 1,500 jobs in SC. And the Fed released its seventh rate hike this week to close out 2022, leaving CRE financiers and borrowers wondering how many more we’ll see in 2023.

READ, WATCH, LISTEN

• 📖 Read: Bloomberg reached out to more than 2,700 journalists in search of the best books of 2022; here's the list.

• 💻 Watch: Ric Campo, CEO of Camden Property Trust (CPT), explains why he’s taking a “wait-and-see” approach on transactions.

• 🎧 Listen: On this episode of Business Wars, listen to how a fateful rivalry unraveled in the ’90s between Sotheby’s and Christie’s.

THE PERFECT STORM

NYC Rent-Stabilized Apartments to Face Big Changes

New York City landlords are always finding themselves in the middle of a perfect storm of one kind or another. This time, it's a tidal wave of mortgage maturities and resets coming their way for those rent-stabilized buildings they bought before the Housing Stability and Tenant Protection Act of 2019 passed.

What’s at stake: Mortgage maturities and resets will be applied to properties purchased before the passage of the Housing Stability and Tenant Protection Act (HSTPA) in 2019. Roughly 795 rent-stabilized buildings were purchased from 2016–2019 alone. Their owners, who were counting on offsetting their investment with appropriate rent increases, will have no choice but to refinance at much higher rates.

Slimmer pickings: Investor interest in rent-stabilized assets fell from 27% of Q1 2022’s $2.87B in multifamily sales to just 11% of the $3.57B traded this Q3. The HSTPA regulations, plus high interest rates, have pushed down valuations, shifting the investor profile for rent-stabilized buildings to private high-net-worth individuals with more patient capital.

➥ THE TAKEAWAY

Scrambling for space: Demand for housing in NYC still far outpaces supply, which has caused rents to keep rising. Only 45.5% of New York’s 2.2M rental units are rent stabilized, leaving rents in the remaining free market apartments to skyrocket. Projections estimate that the city will need 560K new units by 2030 just to keep up with population growth.

LEISURE TRAVEL

Hotels Could See Boost in Group Business Bookings Next Year

Despite a mild recession in the wings, an uptick in convention center bookings for 2023 might just suggest that groups will be booking U.S. hotels rooms at higher rates next year. Fingers crossed.

Business class clue: Convention center bookings for 2023 are already 13% higher than 2022. Ryan Meliker, president and co-founder of Lodging Analytics Research and Consulting (LARC), believes this suggests hotels will see a growth in group demand next year. While Meliker doesn’t believe things will ever go back to pre-pandemic levels due to the rise of remote work, he projects leisure travel will eventually stabilize around 30% higher than 2019’s bookings.

Tale of two travelers: After stimulus checks flooded in and pandemic restrictions loosened up, leisure travel hit record highs in 2021 and 2022. By year’s end, the average U.S. personal savings account had doubled in value, greatly boosting leisure demand. But now that those stimulus checks have all dried up, personal savings have shriveled under high inflation. In other words, while the liesure bit of T&L might suffer next year, travel—especially business travel—is looking fine.

➥ THE TAKEAWAY

Stormy weather ahead: Meliker’s company predicts a brief, mild recession will hit the U.S. economy between late 2022 and early 2023. But the recession could be worse, depending on factors such as new COVID variants and the Federal Reserve’s hawkish approach to firefighting inflation. Barring a severe recession, Meliker projects hotel revenue and occupancy should both go up next year.

GOING ELECTRIC

Tesla Co-founder Aims to Rev Up U.S. EV Battery Market With Record $3.5B SC Plant

Redwood Materials, a company led by Tesla co-founder JB Straubel, is building a $3.5 billion factory in South Carolina to produce critical components for electric vehicle batteries.

Massive investment: Redwood Materials is building a $3.5 billion plant in South Carolina to recycle used batteries and turn them into cathode and anode materials. The facility will be the biggest of its kind in the US, and is set to begin operations by the end of 2023. At full capacity, the plant will produce enough materials for a million electric vehicles per year - a clear sign there’s a giant wave of battery manufacturing heading toward the US.

Growing demand: The Southeast region of the United States has seen an increase in industrial projects related to electric vehicles and lithium-ion batteries. Volvo is building a factory in the same industrial park as Redwood's plant, and Kontrolmatik recently announced a $279 million factory to produce batteries for renewable power storage in South Carolina.

