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A Storm is Brewing for Rent Stabilized Owners

Once upon a time, in a land far, far away, there was this urban oasis perceived by the world as the epicenter of capitalism where people flocked from all over to realize their professional and personal dreams. Capitalism was embraced and upward mobility was not a slogan but a truism of what was possible for anyone willing to work hard for it. That place was called New York City and the year was 2018.

The Rules Governing Rent Regulation in NYC Turned Upside Down

In 2019, the legislative Armageddon commenced from headquarters in Albany. New York State passed the Housing Stability and Tenant Protection Act (HSTPA) and, overnight, the economic incentive to maintain or improve rent stabilized properties evaporated. It even stopped making sense, in many cases, to rent out recently vacated units. Best to leave the units vacant and hope for the laws to change than receive a nominal rent and an endless parade of 311 complaints. The consequences were foreseeable to all except those in government so it seemed. Your humble author wrote this piece the day the law came into effect in June 2019 (link here) and I’m no genius just an astute observer.

Rent Stabilized Properties are Distressed and it’s just the Beginning

Now some four years later with elevated interest rates, the entire asset class is at risk. Expect a tsunami of defaults in the coming months, especially from those owners who purchased properties just before the HSTPA came into effect and capitalization rates were below 4%. Sugar Hill Capital Partners was the first notable group to fall, defaulting on most of their assets in 2022. Many are now concerned that the Sugar Hill “foreclosure cases may be the proverbial tip of the iceberg.” So far, politicians remain on the sidelines unwilling to modify HSTPA and may even be gleeful by what they are witnessing if, as they must believe, it assures their re-election.

Distressed sales of rent stabilized buildings are ramping up. Two institutional players, Taconic Partners, and Clarion Partners, sold a 14-building Bronx portfolio in April 2023 at a 40% discount to what they paid in 2018. The 550-unit Dunbar Apartments in Upper Manhattan sold for a bit over $86 million, or just enough to cover the adjustable rate loan. One broker active in this space lamented that despite pricing these assets so low, he “still isn’t getting any bids.” According to The Real Deal, there are $161 million in foreclosures on rent stabilized buildings in NYC and many more in default. City Skyline Realty has at least $76 million in delinquent debt and $10 million in foreclosure in connection with one of their Bronx buildings.

Owning Rent-Stabilized Buildings: Reckless Decision Making or Unfortunate Circumstances?

Were all these groups—many institutional owners—reckless or just unfortunate? Hard to say and perhaps it’s a bit of both. One could argue that it’s a risky game to own a highly concentrated portfolio of rent stabilized properties in a few select neighborhoods. That said, Vornado Realty Trust and SL Green Realty—both led by well-regarded industry legends—suffer from a similar fact pattern the only difference being they operate in the office market. In fact, it is quite common for owners to stick to an asset class they know well and in markets they specialize in.

Albany didn’t tweak the rent laws with the HSTPA, they changed the game entirely throwing owners overboard into shark-infested waters with little warning and the most meager of provisions. Perhaps they didn’t understand the full impact of the law on owners at the time but they certainly do now. Without the ability to renovate apartments and increase rent rolls, these buildings and their owners were doomed the day the law passed. Inflation isn’t helping either. According to real estate attorney, Sherwin Belkin, “if the costs are going up and the income stream is substantially reduced, that’s going to put a lot of folks underwater or close to it.” So, where do we go from here?

What can Owners do to Survive and Keep their Assets?

For certain borrowers and types of loans, kicking in more capital may result in an extension of the loan allowing ownership to live to see another day. Government agency loans (which are amongst the biggest lenders for rent stabilized buildings), however, are less forgiving and generally don’t have the appetite for so-called workouts. Furthermore, many borrowers don’t have the ability or willingness to add more equity in the current environment only to lose the building at a later date. Why throw good money after bad the thinking goes.

The industry is bracing for the worst. With mass foreclosure sales on the horizon, who takes back the buildings, the banks, or the city? Either way, “you end up with a housing stock that does not get attended to, and that has both short- and long-term negative ramifications for the city,” according to Belkin. It’s too early to call whether we return to the urban decay of the 1970s and 1980s—marked by high crime rates and abandoned buildings—but there’s nothing to suggest the situation is improving. A rollback or significant watering down of the 2019 HSTPA law may be the only meaningful salvation for distressed owners but there isn’t even a whisper of that coming from Albany.

