Theme Parks Tackle Housing Crisis by Venturing into Homebuilding

Theme Parks Tackle Housing Crisis by Venturing into Homebuilding

Orlando, Florida, known for its sprawling theme parks, is witnessing an unexpected trend: major theme parks like Universal and Disney are stepping into the realm of housing development to address the local workforce housing gap.

The housing challenge: Central Florida, particularly the Orlando-Kissimmee-Sanford metro area, is grappling with one of the United States' most severe affordable housing shortages. The region has experienced rapid rent increases, largely due to job growth, migration, and housing underproduction. The average rent in the area surged by $600 from early 2020 to early 2023, creating a significant strain on residents, especially those in low-income brackets.

Theme parks solution: In response to this crisis, Universal Studios has launched a project called Catchlight Crossings, a 1,000-unit mixed-use development scheduled to open in 2026. This initiative, which involves a 20-acre land donation by Universal, aims to provide accessible housing for service industry workers. Similarly, Walt Disney Co. announced a plan to donate 80 acres for a 1,450-unit affordable housing project near its Flamingo Crossings Village. These projects are part of a broader move by these entertainment giants to contribute to solving the housing shortage in the area.

A growing need: Workforce housing, often aimed at individuals earning between 80% and 120% of the median area income, is increasingly essential yet underserved by developers. Recent trends show a shift towards the construction of more affordable Class B units, responding to the critical need for housing that accommodates middle-income workers like teachers and first responders. Big developers have begun exploring cost-effective housing solutions, such as Grubb Properties' "car-light" developments and Greystar's Modern Living Solutions.

➥ THE TAKEAWAY

Why it matters: These theme park-driven housing initiatives are part of a larger effort to address the nationwide shortage of approximately 2.2 million workforce housing units. While these projects show promise, their long-term impact on the local housing crisis remains to be seen. Universal and Disney's investments highlight the increasing role of corporate entities in addressing societal challenges like affordable housing, a trend that may set a precedent for other industries and regions facing similar issues.

Houston Leads Nation in Criticized Multifamily Loans

According to Trepp, Houston stands out at the start of 2024 with the highest percentage of criticized loans in its multifamily real estate market.

Some background: Criticized loans are those that serve as early indicators of credit stress and potential default. They are identified based on internal risk ratings assigned by various banks, ranging from large multinational institutions to smaller regional ones. On a scale of one to nine, these ratings determine the probability of default, with a score above six classifying a loan as "criticized."

The problem: In Houston, approximately 38 percent of multifamily loans fall under this category, setting a new record for the city and surpassing its previous high of 36 percent in the second quarter of 2017. This percentage far exceeds that of second-place Phoenix, where only 18 percent of loans are criticized.

Between the lines: Matt Anderson, Trepp's managing director, attributes this high percentage of criticized loans in Houston to concerns about the rapid pace of new construction compared to the slowing absorption rate. While these are positive developments individually, when construction outpaces absorption and occupancy rates decline, it can negatively impact rental income and rent growth, making it challenging for borrowers to make their payments.

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Supply surge: Houston's multifamily market is at a crossroads as it leads in criticized loans despite a lack of recent defaults. The surge in apartment properties expected in 2024 presents challenges for developers who grapple with limited pricing control and declining values in older properties. With robust development, including 90 communities and 23,000 new units under construction in Q3 and high deliveries in 2023, an oversupply in Class A units has led to discounts. This oversupply and the delicate balance between construction and absorption rates highlight uncertainty about the market's future stability.

According to Nareit, in 2023, data centers outperformed all other real estate sectors with an impressive total return of 29.9%. Following closely were lodging/resorts at 20.0% and self-storage at 17.3%.

Telecommunications and office sectors faced challenges with negative total returns of -1.7% and 1.8% for the year. However, it's worth noting that both the telecommunications and office sectors showed positive growth from mid-October through the end of the year, with telecommunications rising by 36.1% and office rising by 24.8%.