Joseph Kuhl’s Post

Fascinating insights by Bob Knakal on the NYC real estate market. I agree with him that assets will be repriced and traded with increasing velocity. Some of this is due to increased financing costs as current mortgages come due. And office space (especially in Manhattan south of 96th Street) is incentivized by the new 467-m property tax exemption to consider a conversion to residential use. Under 467-m the best benefit goes to early adopters who pull DOB permits for a conversion by June 30, 2026. For more information about 467-m (conversion incentive), 485-x (new construction incentive replacement for 421-a) and other new housing incentive programs, please see Rosenberg & Estis, P.C. Materials located here: 1. 4/22/24 - R&E overview of six of the major new housing laws (tax incentives - 421-a, 485-x, 467-m; Good Cause Eviction; Individual Apartment Improvement rent increases; and Lifting NYC’s residential floor area ratio cap): https://lnkd.in/eXCKwh27 2. 467-m Fact Sheet: 467-m: https://lnkd.in/et4Vadzr https://lnkd.in/eXCKwh27 Let us know if we can assist with these or other real estate matters.

Recently, I was on CNBC's Last Call with my buddy Brian Sullivan, where I made a bold statement: New York is entering what will be the biggest sell-off in the city's history. At BKREA - BK Real Estate Advisors, we've studied the market extensively, and if you look at Manhattan south of 96th Street, there are 27,649 investment properties. Historically, the average turnover rate of these properties has been 2.6% for the last 40 years. Interestingly, this turnover rate remained consistent at the end of every decade. We've had below-average turnover, dipping to as low as 1.2% in 2009. The highest turnover rate we've seen was 4.3% in 2012. Now, I believe we're entering a period where turnover will exceed 5%, something unprecedented in the past 40 years. Why do I think this? We have different product sectors performing differently. The hotel market is on the upswing, retail is stabilizing, and the industrial market, although small, is strong. These sectors will see positive trading due to pent-up demand and rising values. However, the multifamily and B&C office sectors are facing significant challenges. Almost every multifamily refinance today requires significant cash in, and with the 2019 rent regulation changes, the pandemic, and rising interest rates, many owners don't have the fresh capital needed. They are selling buildings to raise capital, leading to significant trading in this space. The B&C office sector is also struggling. Buildings acquired for $700-$800 per square foot with $400 per square foot in debt are now competing with buildings selling for $200-$300 per square foot. Tenants are increasingly aware of the cost basis and debt levels of these buildings, creating a tough environment for owners with high debt levels. I believe that within the B&C office building sector, 50% or more of these buildings will be owned by someone else in the next three to four years. With about 100 million vacant square feet of office space in New York, policymakers are implementing programs to incentivize conversion to residential use, but many buildings will still face demolition or significant renovation. We're going to see an unprecedented turnover driven by rising values in certain sectors and forced sales in others. I believe turnover will exceed 5% by 2025 or 2026, marking an unbelievably historic time for property ownership transfer in New York City. We will see what happens in the next year, but I firmly believe we're on the cusp of an extraordinary period in New York City's real estate market. #mondaymarketupdate #nycrealestate #bkrea

A 50 bps rate cut was set to stir the market. And, although I maintain the position that we won’t see the full effect of lower interest rates (especially as more cuts are expected in the remainder of the year) until 2025, it’s definitely a good time to start looking at options. I’ve been reviewing different major metros, and so far, here’s my list of those worth considering: - Miami, FL: The retail sector here is seeing significant activity, largely driven by an influx of new residents, and experiencing a remarkable 209% year-over-year increase in sales, reflecting growing demand for commercial space. - Phoenix, AZ: Multifamily properties are particularly strong in this metro. Along with other Sunbelt markets, it continues to show resilience, attracting developers and investors with solid growth prospects. - West Palm Beach, FL: Both the retail and multifamily sectors are seeing sustained momentum here. The migration of businesses and individuals to Florida has strengthened demand, making West Palm Beach a noteworthy area for future growth. - Dallas/Fort Worth, TX: Despite everything, this metro remains a reliable market for industrial investors, with industrial space still in high demand and a growing volume of leasing activity. New projects in the pipeline, though, need to be watched. - New York metropolitan area: With NYC as a top city for job growth, there are a few interesting opportunities in this metro. For one, the multifamily market is rapidly expanding, with nearly 33,000 new units expected to be delivered this year. Also, industrial leasing activity is rising, particularly in the outer boroughs of Brooklyn and Queens. - Houston, TX: The shift towards suburban office properties outperforming in terms of rent growth and lower vacancy rates is worth looking at for investors and developers in the office sector. Other markets on the radar include Las Vegas, Hartford, and Colorado Springs for retail, each showing strong growth over the past year; Durham-Chapel Hill and Tampa-St. Petersburg for multifamily investments, standing out with solid returns and continued development; and Denver and Fort Lauderdale for industrial. Any thoughts? Which other metros have you been looking at?

