RealEstateNews 7.29.24
Weekly News Roundup
- The Shrinking Apartments Trend
- Washington DC’s Empty Offices
- Commercial Real Estate Rebound
Shrinking Apartments
Developers are thinking small when it comes to studio apartments. The average size of studio units has shrunk by 54 square feet to 445 square feet since 2014, making them 10% smaller today than they were a decade ago, according to a new report from RentCafe. Smaller studios, which are self-contained apartments without walls between the living space and kitchen, appeal to renters and landlords. Tenants in these apartments tend to care more about saving on cost than about absolute size, so most are willing to sacrifice a little space if it keeps the monthly charge down. Developers, meanwhile, can rent more units per building if they are smaller, which also helps cover growing construction costs.
Retailers are taking note. In January, furniture company IKEA launched a space-conscious collection of exercise products for use in small homes, including a soft-topped bench with drawers. It serves as an exercise bench, coffee table and storage space in one. The shrink in studio apartments far outpaces the more modest contraction of 12 square feet among all apartments over the past decade. In that time, pricier two- and three-bed apartments have grown by 7 square feet and 19 square feet respectively, according to RentCafe.
With smaller kitchens and living areas, many developers are counting on tenants spending more time at ground-floor businesses to eat and hang out. Instead of hosting gatherings in their apartments, young people are increasingly entertaining guests at bars and restaurants, said Stenn Parton, founder of Prism Places, which operates mixed-use residential developments. Plus, more people are working out at community gyms, eating out at restaurants and working at coffee shops. Developers Alex Lowe and Jon Hetzel’s upcoming Dallas development Bloc House features studios of roughly 350 square feet. They are supplementing traditional amenities such as fitness centers with co-working spaces and large tables for group dinners in the hope of helping tenants meet each other. Source: Wall Street Journal
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Washington DC’s Empty Offices
The Washington, D.C., office market is struggling with rising foreclosures, plunging values and its highest vacancy rate ever. While some pockets, such as New York City, have shown recent signs of bouncing off a bottom, the slow return of federal workers to the office continues to sour the mood of the district’s office owners. The outlook looks grim whether Donald Trump or President Biden’s Democratic Party successor is in the White House next year.
The district’s office market is poised to get worse regardless of the outcome of the election. The Biden administration has struggled to get more of the tens of thousands of members of the federal workforce in the District of Columbia back to the office on a more regular basis. If Trump is elected, he is widely expected to try to force workers back at a higher rate. But he also would likely resume efforts to eliminate the Education Department and move agencies out of the city, which could more than offset any positive impact from bringing more workers back to the workplace.
The federal government is likely to shed more space in the years to come partly because of the growing number of employees working remotely. Six agencies, including the Justice and Treasury departments, have lease expirations between 2024 and 2027 in which they are expected to give up close to 600,000 square feet, according to Cushman & Wakefield. A Government Accountability Office review of 24 federal agencies last year estimated that 17 of them used on average one-quarter or less of the capacity of their headquarters buildings during a three-week sample period. The district’s office vacancy rate rose to a new high of 22.4% in the second quarter from less than 14% in the fourth quarter of 2019, according to CBRE Group. Source: Wall Street Journal
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Commercial Real Estate Rebound
Suppose you bought a broad index of US real estate investment trusts on the eve of the pandemic in February of 2020 and held them until now. What would your total return be today? As it turns out, you would be up 16 per cent, if dividends are included. This is not great: about 3 per cent a year, hardly enough to keep up with inflation. But Reits might be the most rate- and inflation- sensitive sector of the market. Many investors treat them as bond substitutes, and the underlying properties are generally leveraged. So to find that returns are flattish since everything went sideways is surprising, at least to me. Even in pure price terms, the broad MSCI US Reit index is almost flat, after the sector leapt in recent weeks on lower inflation and rate expectations.
The most unloved of Reits have risen. Office and retail, besieged by work from home policies and online shopping, have gained 9 per cent in two weeks. Are Reits — and commercial real estate more generally — over the hump? Let’s assume, as the market is doing, that rates are now on a glide path downward. Surely indebted asset owners can play for a little more time with their lenders and refinance when lower rates have restored the value of their buildings and the financial logic of their capital structures?
The problem is that even assuming rates are falling, the speed at which they fall matters if you are a building owner with a loan coming due, especially if you have already extended and renegotiated about as much as you can. In many ways, the broad data on real estate debt looks pretty benign. Imogen Pattison of Capital Economics estimates there are $1.2tn in CRE loans coming due this year and next. Those borrowers may not have time to wait for the return of low rates. Reits have recovered remarkably well. But CRE may provide a few more surprises before the rate cycle bottoms. Source: Financial Times
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