Real Estate Newsletter 3.11.24
Weekly News Roundup
- Ikea Saves Shopping Malls
- Apartment Buildings Get Bigger
- Commercial Real Estate Silver Linings
Ikea Saves Shopping Malls
Many malls are struggling but IKEA is betting it can breathe new life into the troubled format. The company’s blueprint is to anchor its malls with an IKEA store and seek to pull in more would-be shoppers with additions such as WeWork-style co-working spaces, Nordic-themed food halls and children’s play areas inspired by outer space.
“People are looking for places that offer much more, not only shopping,” said Cindy Andersen, the managing director of Ingka Centers, the company’s real-estate arm. “If you bring in more reasons to visit, then people will still come.” That includes using a mall as an event space, she said, and encouraging service businesses such as hair salons and medical centers to occupy spots alongside retail brands.
Play areas for children—including one called SpaceLab that is offering space-themed creative activities—and repair hubs for clothes and other products are features Ingka has been trialing in some of its malls to boost their appeal. Traffic at Ingka’s mall in London, for example, nearly doubled last year from the year before. When the company bought the Hammersmith mall about a quarter of its units were vacant. Now it’s fully let after a makeover that revamped community spaces, added food options and opened the door to nonretail occupants that have regular visitors, including a gym. Source: Wall Street Journal
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Apartment Buildings Get Bigger
More new rental apartments are coming to the market than at any time since the 1980s. Really big buildings are a major reason why. Apartment developers are creating soaring properties with more units. They have seized on the willingness of some local officials to relax zoning and other laws and institutional investors to bet on smaller cities, enabling developers to go bigger than ever before.
While office towers have typically shaped the American city skyline, builders are now pushing apartments higher into the clouds. High-rises were just 2% of new apartment supply during the 1990s, but rose to 14% in 2022. Rising construction and other costs mean that developers often need to build more units to be profitable. For years, they have been designing smaller apartment units, allowing them to fit more into each building. The average square footage of a new apartment unit fell 6% from 2013 to 2022.
Most of the large apartment buildings going up now were planned at least a few years ago, when rents were rising fast. Rent growth has since slowed in most of the country, but steady tenant demand makes multifamily development still appealing. Record home prices, limited inventory of homes for sale and steep mortgage rates are keeping relatively-high earners in rentals for longer. Source: Wall Street Journal
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Commercial Real Estate Silver Linings
Federal Reserve Chair Jerome Powell said he still feels the challenges in commercial real estate are “manageable” during recent congressional hearings. That matches comments he made during an interview with 60 Minutes in early February, when he said he saw the challenges in that sector as sizable, but manageable. Powell stated, “What it really is—it’s a lot of downtown real estate where there’s too much office supply because of work from home. And also you know, the kind of downtown retail that is no longer as profitable and things like that are really at the heart of it.”
There are also silver linings in the market for commercial mortgage-backed securities, which are bonds backed by bundles of loans on commercial properties. The bonds have staged a strong rally on the heels of a Fed pause in rate hikes. “I take that as a signal of a potential turn in the CMBS market in terms of the market sentiment. I would say this probably is a forerunner to the CRE market recovery,” said Tracy Chen, a portfolio manager at Brandywine Global.
The property sector is healthier than people think, Chen added. “Commercial real estate isn’t all about office space, there’s a broad spectrum of property types, and some are doing really well. Suburban offices are doing well, so are Class A buildings, which are in short supply. And buildings built after 2010 have been in demand.” Source: Business Insider
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