Worth the read. This is spot on and highlights the challenges!

Following a challenging period marked by negative rent growth in some metro areas, the nation's Sun Belt market has delivered some encouraging metrics. Advertised rents increased in Austin, Dallas, Charlotte, Denver, Raleigh and Phoenix in July, according to the most recent Yardi Matrix national multifamily report. Each of these markets previously had recorded negative rent growth attributable to rapid supply and falling occupancy, giving renters plenty of choices. Overall, 24 of the Yardi Matrix top 30 metros posted rent gains in July. However, the firm said continued high levels of new deliveries over the next 15 to 18 months could present rent growth uncertainty. Several metros that had been performing well on a year-over-year basis saw rents decline in July and vice versa, said Yardi Matrix. Columbus, for example, had been a top-performing metro for several months – up 2.9% year over year – but saw advertised rents fall 0.4% month over month. Boston and Chicago followed a similar trend. Meanwhile, Austin posted a 0.6% month-over-month increase in July despite declines in rent for much of 2023 and 2024. Raleigh and Phoenix had similar trendlines. Rent growth has been highest in gateway metros in the East and secondary markets in the Midwest, according to the report. New York City led all markets with 5.2% year-over-year rent growth, followed by Washington, D.C., at 4%, Kansas City at 3.4%, and Columbus and New Jersey both at 2.9%. Metros that struggled with declining rents in July included Austin at -5.7%, Atlanta at -3.3% and Raleigh at -2.8%. Austin, which added 6% to its multifamily stock in the past year, was particularly impacted by high supply. Only two markets posted year-over-year occupancy increases in July, including Las Vegas, which was up 0.7% to 93.6% and Minneapolis/St. Paul at 95%, an uptick of 0.1%. Indianapolis, Houston, Dallas and Kansas City all had drops in occupancy rates of 0.8%. Single-family rental markets with high levels of new supply are beginning to feel pressure on rents, including in Orlando, where the average rent fell $19 month-over-month in July to $2,362 and advertised rents are down 1.1% year-over-year. In Savannah, Georgia, average rent fell $24 month-over-month to $2,283 and advertised rents were down 1.5% year over year. And in Huntsville, Alabama, the average rent fell $16 month-over-month to $1,602 and advertised rents were down 1.7% year-over-year.

A large amount of multifamily housing supply coming online is expected to suppress national average asking rent growth this year, according to a new special report from Yardi Matrix. The report also showed that Phoenix is among the cities that saw the largest rent decline in 2023.

This report (link below) is worth a read if you are in the multifamily sector in Philadelphia. The Greater Philadelphia multifamily landscape has become a tale of two divergent markets – the suburbs and the city. Property fundamentals in the suburbs remain healthy, with stable rent growth and high occupancy levels. Unlike the wave of new construction that hit King of Prussia, Bala Cynwyd and Exton a few years ago, there are no submarkets with multiple properties currently in lease-up simultaneously. Operating fundamentals in the City of Philadelphia, however, softened as approximately 14,000 units are under construction or in lease-up currently. Many neighborhoods are dealing with multiple assets in lease-up and an abundance of new construction set to be delivered in 2024. While winter is always the slowest leasing season, the new supply is adding to the challenge. To combat slow leasing and remain well-occupied, owners are employing concessions to attract new residents. In some cases, as much as two or three free months of rent are being offered to entice prospective residents to move. Institutional investor interest is focused primarily on the suburban submarkets, to avoid concerns of overbuilding and crime. While the long-term trend remains favorable for multifamily assets in Philadelphia, many investors believe that the next 18 to 24 months are likely to be challenging. https://lnkd.in/eVN8g_9f

