Sunday Summary: Jerome Powell Is Committed to Annihilating That Punch Bowl
Back in the 1950s, Federal Reserve Chairman William McChesney Martin Jr., famously described the role of the Fed as “the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
Few have taken this dictum more seriously than Martin’s current successor.
Last Wednesday, Fed Chair Jerome Powell announced yet another 25 basis point uptick in rates, bringing the benchmark funds rate to the highest it’s been in 22 years.
While some had hoped the Fed’s rate spree might have finally been winding down, this news was received philosophically by some real estate pros.
“You can point to a proactive Fed policy, Bidenomics, whatever you want to call it, but I think something is working, it really is,” Ariel Property Advisors capital services expert Matthew Swerdlow told CO. “People are buying deals. It’s happening.”
Others were less sanguine.
“[The hike] does impact all commercial real estate owners, because ultimately the cost of debt increases as rates increase, and it does have correlation to the values underlying assets that we’re lending to or that we own,” said Peachtree Capital’s Greg Friedman. “We got used to this really low interest rate environment, and now we’re sort of on the other side of that train.”
Powell indicated that the rate raising might continue, which is not what CRE people wanted to hear, but with a labor market that has more openings than job seekers and an unemployment rate of 3.6 percent “the labor market is still too hot for [the Fed’s] liking,” said Moody’s Analytics Thomas LaSalvia. “What they’ll worry about there is the wage-price spiral: as wage growth is too high, it keeps consumer spending too strong, and that demand pressure will not allow the Fed to get to that 2 percent [inflation target].”
Beyond inflation, the government at different levels has been doing what it can in the world of real estate.
Like, say, housing. Bumps aside, there are still areas in desperate need of more homes. (Just this week Related Companies snapped up a parcel of Jersey City land for its first New Jersey multifamily project.) And last Thursday New York Gov. Kathy Hochul announced a deal with the Port Authority of New York and New Jersey to build a 1,200-unit residential tower at 5 World Trade Center in which about one-third of units would be affordable.
And the federal government is putting down $10 billion for a “Regional Technology and Innovation Hubs” program to essentially identify and cultivate new tech centers around the country.
What’s going on with retail?
Retail is one of those good/bad stories, depending on the geography.
Last week the Real Estate Board of New York released a report showing tenants in New York returning to 10 out of 17 retail corridors in particular, and some impressive leases — including a reopened Century 21 in Downtown Manhattan and a new Barnes & Noble on the Upper East Side. Moreover, asking rent, which is about 30 percent off from its 2016 peak, is starting to edge up, too. (Office owners can’t feel nearly as good!)
That’s decidedly not the case in Southern California. According to a report from NAI Capital, vacant space in Los Angeles County grew to 19 million square feet last quarter. That’s about 3 million square feet more than it was when the market was struck by COVID. Plus, L.A. landlords don’t seem to be reducing rent — in fact, rents actually went up by 0.7 percent!
One can see why certain landlords like Unibail-Rodamco-Westfield (URW) have been divesting themselves of retail. Earlier this month, URW sold off the titanic 1.5 million-square-foot Westfield Mission Valley shopping centers in San Diego for $290 million, which is about 12 percent less than it was last appraised for. (Speaking of San Diego, did we mention that Steve Hermann Hotels just sold The Inn at Rancho Santa Fe for $100 million, which it originally bought in May of 2022 for $42.7 million? So, clearly hospitality is telling a different story than straight-up retail.)
As for the Miami area, we saw some interesting retail activity last week. Elcielo, the Michelin-starred Colombian restaurant, plans to open its second South Florida location at the SLS South Beach. And a trio of tenants — Sweat440, Crema Gourmet Espresso Bar and The Spot Barbershop — all announced deals to take space at Related Group’s Manor Miramar.
But this hasn’t deterred anybody from purchasing in Miami, that’s for sure. Greystar, for one, just plunked down $56.1 million for a 15.8-acre, 350-unit garden-style apartment community called Park Place at Turtle Run by ARIUM in Coral Springs. (Our advice to Greystar: Just don’t expect to get cheap insurance on this.)
And Aby Rosen also signaled his interest in developing a 1,049-foot supertall condo/hotel along Biscayne Boulevard at 141 NE Third Avenue, which would replace the current Yve Hotel on the spot. (RFR’s plans include more than 1,000 condo units and 252 hotel rooms.)
Piercing the whale, er, veil
The trades in industrial real estate are a pretty good indication of the confidence in the sector. For example, last week LBA Realty put down $37 million for Newcastle Slover Logistics, a 95,600-square-foot property in California’s Inland Empire. And Link Logistics (whose parent is Blackstone) just shelled out $162 million for an industrial park in Deerfield, Fla.
Indeed, we suspect that industrial real estate will remain pretty strong for the foreseeable future, mostly thanks to the rise of e-commerce.
We wish we could say that the whales feel as good about e-commerce.
Humpback whales have apparently been swimming in shipping lanes off the shores of New York City and colliding with vessels.
It makes for some blood-boiling reading on this last Sunday of July. So pour yourself a nice cold glass of lemonade, read it, and send your donations to Save the Whales.
See you next week!