Central TX Roundup | JLL Multifamily | 3/4/24

Summary

• The FOMC emphasizes its commitment to achieving 2% inflation in its latest monetary policy report.
• JLL, along with other brokerage firms, predicts a recovery later in 2024.
• Distress levels in multifamily property-backed loans increase, reaching $1.4 billion.
• The decline in multifamily permitting exacerbates concerns about future supply shortages.
• Austin developers welcome the revival of the density bonus program, which replaces VMU2 zoning.
• Karlin's Highpoint 2222, a new life sciences hub, is being constructed on the former 3M campus in Northwest Austin.
• The rapid growth of Round Rock prompts a mixed-use developer to increase their project investment by 150% to $500M.
• A futuristic office tower worth $300M at Port San Antonio is expected to raise the rental market standard in the metro area.
• The construction of new apartments near the burgeoning New Braunfels airport could incite significant opposition.
• UTSA achieves a record enrollment of 32,405 students.

National and State News

JLL Posts Higher Revenue as Brokerage Spots ‘Encouraging’ Signs of Market Pickup (CoStar )

• Why it matters:?Along with other brokerages, JLL is forecasting a recovery later in 2024.
• Fourth-quarter revenue for the Chicago-based firm increased by 4% to $5.88 billion, surpassing Wall Street's projected amount of $5.79 billion. However, profit declined by about 1% to $172.4 million.
• Despite a 5% decrease in leasing fee revenue during the fourth quarter, JLL noted indications of demand stabilization. JLL CEO Christian Ulbrich stated that since late 2023, there has been an increasing number of bidders entering the market. Although large office lease transactions are starting to resurface, they have not yet made a significant comeback.
• JLL, along with CBRE, Colliers, Cushman, Marcus & Millichap, and Newmark, anticipates a recovery in the commercial real estate market later in 2024. Ulbrich described this year as a transitional period for the industry.
• JLL executives believe that interest rates have peaked and anticipate an improvement in commercial real estate deal activity as credit conditions get better. However, Ulbrich emphasized that it will take time and sustained stability for pricing to fully adjust.

Distress Levels in Property-Backed Loans Rise, Reaching $1.4 Billion for Multifamily (CoStar )

• Why it matters:?Fitch forecasts that apartment delinquencies will continue to increase through 2025.
• CoStar News analysis reveals that while office properties have the highest proportion of distressed loans, multifamily real estate experiences the greatest distress in terms of dollar amount, with approximately $1.4 billion in distressed funds. This represents nearly half of all delinquent loans and a balance more than 6.5 times larger than that of office properties.
• According to a CoStar News analysis of Morningstar data, approximately 6.2% ($3.33 billion) of CRE CLO loans are either delinquent or have matured without being paid off. Delinquency rates have nearly doubled over the course of 2023, increasing by over 280 basis points. Distressed rates for CRE CLO loans issued in 2019, prior to the pandemic, stand at 19.5%, amounting to $471 million. Similarly, 11.7% of 2020 deals valued at $264 million are distressed. However, newer loans fare better, with 5.7% of 2021 loans and 5.5% of 2022 loans facing distress.
• Out of the total $52 billion in outstanding CRE CLO loans analyzed by CoStar News, 78% are backed by multifamily properties. Multifamily properties also account for nearly half of all distressed loans, with $1.39 billion out of the total $2.75 billion in delinquent loans, aligning with findings from other analysts' reports.
• Fitch, a bond-rating firm, anticipates that delinquencies in the apartment sector will increase to 1.3% by November 2024, up from 0.62% in November 2023, and may reach 1.5% in November 2025. Freddie Mac's January 2024 volume summary also reports an increase in delinquencies, with total multifamily delinquencies rising to 0.44% from 0.28% in December 2023 and 0.12% in January 2023.

Multifamily Permitting Falls 9% in January (Real Page )

• Why it matters:?Multifamily permitting continues to decline, increasing the severity of the future supply cliff.
• According to data from the U.S. Census Bureau, the seasonally adjusted annual rate (SAAR) for multifamily permitting dropped by 9% compared to December's rate and decreased by nearly 27% compared to the previous year, resulting in 405,000 units. Multifamily starts experienced a decline of 35.8% from the previous month and fell by 37.9% compared to January of the previous year, reaching 314,000 units.
• The completion of multifamily units saw a 6.3% increase from December, totaling 538,000 units, and a significant growth of 53.7% compared to January of the previous year. The number of multifamily units under construction experienced a slight decrease of 0.9% from December, reaching 979,000 units, but recorded a 5% increase compared to the previous year.
• In terms of annual multifamily permitting rates, two out of the four Census regions displayed decreases compared to one year ago. The South region experienced the largest decline, down 39.5% to 183,000 units, followed by the West region with a decrease of 25.7% to 99,000 units.
• Other significant decreases in permitting were observed in major non-top 10 markets such as San Antonio (-6,230 units), Tampa (-4,528 units), Denver (-3,131 units), and Fort Worth (-3,119 units).