The idea sounds great on paper - buy outdated office buildings on the cheap and convert them to apartments. But as Kenny Wolfe's saga shows, the financing can be the Achilles' heel. Wolfe paid as little as $40-$90 per square foot for office buildings like 211 North Ervay in Dallas. Seems like a steal, right? But the total capital stack, including $13M in debt, pushed the basis to $118 PSF. Then come the unpredictable construction costs. Wolfe defaulted before ever landing a construction loan, a crucial missing piece. As one lender said "You want to make sure you're lending to a group that has done this before." The bigger issue - Many syndicators relied on floating-rate loans that became anchor weights as rates spiked. Wolfe himself was late on a $20M Atlanta loan. The lessons? Conversions require hefty equity cushions for surprises. Fixed, non-recourse debt is key given the risks. And don't be the guinea pig - leaving conversions to proven firms. The potential can be huge for those who get it right. But as we've seen, overly rosy projections and overleveraged capital stacks have led many down a painful path. The bigger picture: Are conversions just trying to fit a square peg into a round hole by shoehorning multi-family into office buildings? Or is the U.S. facing such an extreme housing crunch that this gambit makes sense? What's your take? https://lnkd.in/gyKbyzG3 #OfficeToApartment #RealEstateConversion #KennyWolfeSaga #DallasRealEstate #ConstructionCosts #RealEstateFinance #SyndicationRisks #InterestRateSpike #EquityCushion #NonRecourseDebt #RealEstateInvesting #AdaptiveReuseChallenges #HousingCrunch #UrbanDevelopment #RealEstateTrends #InvestmentStrategies #PropertyDevelopment #SquarePegRoundHole #HousingSolutionDebate

It Doesn’t Get Any Better Than This - For Multifamily Aside from office spaces, commercial real estate (CRE) is stabilizing. While some markets still face challenges, the overall CRE situation is gradually improving and could continue to do so over the next year or two. Patience is essential. 🕰️ 💼 Office Market Outlook Office spaces will remain troubled for years. For other property types, if you can negotiate with lenders and survive until 2025, you should be in a strong position. Don’t count on a significant drop in the ten-year index rate to 3.0%—that’s wishful thinking, not reality. 📈 Rate Assumptions & Strategy With the amount of debt the Treasury needs to finance, expect the ten-year rate to stay around 4.0% or higher. Planning with this assumption is crucial; anything lower likely signals a recession, which brings other challenges like declining values and rents. Historically, the ten-year average is 4.5%. Lending will be slow to rebound significantly, but there’s a silver lining—minimal new construction in the next year or two will eventually drive demand and increase values. 🏢 Multifamily Market Insights Cushman & Wakefield's latest report aligns with what I’ve been saying: multifamily is bouncing back strong. Deals are happening, financing is becoming more accessible, and there’s a noticeable uptick in Broker Opinion of Value (BOV) requests. The turnaround is beginning, and as financing becomes more available, values will rise. 📊 🌆 Regional Overbuilding Concerns Cities like Phoenix, Denver, and some areas in North Carolina and Atlanta have seen overbuilding, but occupancy is starting to catch up, and concessions are declining nationally. By 2025, multifamily properties will be solid investments again, with almost no new supply expected in the next two years. 📉 No Multifamily Banking Crisis! The so-called multifamily banking crisis was blown out of proportion. Despite the chatter, only one bank has failed in recent months, and it was swiftly resolved. If you’re an investor in multifamily, now is the time to act. The best deals won’t be available for long. 🚀   Please note we do not invest in the multifamily sub-asset class. This is just my view for all of those who have asked. #CRE #CommercialRealEstate #RealEstateInvesting #Multifamily #RealEstateMarket #RealEstateTrends #PropertyInvestment #RealEstateInvestors #RealEstateFinance #CREInvesting

