Sunday Summary: No Surprises at Kevin Warsh’s First Fed Meeting

Those who think that this era could stand to get a little less interesting were pleasantly surprised by the Fed meeting last week.

To put it as politely as possible, the executive branch of government has not tried to hide its disdain for the previous chairman of the Federal Reserve.

Despite the fact that Donald Trump had named Jerome Powell to chair the Fed back in 2018, the president quickly came to loggerheads with the chairman over how aggressively borrowing rates should be lowered. As such, Trump publicly (and repeatedly) mused about the possibility of firing Powell, as recently as this spring.

Powell’s replacement was Kevin Warsh, whose qualifications seemed pretty normal for a Fed chairman: He had served as a Fed governor; he worked at Morgan Stanley and a respected think tank; he bagged degrees from Stanford and Harvard; he could even boast that he was Ronald Lauder’s son-in-law.

Even better, Warsh’s first meeting came and went Wednesday with no theatrics whatsoever. The board voted unanimously 12-0 to keep the benchmark interest rate at between 3.5 percent and 3.75 percent, citing inflationary concerns due to the war with Iran — and everyone seemed OK with that.

“Economic activity is expanding at a solid pace despite elevated uncertainty that owes in part to conflict in the Middle East,” Warsh said. “Productivity growth and capital investment are both strong, job gains have kept pace with the workforce, and the unemployment rate has changed little.”

This was more or less what the CRE world wanted to hear — and expected. Moreover, it seemed to suggest the economy should be healthy enough to withstand a little anti-inflationary discipline.

“Some of the people I deal with are saying if a 25 percent basis point change increase in interest rates is the difference between the deal making sense and not making sense, then the deal doesn’t make sense,” said HSF Kramer’s Jay Neveloff. “Some people are still a little reluctant and they don’t know if they’re going to get approval from the investment committee, and others are saying this is the moment and this is the window.”

While we’re at the intersection of politics and real estate…

Given how much hand-wringing there is in New York City real estate over the slow pace of multifamily development, we were somewhat surprised when we learned earlier this month that the sector was growing faster in Gotham than anywhere in the country.

How is this possible?

Like a lot of metropolises nationwide, New York has tried to encourage housing through tax incentives and zoning changes. One such initiative has been working exceptionally well by essentially looking at the city’s obsolete office space and offering a glidepath for conversion.

Another incentive has yielded extremely limited development.

We’re talking about 467-m, the adaptive reuse program that is bringing tens of thousands of new units onto the market via office conversions, and 485-x, the property tax abatement that has made it nearly impossible to meet wage requirements on projects of 100 units or more.

“We’re getting developers spending more time figuring out how to create 99-unit buildings to avoid the wage requirements than underwriting deals,” said Bob Knakal of BK Real Estate Advisors.

Knakal pointed to one developer who is carving their property up and calling it a half-dozen projects instead of one. “The site is very likely going to be subdivided into six pads, and six 99-unit buildings are going to be built on a site that could accommodate 680,000 buildable square feet, and only 500,000 square feet is going to be used,” said Knakal. “So, because they’d go over the 99-unit threshold, 180,000 feet is not going to be built. That’s 250 apartments that are not going to be built because the incentives don’t work. On what planet does that make any sense?”

But, if you really want to understand the nitty-gritty of a successful government initiative versus a dithering one, you should take the time to look at CO’s deep dive here. (And, if you want to better understand the other challenges that developers face in generating new housing, check out this rundown on the current cost of construction.)

Of course, there are a lot of city actors who are earnestly working with developers to create more housing. “We have a portfolio of workforce housing that we have at the ready to be occupied, and we’re working with the city to help facilitate how to truncate an extended approval process to get folks who qualify into housing quicker,” Taconic’s Colleen Wenke told CO.

And 485-x and 467-m are not the end of the story. On June 16, the New York City Department of Housing Preservation and Development announced that they were putting $1 billion toward supportive housing. In the meantime, too, there are … well … a lot of those 99-unit multifamily buildings going up. This week alone brought news of five more.

Also, hey, the luxury end of the New York housing market keeps chugging along. Dan Parker, co-head of new development for Compass Development Marketing Group, explained to us how fresh higher-end condo product moves off the proverbial shelf. Hint: Things start early.

There’s always Florida

A lot of people prophesize that if New York government gets too pesky and too tax-happy, the population will pick up and move to Miami.

There’s both a real and a dubious case for this.

There’s no question that at the very high end of the South Florida market there has been a wave of billionaires who are looking for a less judgmental place to live. And the dollar amounts splashed around by the likes of Mark Zuckerberg, Larry Page, Jeff Bezos and others have been obscene. (Tallying the personal Miami real estate of those three billionaires alone result in $577 million.)

That being said, so many condo developers have tried to get in on the Miami action that indicators like time on the market and active listings have been rising, suggesting a glut. Moreover, older stock has been deteriorating and is in need of extensive repairs that became mandatory after the Surfside collapse in 2022.

“The older condo stock, unfortunately, is facing a double whammy,” said Ana Bozovic of Analytics.Miami. It’s being “challenged by the state law. And at the same time it’s not benefiting the new buyers, because they are not purchasing at this price point, regardless.”

Of course, there are markets other than New York and Miami.

Some have been looking kindly at Nashville.

“It has become a pretty balanced economy that isn’t necessarily that reliant on one specific sector of the economy like, say, Dallas or Austin is,” said Andrew Donchez, partner and head of development at SomeraRoad, which has been invested in the Tennessee city for a decade. “Health care is obviously a huge driver, but you’ve also got tons of tech [and] financial services with a number of big companies all looking at Nashville or already here.” (And don’t forget the town’s music scene.)

Hey — don’t mess with Texas, Andrew!

“When we talk about this with our investors, we frame up demographic trends, consumer behavior and corporate behavior as three pillars that will dictate how markets interact and behave, and where demand is going to form,” said KKR’s Joel Trautt in our cover story last week.

“Dallas is one of the easy winners on that continuum. It’s a tremendous market, it’s scaled, it’s got great demographic trends, it’s got great corporate relocation and growth activity, and the consumer there is really well positioned and active. So, when you put those things together, it’s easy for us to say, ‘OK, demand is going to be there, and now we’ve got to figure out which asset types we want to invest in, the specific locations we want to invest in, and where we believe has more demand than supply and the ability to generate outsized growth.’”

See you next week.