➥ THE TAKEAWAY

Why it matters: This is the largest economic development project in the state's history and reflects the increasing demand for batteries in the region. The factory will help speed up the supply chain and lower costs for battery makers, according to the company. South Carolina will issue $226 million in general obligation bonds to help pay for the new factory, and the state also awarded Redwood with financial incentives based on job creation. The project is expected to create 1,500 jobs. Initial production is expected to start by the end of 2023.

HIKING SEASON

Fed Ends 2022 With 7th Consecutive Rate Hike. What Now?

Commercial real estate borrowers and financiers have been left scratching their heads after the Federal Reserve closed 2022 with its seventh rate hike—without indicating a clear path forward for 2023.

The Fed’s furious fight: Powell’s team ended its streak of four consecutive 75 basis point (bp) increases after it announced a 50 basis point hike Wednesday. The federal funds rate was placed between 4.25 to 4.5%, the highest rates we’ve seen since December 2007. After the meeting, the Fed indicated that rates could keep climbing in 2023 to combat inflation.

Nightmare refi rates: Sam Chandan, director of NYU’s Chen Institute for Global Real Estate Finance, thinks that sales activity could bounce back under new price adjustments by mid-2023. However, Chandan warned that debt scheduled to mature next year remains a major concern because borrowers will have to refinance at much higher rates. The good news is that, at least for now, Chandan doesn’t see 2008 levels of distress.

➥ THE TAKEAWAY

Are we there yet? The consumer price index reading for November was 0.1% just one day before the Fed’s 50 bp rate hike. Powell stated Wednesday that recent inflation strides are not sufficient to discontinue more rate hikes in the near future. “It will take substantially more evidence to give confidence that inflation is on a sustained downward path.” He must be great at parties.

📰 Editors' Picks

• Mortage debt spike: The outstanding mortgage debt for commercial and multifamily rose by $70B in Q3, totaling $4.45T.

• Ponzi no more: National Realty Investment Advisors, a CRE firm accused of operating a $650M Ponzi scheme, will receive no punishment after signing a cease-and-desist order.

• The Manhattan Project: A panel of city officials and business leaders proposed a series of parks and promenades to revive office-centric neighborhoods in Manhattan.

• Greedy Grant: A workforce apartment complex in Lake Worth owned by Grant Cardone was found to have been overcharging tenants for years. Can’t say that’s surprising.

• Amazon Theaters: Streaming giant Amazon (AMZN) opened its first traditional movie theater as it plans to embark on a $1B campaign to release its films in theaters.

• New year, new rules: The Real Estate Board of New York is making “significant” changes to its universal co-brokerage agreement moving into 2023.

• Hottest buyer’s markets: Atlanta is among the top U.S. metro markets where renters stand the greatest chance of becoming homeowners in 2023.

• Tax tipping point: New York’s Comptroller has warned lawmakers against raising taxes, fearing they may be taxing the wealthy out of town.

🤝 Deals & Dealmakers

• Keys to the castle: Empire Capital Holdings is in contract to purchase the luxury apartments atop Mercedes House from Invesco (IVZ) for $100M.

• New to the area: An international REIT based out of Tel Aviv has entered an agreement to purchase four warehouses in the fast-growing Greater Baltimore industrial market for $28.6M.

• State-of-the-art campus: Longfellow Real Estate Partners is set to break ground on new 316 KSF life science campus Bioterra in San Diego, slated to be completed by 2024.

• Multi-use dreaming: PREIT has gotten approval from the Fairfax County Board to develop 460 apartments and a 165-room hotel in the Springfield Town Center.

• Tampa tower: Highwoods Properties and The Bromley Cos. have teamed up to add an 18-story, 432 KSF office building to their $1B Midtown mixed-use tower in Tampa, Florida.

• Viceroy’s second debut: Hotel owner and management company Highgate has announced its acquisition of Viceroy Hotels & Resorts, and plans to open a new European location.

• Out with the old: Miami Beach officials have approved three redevelopment projects of historic properties that will demolish existing structures for new hotels and condos.

• ZARA doubles down: Amancio Ortega, the billionaire founder of the ZARA clothing brand, closes another real estate deal after acquiring an apartment building in Seattle, Washington.

📈 Chart of the Day

The graph shows the percentage of Americans who owned REITs (real estate investment trusts) in 2001 and 2022, as well as the types of funds they were invested in. In 2001, 65.3 million Americans owned REITs, with the majority (86%) being held in equity funds tied to retirement accounts and the rest (14%) being held in balanced funds. In 2007, target date funds were introduced and have since become popular, causing the percentage of retirement assets held in equity and balanced funds to decrease.

😎 Offering-MEME-Orandum

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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.