Federal Reserve Monetary Policy Report March 1, 2024 (Federal Reserve Publications )

• Why it matters:?FOMC is strongly committed to returning inflation to 2 percent and does not expect it will reduce the target rate until more progress is made.
• Inflation: While inflation remains above the Federal Open Market Committee's (FOMC) target rate of 2 percent, it has moderated over the past year. The price index for personal consumption expenditures (PCE) increased by 2.4 percent in the 12 months ending in January, down from its peak of 7.1 percent in 2022. The core PCE price index, which excludes volatile food and energy prices, rose by 2.8 percent during the same period. Measures of longer-term inflation expectations align with pre-pandemic levels and the FOMC's 2 percent objective.
• Labor market: The labor market remains tight, with low unemployment rates and elevated job vacancies. Job gains have averaged 239,000 per month since June. Labor supply has increased due to immigration and higher participation from prime-age workers. Nominal wage gains have slowed but still exceed the pace consistent with 2 percent long-term inflation.
• Economic activity: Real GDP expanded by 3.1 percent last year, surpassing the growth rate in 2022. Consumer spending has shown steady growth, and the housing market began recovering in the second half of the year. However, real business fixed investment growth has decelerated due to tighter financial conditions and negative business sentiment. Manufacturing output remained relatively stable in 2023 compared to previous years.
• Balance sheet policy: The Federal Reserve has significantly reduced its holdings of Treasury and agency securities, leading to tighter financial conditions. Since mid-June 2023, the reduction amounted to approximately $640 billion, bringing the total reduction since the balance sheet runoff began to around $1.4 trillion. The FOMC aims to maintain securities holdings that support the effective implementation of monetary policy within its ample-reserves regime. The Committee plans to gradually slow and eventually halt the reductions.
• Housing policy: The increase in mortgage rates has dampened housing demand, resulting in a decline in housing activity and slower price growth in 2022. However, factors such as a strong job market and increased remote work have mitigated significant price declines. High mortgage rates have also discouraged some sellers from moving, leading to a shortage of existing homes. This has prompted homebuyers to turn to new homes, supporting a modest rebound in single-family home construction in 2023.
• Interest rate policy: The FOMC has maintained the target range for the federal funds rate at 5? to 5? percent since its meeting in July 2023. The Committee believes that the policy rate has likely reached its peak for the current tightening cycle, which began in early 2022. However, the Committee remains vigilant about inflation risks and will not consider reducing the target range until it is confident that inflation is sustainably moving toward 2 percent. Adjustments to the target range for the federal funds rate will be carefully assessed based on incoming data, the evolving outlook, and risk factors.

Austin News

Density bonus program revived for Austin developers (ABJ )

• Why it matters: When looking at high demand, infill sites, density bonuses can help make new projects more feasible for developers.
• DB90 is a new policy that permits developers to construct buildings up to a height of 90 feet on commercially zoned properties in specific areas of the city. This policy replaces the previous VMU2 zoning. However, to take advantage of this increased height allowance, developers must include on-site affordable housing as part of their projects.
• Under DB90, any project seeking to utilize this policy will undergo a thorough review process by the city's rezoning procedure. This entails obtaining approval from the planning commission and council, ensuring that neighboring residents are informed about the proposed changes.
• In rental projects participating in the program, there are specific requirements for affordable housing. Developers must either dedicate 10% of the project's units as affordable housing for families earning 50% of the median family income (MFI), or allocate 12% of units for households earning 60% MFI.

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Karlin's Highpoint 2222, a planned life sciences mecca, rises from former 3M campus (ABJ )

• Why it matters: Far Northwest Austin isn’t particularly known as an office hub, however a campus of this scale could change the narrative.
• The 156-acre Northwest Austin campus, previously owned by 3M and acquired by Karlin Real Estate in 2021, has undergone a significant transformation. The Los Angeles-based company aims to complete construction and welcome tenants by late summer.
• The renovation aligns with the growing life sciences sector in the metro area. According to data from the Austin Chamber of Commerce, there are already nearly 300 companies employing over 21,000 individuals in the region's life sciences sector. The Opportunity Austin regional economic development group also aims to further develop this industry as part of its upcoming five-year strategic plan.
• Plans for the campus include converting a former 3M "innovation center" into a 58,000-square-foot amenity hub that will offer health and wellness facilities, as well as food and beverage options. Additionally, a 75,000-square-foot atrium is being designed with outdoor pavilions, courtyards, and games.

