Good morning. In today's email: Airbnb is looking to expand its presence in multifamily properties and is working with property owners for a new listing service focused on rental apartments. Florida developers hold off on building new projects as insurance rates shoot through the roof. Oh, and the U.S. government will backstop mortgages over $1M in high-cost areas of the country for the first time ever. 

SUBLET IT & FORGET IT

Airbnb (ABNB) is teaming up with multifamily landlords to provide a listing service where tenants in select apartment buildings can sublet their units for short stays. Not only does this take the edge off high rents, but it also carves out a new source of revenue for landlords, who get a 20% cut of the hosting fee.

The gist of it: Hosts have to be the primary resident and leaseholder of the unit and can only sublet through Airbnb for a certain number of nights each year. These restrictions are meant to prevent investors from subletting apartments full-time. On average, test runs of the new rental program have seen tenants host nine nights per month with an average income of $900 per month.

Who’s on board: The service will launch with over 175 properties. Over 100 of these properties are owned by multifamily titan Greystar or Equity Residential. While the program will span most major US cities like LA, San Francisco, Houston, and more, it won’t come to NYC or DC, which both prohibit leases less than 30 days long. Drifters (and destructive partygoers) need not apply.

THE TAKEAWAY

Join the party: While rent price increases are starting to taper off, they’re still up 10% YoY. And last year saw rent increases of 15% YoY from 2020, and tenants are bristling. What’s more, there’s been a 4.9% decline in short-term rental listings since October 2019, so Airbnb just might have found a way to fill more apartments in a win-win for tenants and landlords alike. 

BUILDERS BEWARE

Developers Delay Building in Florida as Insurance Rates Skyrocket

Commercial property insurance has doubled in Florida this year, making it the most expensive state in the country to secure CRE insurance. With inflation and interest both sky-high, many developers are putting a pin in new projects. But even if market conditions improve, it’s not clear that insurance will.

Paying the premium: Builders’ risk insurance premiums have surged 30% in the past two years, while condo liability insurance has quadrupled over the same period. Insurance accounted for just 2% of the total cost of Florida highrises as recently as three years ago—but now sits precariously at 8%. For many developers, the cost of insurance isn’t worth the squeeze, delaying (or shuttering) countless projects.

Why God, why? Insurance has shot up due to recent natural disasters in the Sunshine State, which are getting worse and happening more often. Last year, the Champlain Towers collapse that killed 98 people led to an unprecedented $1B insurance claim. Then Hurricane Ian caused an estimated $41–$70B worth of property damage—and the insurance market hasn’t even adjusted its rates to reflect that yet. 

THE TAKEAWAY

Rain on the parade: Natural disasters are getting worse due to climate change. Eventually, certain areas may become so risky they’ll likely be abandoned. But before that happens, a new shared-risk model—where smaller insurance firms claim pieces of a bigger risk pie—is emerging. The new Waldorf Astoria, for example, has 25 different insurers signed onto the project. 

BABY GOT BACKSTOPS

US to Backstop Mortgages Over $1M in High-Cost Areas

For the first time ever, the US government will backstop mortgages above $1M in the 3% of counties that qualify as high-cost markets. The move is meant to stimulate homebuying in an ice-cold housing market, but the government’s willingness to assume more risk in uncertain economic conditions is worrying.

By the numbers: In high-cost markets, the maximum size for a loan eligible to be backed by Fannie Mae (FNMA) and Freddie Mac (FMCC) will rise from around $971K to $1.09M next year. For most of the country, however, the maximum will go from $647K–$726K. Conforming loans that fall within this range can be securitized and sold to investors by Fannie and Freddie at preferred rates.

The calculus of capitalism: Mortgage rates have topped 7% for the first time in 20 years, while existing home sales have slumped for nine straight months. It’s fair to say the housing market needs a boost. By allowing more mortgages to qualify as conforming loans, Fannie and Freddie hope to make buying more attractive. And given inflation, the backstop looks more like a corrective measure than a risky move.

THE TAKEAWAY

2008 says what? Critics worry that Fannie and Freddie are propping up too much of the mortgage market already (60%) and things could get really bad if lots of homeowners default around the same time. The trillion-dollar question is whether short-term relief will, in the long run, bring the US economy back to baseline or tip it over the edge into total collapse.

📰 Editors' Picks

• Feet in the door: Generous Black Friday discounts brought a record number of customers into brick-and-mortar retail stores this weekend.

• Wake up, Uncle Sam: Distressed DC office owners are appealing to the city government to protect their revenues as demand for office space plummets.

• Brookfield break-up: In a move that could make the company more powerful than ever before, Brookfield (BAM) plans to spin off its asset-management business to simplify its structure.

• Russians on ice: London properties owned by Russian oligarchs may be in trouble as the UK continues freezing Russian assets over the Russia-Ukraine conflict.

• Weathering the storm: Times are tough for most retailers, yet some stores have managed to thrive despite difficult conditions by branding themselves as bargain outlets. Go figure.

• Snap back to reality: Snapchat (SNAP) tells workers to come back into the office four days a week in hopes that in-person work will allow the company to keep its head above water.

• Sucks to be you(ng): As the commercial real estate industry continues to cut costs by firing brokers, the workers hit hardest also tend to be the youngest.

🤝 Deals & Dealmakers

• Getting the go-ahead: Goldstar secures $84M to finance a 350-unit multifamily complex they plan to build in Frederick, MD.

• It’s a Wonderful world: The Wonderful Company just purchased 350 Holger Way, an office building in Silicon Valley, for $55M.

• Dark times for Starlight: Starlight investments cuts distribution on two of its US funds to secure liquidity as short-term rates rise.

• Holla at the Hollos: The Hollo Family got one step closer to building their planned supertall tower in Downtown Miami after demolishing the 19-story tower it’s slated to replace.

• A Broe’s gotta build: The Broe Real Estate Group will begin construction on 250 Clayton, an eight-story mixed-use project in Denver, by Q4 2023.

• Oracle’s offload: The software company (ORCL) is looking to get rid of even more CA office space, putting its 185 KSF property on the market after a recent round of layoffs.

📈 CHART OF THE DAY

As rates have eased off of 7%, heading back to around 6.5%, U.S. home purchase applications have bounced back a bit.

ICYMI

What happened last week...

• Atlanta's Data Center Market is Booming But Running Out of Room

• Kushner Secures Fortress Loan For Hostile Takeover

• Investor Home Purchases Flop 30% In Q3

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.