Sunday Summary: Wicked Good Job Numbers, Wicked Small Rate Hikes
By The Editors February 5, 2023 9:00 amreprints
Last Wednesday we were hit with the old good news/bad news deal.
The bad news was that the Fed announced a new rate hike.
The good news was that the rate hike was more modest than we’ve been seeing up until now. It was 25 basis points, which is a lot less painful than the 50-point hike in December, or the 75-point hikes the four times the Fed met from June to November of last year.
However, while the news could certainly be worse, the fact that the Fed is seemingly not yet finished raising rates left some analysts queasy.
“My biggest concern for CRE markets is they need clarity,” Moody’s Tom LaSalvia told Commercial Observer. “If the economic data isn’t pointing strongly enough toward inflation being under control and we know rates are going up, then CRE markets are going to remain a little illiquid, or certainly we’re going to see transaction volume remain subdued for the time being.”
This was complicated by another good news/bad news scenario.
On Friday we were hit with what you’d think would be an unalloyed piece of good economic news: a much-better-than-expected jobs report.
More than half a million jobs were added to the economy in January, pushing the unemployment rate down to 3.4 percent, the lowest level since 1969, and leading the way was hospitality with 128,000 jobs added over the course of the month. (We weren’t 100 percent surprised that hospitality was surging. We’ve been seeing it on the ground. Williamsburg hotels, for example, have been hopping.)
This is great … unless, of course, your biggest piece of economic worry is rising inflation. The clarity that LaSalvia spoke about might have just been thrown yet another curveball.
Running with the bulls or the bears?
Strangely, we saw all sorts of conflicting bullish/bearish signs all week.
We sat down with CompStak’s CEO and co-founder Michael Mandel, who had a bit of a mixed message in that “we found that roughly half of tenants whose leases were expiring downsized, and roughly half expanded.”
Well, that’s pretty good. (We think.) Mandel, for one, just signed a new lease and sounded pretty optimistic about office culture.
“A lot of CEOs are recognizing that there’s been a loss in something, whether it’s productivity or culture or whatnot, from having people remote, and want to have people back in the office,” Mandel told CO. “To be clear, though, for us, it was not all about productivity. It was about culture.”
But some office heavies also didn’t have what we’d call welcome news this week — the $69 billion Blackstone Real Estate Income Trust hit its redemption limit for January with investors.
Blackstone largely shrugged it off. “We believe we have selected the right sectors and geographies and positioned our balance sheet to continue to produce meaningful cash-flow growth,” Blackstone President Jonathan Gray wrote in a letter to shareholders. “Generating strong performance remains our top objective.”
And RXR’s Scott Rechler said in an interview with the Financial Times that he was considering giving the keys back to lenders on several obsolete office properties RXR owns that couldn’t be converted to housing. The next day Rechler sent a letter to investors calling the FT story “sensationalist,” after the comment blew up in the business press. RXR, Rechler wrote, is taking an “eyes wide open” approach and “recalibrating for the current reality.”
There was a bullish/bearish signal when it came to industrial. (Although mostly bullish.)
A new report from CommercialEdge found that after years of surging rents, industrial real estate is finally expected to come down to earth in 2023.
“Investor appetite for industrial has pushed prices high enough to diminish opportunities for yield,” the report stated. “Investors may now need to assume current rent growth will continue for the foreseeable future in order for deals to pencil out, given current prices and borrowing costs.”
This didn’t stop Union Bank from plunking down $53.5 million for 12.5 acres of dirt adjacent to Riverside Municipal Airport in the Inland Empire, the center of Southern California’s industrial heartland.
Nor did it stop Xebec Realty from securing a $44 million construction loan for an industrial development planned in Hialeah, Fla.
Of course, Florida doesn’t really suffer from this split personality problem. It’s strictly bull. For instance, Trinity Investments and Credit Suisse closed on the $835 million purchase of the Diplomat Beach Resort in Hollywood, Fla., from Brookfield Properties. (Careful readers of CO first got wind that this was in the works back in 2021.)
But it isn’t only hospitality that glitters in the Sunshine State. We sat down with Andy Gloor, CEO of Sterling Bay, which developed 545 Wyn, one of the big office hits of Wynwood.
“Wynwood is an unbelievably dynamic neighborhood, they just didn’t have any Class A office,” Gloor told CO. “There were companies that wanted to be there but just didn’t have the product. So we addressed that.”
And we saw a stream of tenants this week coming to South Florida.
Saltbox — what is essentially a ready-to-use WeWork for industrial space — opened a 31,000-square-foot outpost in Doral near Miami International Airport. And Quest Workspaces — which is like a WeWork for, uh, office space — took a 10-year, 22,522-square-foot lease at Alhambra Towers in Coral Gables.
Finally, we definitely saw some bulls this week when it came to the Bronx.
The United Federation of Teachers, for one, signed a 45,000-square-foot lease at 2100 Bartow Avenue. And InterVest Capital Partners (until recently Wafra Capital Partners) bought a seven-property multifamily Bronx portfolio for $65 million from Taconic Partners and Clarion Partners.
Speaking of multifamily…
Those who were hoping that Gov. Kathy Hochul’s $227 billion budget that she unveiled on Feb. 1 would include some sort of Affordable New York/421a replacement might have been disappointed.
“I’m committed to doing everything in my power to make the Empire State a more affordable, more livable, safer place for all New Yorkers,” Hochul said while reiterating her goal to create 800,000 homes over the next decade. “We will make bold, transformative investments that lift up New Yorkers while maintaining solid fiscal footing in uncertain times.”
Which is all fine and good, but the how still remains elusive. Gov. Hochul proposed extending the deadline for completing projects under Affordable New York for another four years, but that and any other facet of a new incentive would need to be decided between the governor and the state legislature when the budget is due on April 1.
“There’s no specifics,” Kramer Levin’s Gary Tarnoff told CO. “The budget doesn’t rule it out, but given the other things in there I wouldn’t say I’m optimistic. I’m hopeful, but I’m not optimistic.”
New day, new faces
There were interesting people moves last week.
First, we learned that Saul Scherl, president of Howard Hughes Corporation’s New York region — which opened the Tin Building at the South Street Seaport last fall with celebrity chef Jean-Georges Vongerichten — is taking a step back and being replaced by Andrew Schwartz and Zach Winick.
“I am so proud of the work that our team has accomplished over the last seven years in revitalizing the Seaport neighborhood,” said Scherl. “It is rewarding for me to pass the mantle of leadership to colleagues who have been such integral, long-standing leaders for HHC at the Seaport. Andrew and Zach’s co-presidency marks the next chapter of HHC’s dedicated stewardship of this dynamic and historic community, and I am looking forward to all they will accomplish together.”
We learned that the U.K.-based meeting provider Etc Venues was purchased by Convene.
“The acquisition of an organization with such an unwavering commitment to delivering high-quality meeting and event experiences allows Convene to expand our ability to serve our clients in more places and exciting new ways,” Convene’s CEO Ryan Simonetti told CO.
And we learned that former SL Green all-star David Schonbraun (he was the REIT’s chief investment officer before jumping for a couple of years to the Carlyle Group) is joining GreenBarn Investment Group, formerly Senlac Ridge, as new managing partner.
But there’s more than just human capital available out there … there’s also AI capital. Last week CO took a look at the university-led programs to increase artificial intelligence in proptech.
To think about all of this, maybe go have a nice dinner someplace. May we suggest the Dept of Culture Brooklyn? This is the high-end Nigerian restaurant in Bed-Stuy that caught the food world’s attention last year. It’s one of the many reasons why Bed-Stuy is so interesting right now.
See you next week.