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The District mixed-use project moving forward even bigger than originally planned (ABJ )

• Why it matters: Round Rock is growing so fast that Mark IV Capital is increasing their project investment by 150%.
• The District is a planned $500 million investment that aims to develop 3 million square feet and create a minimum of 5,000 jobs by 2039. Initially, the project had planned for 1 million square feet and a $200 million investment by the same timeframe.
• Developers achieved a significant milestone on February 23 when they received approval from the Round Rock City Council for a modified development agreement. If everything goes according to plan, construction will commence by the beginning of 2025.
• The current plan for vertical development involves starting with a 320-unit, 270,000-square-foot multifamily building that includes 15,000 square feet of high-end retail space. This will follow the infrastructure work, with $25 million being reimbursed by the city's Type B economic development corporation.
• The project now incorporates an urban village concept in the heart of the property, focusing on amenities such as retail stores and a hotel. There is also the potential to block vehicular traffic with bollards to enhance pedestrian accessibility. The goal is to begin infrastructure and vertical construction in January and complete the project by the middle of 2026, with full stability by 2028.

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San Antonio News

Port San Antonio unveils new details about $300 million futuristic office tower (SA Express News )

• Why it matters:?Port San Antonio office tower expected to set a new ceiling for rents in the metro. ??
• A striking wing-shaped building at Port San Antonio is set to become one of the city's most expensive office spaces, with an estimated cost of around $300 million and rents of $50 per square foot or more. These rental rates surpass those of upscale office buildings downtown, such as the Frost Tower, the 1900 Broadway building, and The Soto, making it a high-end option in the city.
• Despite the rising office vacancies in San Antonio, Port CEO Jim Perschbach believes that filling the space will not be a problem. He sees the futuristic tower as a representation of the port's work in cybersecurity, aerospace, defense, and advanced manufacturing, and a means to elevate the city's reputation. Similar buildings exist in cities like Chicago, Austin, and Dallas, housing companies that offer high-paying jobs, much like those already at the port.
• The data supports Perschbach's optimism. While the city's overall office vacancy rate is nearly 20%, the port's vacancy rate is just 4% for its 8.2 million square feet of space. The 1,900-acre campus is home to over 80 tenants with a combined workforce of 18,000 employees, a number expected to double within the next seven to 10 years, driving the demand for office space.
• The proposed building, designed by Pelli Clarke and Partners, aims to solidify the port's position as the largest technology center in the region. It features floor-to-ceiling windows, terraces on each floor, and high-quality amenities such as "spa-quality" locker rooms with saunas. Approximately 27,000 square feet will be dedicated to health and wellness facilities, a fitness classroom, and a dining terrace.
• The construction is anticipated to begin in early 2025, with a goal of completing the project within four years.

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New apartments could trigger significant backlash for burgeoning NB airport (SABJ )

• Why it matters:?Growth at Creekside in New Braunfels is beginning to encroach upon the airport.
• New Braunfels City Council is scheduled to review a proposal for mixed-density apartments on land adjacent to New Braunfels National Airport during their meeting on Monday. The property, spanning 86 acres at the intersection of Saur Lane and Saengerhalle Road, was acquired in February 2023 by Rockspring, a Houston-based real estate development and investment firm.
• If approved, the construction of apartments near the airport could have a significant impact on its growth as a corporate operations hub. The airport is actively working on a military contract with Randolph Air Force Base, which would entail it being utilized as a stop for cross-country training flights. Airport Manager Lee expressed that securing the contract could result in a doubling of operations overnight. Currently, the airport handles around 71,000 yearly operations and has plans for infrastructure expansion, including the construction of a new terminal and the expansion of its ramp size.

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UTSA hits record enrollment, research expenditures (SA Report )

• Why it matters:?UTSA continues to grow rapidly along with the city. ?
• According to the University of Texas at San Antonio (UTSA), their enrollment has reached a record-breaking number of 32,405 students, as shared by the university on Tuesday. This marks a 2.1% increase from spring 2023. UTSA has set a goal to further increase enrollment to 41,000 by 2028.
• The university reports growth across various levels within the institution. Undergraduate enrollment has grown by 2.7%, while doctoral enrollment has seen a 1.7% increase. The fully online programs have experienced substantial growth of 20.6%, with the number of students rising from 845 in spring 2023 to 1,019 in the current year.
• On the same day, UTSA announced that it has allocated more funds to research in the last fiscal year compared to any previous year. The university spent $152.3 million on research, which reflects a 7.5% increase from the $141.7 million spent in fiscal year 2022.

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