W.P. Carey Retreats from Office Market as Remote Work Prevails

Apartment Construction Surges in Salt Lake Amid Housing Crunch

A recent RentCafe report reveals a spike in apartment constructions in Salt Lake metro since 2020, anticipating 4,525 new units this year, amid a U.S. housing shortage elevating rents and home prices.

Tight market: According to analysis from Yardi Matrix, the Salt Lake metro has experienced a 20.8% increase in new apartment constructions between 2020 and 2022. In 2021 alone, Salt Lake County had about 148,500 rental units, of which only 2% were vacant, rendering it the tightest apartment market in the county’s history, as per a report by the University of Utah Kem C. Gardner Policy Institute.

Supply shortage: The pandemic saw the completion of 1.2 million units, moderating rent growth across the U.S. However, major construction is concentrated in 20 metro areas, including Salt Lake, housing about 41% of U.S. renters. A RealPage survey shows three-quarters of renters can't afford to buy in their areas, and with 89% of units built between 2020 and 2022 being high-end, affordability remains a significant concern for many.

Affordability concerns: Affordability isn’t the sole determinant in renting preferences. Many, at their current life stages, prefer the flexibility associated with renting, as expressed by RealPage’s chief economist, Jay Parsons. Looking forward, around 1 million rental units are anticipated to be completed by 2025. However, obstacles such as tightening bank lending standards and escalating costs in construction materials, labor, and land could potentially decelerate the developers' momentum.

➥ THE TAKEAWAY

A nation of renters? The focused development in Salt Lake and other metro areas is a noteworthy response to the prevailing housing shortages and price inflations, addressing the nuances of renter needs and market demands. While the influx of high-end apartments may not align with the affordability needs of many renters, it underscores a broader trend in consumer preferences and market responses in the evolving real estate landscape, highlighting the balance between supply dynamics and varied renter inclinations.

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*Past performance is not indicative of future results. This post contains sponsored content. This information should not be used as a basis for an investor's decision to invest. An investment in commercial real estate is subject to risk, including the risk that all of your investment may be lost.

Assessing 2023's CRE Landscape: Not as Bleak as It Seems?

The CRE market has experienced a 50% drop in YoY activity this year, but a closer look suggests it might just be a return to long-term averages rather than an outsized crisis.

Reversion to the mean: A recent Green Street report showed a 50% drop YoY in 2Q23 CRE transactions to $137 billion from 2022’s $306 billion. This sparked concerns, portraying 2023 as a tumultuous year for CRE. However, considering a wider context, this perceived decline aligns with the 10-year average transaction volume of $130 billion, marking a 5.4% increase and suggesting a reversion to standard market conditions rather than a significant downturn.

Numbers don’t lie: CRE transaction volumes have seen notable fluctuations over the past decade. Annual volumes ranged from $212B in 2013, peaking at $685B in 2021, and registering $526B in 2022. This data suggests that the market in 2022 and 2023 is aligning more closely with the historical average, reflecting a normalization in transaction volumes.

➥ THE TAKEAWAY

Predicting the future: While 2023 CRE activity appears lackluster compared to the record-setting 2022, a deeper dive suggests the markets may simply be returning to more typical long-term norms. The future of the CRE market hinges on whether interest rates return to pre-pandemic levels or settle at a longer-term mean, impacting market stability and predictability.

📖 Read: Glenbrook, straddling the CA-NV border along Lake Tahoe, boasts the country's most expensive mountain homes, driven by an exclusive, low-density, and property tax-friendly environment.

🎧 Listen: In this episode of GreyCast, Don Peebles, entrepreneur, author, philanthropist, and political activist, discusses his remarkable career, impactful projects, and vision for a fairer real estate industry.

W.P. Carey Retreats from Office Market as Remote Work Prevails, Shifts to Industrial Holdings

After half a century in the net lease business, a veteran in the real estate arena, W.P. Carey, has decided to steer clear of the office sector. Instead, they're focusing on strengthening their industrial property portfolio.

Shedding assets for a new REIT: In a bid to realign its interests, W.P. Carey is on the move to liquidate 87 of its office properties by the onset of next year. The rest of its significant office assets, spanning 9.2M SF and predominantly leased to individual entities, will branch out into a separate, publicly-traded REIT, christened "Net Lease Office Properties." This includes high-profile properties like the KBR headquarters in Houston and Blue Cross and Blue Shield's expansive campus in Minnesota.

Reason for the shift: The world of commercial real estate is witnessing a waning interest in the office sector, mainly attributed to dwindling lease demands and the subsequent drop in property valuations. This slump has led many banks in the US to bolster their reserves, anticipating potential loan defaults. W.P. Carey's CEO, Jason Fox, emphasized the move’s intent to enhance portfolio quality, stabilize earnings, and positively impact the credit profile.

What’s next? W.P. Carey envisions its future largely tethered to single-tenant industrial and retail spaces, notably in the US and Europe, citing better tenant retention and minimal capital expenses. The transition is already underway, with office revenue shares plummeting from 30% to 15% since 2015. Notably, the new REIT will be overseeing 59 office structures, constituting 10% of W.P. Carey’s annual base rent. On the financial front, the whole operation is expected to bolster W.P. Carey's reserves by around $1.15 billion.

➥ THE TAKEAWAY

Big picture: W.P. Carey’s strategic shift is indicative of a wider trend in the REIT sector, with entities adjusting their portfolios to align with evolving market needs and dynamics. The focus on industrial and retail properties represents a reassessment of long-term value, likely influenced by the transformations in work and commerce structures. With remote work and other elements modifying the real estate scenario, industry leaders like W.P. Carey are proactively adapting to maintain relevance.

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