The Commercial Real Estate Story You Didn't Read This Week (but should have)
Plus my take, plus ChatGPT's
Every week I scrounge the commercial real estate (“CRE”) rags and the occasional mainstream source for the most important, or perhaps soon-to-be-important, stories that may have slipped through the cracks. I summarize the piece, explain the broader implication and then give our friends at OpenAI a shot by asking ChatGPT a question about the story.
Taking it easy for the holidays this week, keeping this post to one story rather than three.
Lennar Puts 11,000-Unit Multifamily Portfolio Up For Sale - Source: Bisnow.com
MY TAKE
Last week CRE rags were abuzz with the news, first broken by Bloomberg Law, that U.S. homebuilding giant Lennar (NYSE: LEN) was putting a huge block of apartment communities up for sale, with a reported value of around $4.5 billion.
The first question most people probably asked was, “Wait, Lennar owns apartments? Indeed it does.
According to Costar, Lennar’s multifamily division, Quarterra, owns 60 properties and over 41,000 units, which means that the group owns big (~700 units per community) buildings around the country. CoStar also reports that Lennar was considering spinning Quarterra off into a separate entity last year, but scuttled the plans when the multifamily market hit the skids.
This monster deal raises a handful of questions, but I will address the most obvious one for multifamily market participants: What does Lennar know that we don’t?
Answering that question requires a short history lesson. Post-GFC, multifamily properties enjoyed a nearly 10-year bull market, as low interest rates, broad rent growth and migration patterns drove massive investment into the space.
Sale prices almost tripled from 2009 - 2022, as billions of dollars poured in from domestic and international investors chasing yield in a ZIRP-world.
The pandemic sparked rapid rent growth in most U.S. markets through 2021 and into 2022, as multifamily investment spiked off already high levels, driving cap rates down well below long-term averages.
It was during these frothy conditions that Lennar planned to cash in on its multifamily bets through the Quarterra spin-off.
But when the Federal Reserve began to raise interest rates in mid-2022, Lennar changed course.
Higher borrowing costs squeezed investors while rent growth ran out of steam. Now, as we turn the page on 2024, delinquency rates across sectors are rising and multifamily has not been immune: According to Trepp, a CRE data provider, multifamily distress rose steadily through 2023.
Given this background, it’s no surprise that Lennar took stock of a weak capital market environment and shelved its plans to monetize Quarterra. And given the company’s stock price has been on a tear lately, Lennar may be better positioned to weather any upcoming trouble in its multifamily portfolio.
Which brings us back to the original question of why, at a generally accepted terrible time to sell and with its stock at an all-time high, Lennar would seek to unload more than $4 billion of property?
Public markets tend to move more quickly than private markets, so it’s often helpful to look at publicly traded sector-specific REITs as a guide for future price trends in the less liquid private market.
According to the Avison Young data above, multifamily prices are down around 15% since their peak in 2022. Meanwhile, large multifamily REITs Equity Residential (NYSE: EQR) and AvalonBay (NYSE: AVB) are down around 30% during the same time period.
So equity markets are suggesting that multifamily values could be about halfway through their decline with another 15% to go.
Which still doesn’t quite explain why Lennar, with a nearly $50 billion market cap, would choose this moment to unload such a large portfolio. There could of course be internal motivations we don’t know about, but it does make you think that a year from now we make look back on this sale as a pivotal moment in this market - in one direction or another.
In moments like this I think about the Wall Street axiom, “raise money when you can, not when you have to.”
CHAT GPT TAKE
I asked ChatGPTto consider this historic context and speculate what Lennar’s big sale says about the future for multifamily property values.
Lennar's recent announcement to sell 11,000 multifamily units can be interpreted as a strategic response to the current multifamily market trends and future expectations. Given the backdrop:
Responding to Market Conditions: The slowdown in rent growth, increased construction costs, and higher interest rates may have influenced Lennar's decision. Selling now could be a move to capitalize on the current value before potential further market softening.
Future Price Movements Speculation: The sale could indicate a belief that multifamily property values may not appreciate significantly in the near term. It suggests caution about the market's ability to sustain high growth rates seen in previous years, especially with increasing supply, cooling rent growth, and economic uncertainties.
Portfolio Realignment: Lennar might be realigning its portfolio to focus on more profitable or less risky segments, or to free up capital for other investments.
Overall, while this move doesn't necessarily predict a drastic decline in multifamily property values, it does signal a more conservative approach in anticipation of a potentially less favorable market in the short to medium term. However, the long-term outlook for multifamily properties remains positive, driven by strong fundamentals like housing demand and demographic trends.