Thanks, Powell: Rate Hike Relief is Here (For Now)

Good morning. Following ten successive rate increases and three significant bank collapses, the Federal Reserve declared yesterday that it will maintain the current benchmark interest rate. Starwood Capital (STWD) plans to divest 2,000 single-family rentals it bought in 2021.

Moreover, developers anticipate a continued exodus of New Yorkers to Jersey City's waterfront, lured by lower rents and more spacious apartments.

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Fed Holds on Rate Hike for June

As expected, the Federal Reserve paused rate increases for the first time in 15 months and maintained the benchmark interest rate after 10 consecutive increases. Future rate hikes in 2023 remain a possibility. However, the CRE sector still faces additional rate shocks from other factors.

Short-term sigh of relief: It's a long-awaited day for CRE as the Fed finally hits the pause button on rate increases. While this is good news for struggling borrowers and landlords, the Fed didn't necessarily give everyone a warm and fuzzy feeling about the rest of the year. Chairman Jerome Powell clarified that the Fed expects they will need to raise rates again this year if inflation isn't under control. The pause in rate increases comes after a BLS report showed a 4% annual rise in consumer prices for May, the smallest increase since early 2021.

From the horse’s mouth: “Nearly all committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Fed Chairman Jerome Powell said in post-meeting remarks. “But at this meeting considering how far and how fast we have moved, we judged it prudent to hold the target rates steady to allow the committee to access additional information and its implications for monetary policy.”

Long-term uncertainty lingers: Most of CRE has been hit hard by the Fed's rate hikes, which began way back in March 2022, resulting in banks pulling back lending activity, depositors making a redemption run on regional banks, and, in some cases, banks collapsing altogether. The rate hikes also coincided with increased cap rates and lower cash flows. Many fear that a CRE slowdown that persists for the rest of the year could trickle down to more regional banks, leading to a real recession and perhaps finally ending the stock market rally.

➥ THE TAKEAWAY

Zoom out: The Fed's temporary rate halt provides short-term relief, but the unresolved debt ceiling crisis has had a severe impact on the market. Lending rates depend on short-term Treasury bill yields, with lenders seeking higher profitability than safer government investments. For instance, the 26-week Treasury bill issued on March 30, 2023, initially yielded 4.83%, while the upcoming June 15 bill will yield 5.38%, a significant 55-basis point increase. However, clarity from the Fed regarding the endpoint of rate hikes is crucial for boosting confidence in refinancing and property acquisitions.

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Sternlicht’s Starwood Eyes Sale of More Than 2,000 Rental Homes

Just two years after acquiring a $1 billion portfolio of single-family rental homes, Starwood Capital Group is considering selling the majority of these properties.

Pretium pickings: During the pandemic, Starwood went all-in on single-family rentals and bought a whopping 2,300 houses from Pretium Partners, spending around $1 billion. Now, they're thinking about selling around 85% of those houses. But get this, Pretium actually wants to buy back roughly 100 of those houses from Starwood, but don't expect any discounts—they'll be paying full price.

Nervous investors: Starwood's CEO, Barry Sternlicht, acknowledged in the company's recent earnings call that while single-family and multifamily sectors are performing well, the office sector is worrisome. Concurrently, Starwood REIT is experiencing increased redemption requests from uneasy investors. In April, such requests totaled about 4.2% of the company's net asset value, with only about half of these requests being met.

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Selling the opportunity: SREIT is looking to sell a significant portion of its SFR holdings. Like many other REITs, it wants to offload properties that are holding up better in the downturn. While selling winners and holding onto losers isn’t the best option, it’s better than nothing. And while office assets struggle with higher borrowing costs and remote work, residential real estate has much better prospects, according to Sternlicht.

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Developers Bet Jersey City Will Keep Attracting New Yorkers

Tristate developers are placing their bets on Jersey City's waterfront as they anticipate continued migration from New Yorkers seeking more affordable and spacious housing options across the river.

The sixth borough: Brookfield Properties and G&S Investors are two developers looking to transform NJ's waterfront to attract more New Yorkers. The city's proximity to Manhattan, coupled with lower rents and more access to amenities, makes it an attractive choice for those looking to escape the high costs and limited space of NYC, highlighting the growing appeal of Jersey City as a desirable residential destination for New Yorkers. This was not always the case.

Hudson Exchange: The developers recently introduced the second stage of Hudson Exchange, a 60-story mixed-use tower featuring 802 luxury rental units and 115 KSF of retail space. It’s the 3rd multifamily property the firms have partnered on within the master-planned community. Once completed, Hudson Exchange will have 6M SF and 5,500 residential units just two blocks from the waterfront. The developers expect lease-up to be quick since demand is strong.

Wall Street West: Jersey City, once a blue-collar town, has been reborn, with many Wall Street firms like Goldman Sachs (GS) opening offices there. With its location right across the river from Manhattan as well as many transit options, lower rents, and downtown attractions, Jersey City is becoming a young professional destination. The Jersey City waterfront submarket is extremely tight right now as tenant demand has outpaced supply.

➥ THE TAKEAWAY

Financing success: Brookfield Properties and G&S Investors found three lenders to help finance Hudson Exchange's second stage, Union Labor Life Insurance Co. (Ullico), Washington Capital, and AFL-CIO Housing Investment Trust. The lenders are providing $420M for the $650M project. The new residential waterfront tower will give tenants views of the Manhattan and New Jersey skylines, making it an enticing destination for those seeking an alternative to NYC.

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• The US is best: Pestana Capital, a Miami-based family office, wants to raise $30M to help Brazilians invest in US real estate, particularly in the Sun Belt.

• Stalking horse: Bed Bath & Beyond has selected Overstock.com’s (OSTK) $21.5M cash offer as the leading bidder for the failed retailer’s brand and assets for their bankruptcy auction.

• Write-downs: Goldman Sachs (GS) will write down the value of its CRE assets in Q2, including loans and direct stakes, because of course they would.

• Structural collapse: Electic vehicles (EVs), which can weigh thousands of pounds more than gas-fueled cars, could contribute to the collapse of more NYC parking garages.

• Outrageous conduct: Real estate magnate Patrick Carroll faces a defamation lawsuit and ban from Major Food and Simon Kim restaurants due to alleged slander and use of discriminatory slurs.

• BBQ capital: Kansas City reigns supreme as the most sought-after city by US renters, according to RentCafe’s June Rental Activity Report.

• Loan sell-off: PacWest sold $1.2B of construction loans to Cain International in a strategic move to optimize its balance sheet.

• On life support: WeWork (WE) turned down investments from former CEO and co-founder Adam Neumann, as well as IWG and JLL, before Sandeep Mathrani stepped down as CEO.

• Work for hire: Tulsa, OK, is paying people to live there in an effort to attract and retain talented professionals—and it’s working.

• Joint Venture: Related Group and BH Group are teaming up to develop two 20-story apartments with 8K retail space after the city approved a 99-year ground lease for their Marina Village.

• War at work: A military-focused coworking space, Reveille Grounds, is set to open in Baltimore, focusing on military personnel, veterans, and their families.

• Road trip: Monarch Alternative Capital announced the formation of Go Outdoors, a platform to acquire, develop and operate marinas and RV resorts across the US.

• Slap shot:NHL’s Ottawa Senators will sell 90% of the team to Toronto billionaire Michael Andlauer, who is committed to bringing the stadium downtown.

U.S. banking’s exposure to high-volatility CRE (HVCRE) loans fell 21.8% in 1Q23 from 4Q22 to its lowest level in years.

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