Breneman Capital has averaged a 23% IRR, a 2.2x equity multiple, and a 5.5-year hold period on our 10+ realized investments. We specialize in multifamily properties. Why multifamily? 𝟭) 𝗛𝗶𝗴𝗵𝗲𝘀𝘁 𝗿𝗲𝘁𝘂𝗿𝗻𝘀 & 𝗹𝗼𝘄𝗲𝘀𝘁 𝘃𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆 Using 1990-2020 NCREIF data, we measured all possible return scenarios for 3-, 5-, 7-, and 10-year holding periods. Multifamily had: - The highest returns for every scenario AND - The lowest-return standard deviation for every scenario except one. 𝟮) 𝗥𝗲𝘀𝗶𝗹𝗶𝗲𝗻𝘁 & 𝗱𝗶𝘃𝗲𝗿𝘀𝗶𝗳𝗶𝗲𝗱 𝗶𝗻𝗰𝗼𝗺𝗲 𝘀𝘁𝗿𝗲𝗮𝗺 - Numerous tenants. - Different employers/income sources. (For instance: We collected 99% of our apartment rents during 2020's volatility.) 𝟯) 𝗣𝗼𝗽𝘂𝗹𝗮𝘁𝗶𝗼𝗻 & 𝗰𝗼𝗻𝘀𝘂𝗺𝗲𝗿-𝘁𝗿𝗲𝗻𝗱 𝘁𝗮𝗶𝗹𝘄𝗶𝗻𝗱𝘀 - Current renters are renting longer as home ownership unfortunately gets out of reach for many. - Gen Z makes up ~25% of the U.S. population and is just getting into the rental market. 𝟰) 𝗙𝘂𝗻𝗰𝘁𝗶𝗼𝗻𝗮𝗹 𝗿𝗲𝗹𝗲𝘃𝗮𝗻𝗰𝗲 𝗼𝘃𝗲𝗿 𝘁𝗶𝗺𝗲. - Smallest vacancy-rate difference of any product type among properties when comparing older vs newer properties. Older = built before 1991. Newer = built after 1991. - Older apartment buildings tend to have better long-term relevance than old office buildings or shopping centers. 𝟱) 𝟭-𝘆𝗲𝗮𝗿 𝗹𝗲𝗮𝘀𝗲 𝘁𝗲𝗿𝗺𝘀 - This is the perfect amount of time. - We can reset to higher rents quickly in times of appreciation. We do not need to deal with month-to-month leases (self-storage), renting our property out every day to a new tenant (hotels), or predetermined rent increase schedules (commercial). 𝟲) 𝗕𝗲𝘀𝘁 & 𝗺𝗼𝘀𝘁 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗶𝘃𝗲 𝗱𝗲𝗯𝘁 𝗮𝘃𝗮𝗶𝗹𝗮𝗯𝗶𝗹𝗶𝘁𝘆 - Lenders lend aggressively on multifamily because of the perceived safety. The opposite is true for retail and office. - Fannie Mae, Freddie Mac, and HUD provide a lending backstop that other product types don't have. They only lend on multifamily. 𝟳) 𝗜𝗻𝗲𝘅𝗽𝗲𝗻𝘀𝗶𝘃𝗲 𝘁𝘂𝗿𝗻𝗼𝘃𝗲𝗿 𝗰𝗼𝘀𝘁𝘀 - Turnover costs in multifamily are minimal compared to most other product types. - Turnover costs are also included as an above the line cost in your NOI calculation whereas in industrial, office, retail, etc they are not. In the weeds, but it's important. Disclaimer: This is not an offer to sell or a solicitation to buy securities. Past performance is no guarantee of future results, and investors may experience different results than those shown, including the loss of principal. You should not rely upon forward-looking statements as predictions of future events. -- P.S. If you're interested in passively investing in our next multifamily opportunity, send me a message to schedule a call.