THE BIG SPLASH

Rental Market Cools Down

Apartment rents in the United States are experiencing a significant cooling-off period, and they appear poised to decline compared to the previous year.

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• In August, rents were just 0.28% higher than they were in August 2022, marking a stark contrast to the 11% annual growth seen a year ago.

• Notably, rents haven't shown negative annual growth for over a decade, except for a brief period during the COVID-19 lockdowns, and that was attributed to recession-induced reduced demand.

• However, the current situation differs as apartment occupancies across the nation remain relatively healthy at 94%, aligning with historical norms. The primary challenge driving this rent trend is the substantial increase in apartment supply.

• The construction of new units is currently at a 50-year high, with over 460,000 units completed in the current year alone. Over the past three years, more than a million new units have been built, a record-breaking figure.

• Much of this new supply caters to the higher-end market, providing renters with a broader range of choices and diminishing landlords' pricing power as tenant turnover increases.

• While rents have not yet turned negative on a national level, they have done so in several local markets. Cities like Austin, Phoenix, Las Vegas, Atlanta, and Jacksonville have experienced the most substantial drops in rent.

• Looking ahead, the abundance of supply is expected to persist into the next year, potentially pushing rents lower through 2025. However, new construction activity has seen a sharp decline this year due to various challenges, including financing issues. As a result, there may be less supply entering the market by 2026, which could allow rents to recover somewhat.

A SCOOP OF CREATIVITY

Developers and architects in New York City are creatively converting empty office buildings into apartments to address the city's dual real estate crises: a surplus of vacant office space and a shortage of new housing construction.

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• This transformation has gained momentum since the pandemic accelerated remote work trends, leading to office vacancies.

• The Vanbarton Group and architecture firm Gensler are notable participants in this trend, with their project at 160 Water Street being a prime example.

• They've reimagined a 1970s office tower as 586 apartments by cutting holes in the building's center, adding new floors, and replacing windows.

• Politicians, including Mayor Eric Adams, are supporting such conversions to address the city's housing needs. While most of New York's 96 million square feet of vacant office space isn't suitable for residential conversion, some properties present opportunities.

• However, these projects come with challenges such as limited natural light and air in the building's center.

• To combat this, architects are employing innovative designs, including courtyard creations, additional floors, and penthouses with terraces.

• The renovations also involve upgrades to meet modern energy-efficiency standards, making the buildings more environmentally friendly.

• While these transformations come at a cost, they are contributing to the revitalization of business districts in New York City, boosting neighborhoods, street activity, and the housing market.

A SCOOP OF MORTGAGE RATES

Mortgage rates dropped for the second consecutive week, reaching 7.12% for a 30-year fixed-rate mortgage, as reported by Freddie Mac.

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• Despite the slight decline, these rates are still considerably higher than two years ago when they were below 3%.

• This surge in rates has significantly impacted the housing market, causing it to slow down for over a year.

• As the fall homebuying season approaches, industry experts are closely watching the Federal Reserve's upcoming meeting in mid-September, where discussions about raising benchmark interest rates will take place.

• The decision will be influenced by indicators like job market strength and inflation. Given the cooling job market and reduced inflation, experts anticipate that the Fed is unlikely to raise rates in September or even by the end of the year.

• However, until mortgage rates stabilize or decrease, the housing market is expected to face challenges, including limited inventory, rising home prices, and heightened competition among buyers.

• High mortgage rates have led to fewer sellers listing their homes, and overall inventory has fallen compared to last year.

• New construction remains an alternative for buyers, and new home sales are increasing from their year-ago lows. While home prices have risen, a significant price drop is not anticipated in the near future.

A SCOOP OF CELEBRITIES

Los Angeles is witnessing a trend where wealthy offspring, often from Hollywood families, are purchasing multi-million dollar "starter homes."

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• These "starter homes" can cost between $3 million and $4 million, signaling the unique nature of the Los Angeles real estate market.

• Celebrities like Don Henley, Cindy Crawford's son Presley Gerber, and Dr. Phil's son Jordan McGraw have made substantial purchases with family support.

• The trend reflects an emphasis on real estate ownership as an investment and a secure way to preserve wealth. Real estate agents note that scions tend to buy homes similar in style to their parents' properties, often with a focus on architectural continuity. In some cases, these homes become part of a wealth-amassing portfolio and are used by the entire family.

• Parents often use these property purchases as opportunities to teach their children about smart real estate investing and wealth management. It's seen as a way to impart financial acumen and provide firsthand experience in managing real estate assets.

• As the concept of transferring wealth between generations reaches epic heights, young buyers in Los Angeles are participating in this trend, focusing on property investments that will likely appreciate over time.

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