Photo Credit:
Rebong. (2023, September 5). Distress in rent-stabilized buildings rises to surface. The Real Deal and Getty Images.

Website Credit:
Tuturice, V. (2023, September 5). Distress in rent-stabilized buildings rises to surface. The Real Deal.

Zaveri, M., & Bensimon, O. (2023, June 22). Rents to Rise for 2 Million New Yorkers This Year. The New York Times. 

Mays, J. C. (2023, August 10). Mayor Adams Said Migrant Influx Will Cost NYC $12 Billion. The New York Times.,Mayor%20Adams%20Says%20Migrant%20Influx%20Will%20Cost%20New%20York%20City,them%20and%20provide%20other%20services.
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Local Law 97 Adds to Already Burdened Landlords in NYC

Going Green in NYC Don’t Come Cheap

Going green in NYC is turning into red ink for property owners. For those unfamiliar, Local Law 97 requires buildings larger than 25,000 square feet to meet emissions (with stricter limits in 2030).  Failure to comply means a $268 fine for every metric ton of CO2 emitted, a jaw-dropping amount when considering all eligible buildings.

To illustrate, the Wall Street Journal analyzed 128 properties that would be subject to $50 million in tax liabilities (for failure to comply) for the first enforcement period (and $214 million for the following period). To appreciate the scale and scope of the law, some 50,000 properties fall under the purview of local law 97. 

The law lands at a particularly challenging moment for office landlords who are already navigating a trifecta of woes, including stubbornly elevated vacancy rates, plummeting property values, and less optionality in the debt markets. As buildings represent 68% of CO2 emissions in NYC, a path towards a cleaner city inevitably must focus on the largest polluters but the timing couldn’t come at a less opportune moment for owners.

227 Park Avenue Epitomizes the Troubles Ahead

Perhaps the 51-story office skyscraper located at 277 Park Avenue best illustrates the challenges landlords currently face and how the law adds to their troubles. The property has a vacancy rate of 25% (up from 2% in 2014), according to Trepp. Worse still, the largest tenant occupies 50% of the building and plans to relocate to newly built 270 Park Avenue when their lease expires in 2026.

More troubling, the $750 million mortgage originated in 2014 matures in August 2024 when rates will be much higher than they were in 2014. Add the cost upgrades required under local law 97 and one wonders if the cost to carry for ownership is sustainable. This all spells trouble for The Stahl Organization, the owners of 277 Park Avenue, and other NYC landlords in a similar predicament. Local Law 97 could end up being the tipping point that pushes owners over the edge.  

Photo Credit:
Llorente. (2023, September 2). Buildings Are Empty, Now They Have to Go Green. The Wall Street Journal.

Website Source:
Shifflett, S. (2023, September 2). Buildings are empty, now they have to go green. The Wall Street Journal. 
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Developers Rejoice as NYC’s Sliver Law may be on the Chopping Block

The emaciated heroin chic look may have been a thing among the fashionistas in the early 1990s but NYC officials were having none of it when it came to the look it wanted for its buildings. I am referring to the zoning resolution that included the so-called “sliver law,” limiting building heights on lots less than 45 feet wide. In short, the city decided in 1983 that tall and narrow, or sliver, buildings sprouting from small lots didn’t “blend in with the surrounding buildings” and were therefore prohibited. The oft-cited example is 211 Madison Avenue which rises 32 stories on a 33-foot-wide lot and towers above nearby four and eight-story buildings on the block. Today, a building like 211 Madison Avenue could never be built, as long buildings are only okay if they have the girth to match under the sliver law (and 33 feet of width simply doesn’t measure up under current rules).

Careful observers, including attorney Frank Chaney of law firm Rosenberg & Estis, P.C. (a.k.a. The Zoning Guy) wrote a convincing essay last year with the unambiguous title, “The Sliver Law Must Die,” where he asks why a 45-foot-wide lot could go up 120 feet but a 44 foot wide in the same zoning district (on the same city block even) would be contextually inappropriate and be limited to a much lower height restriction. As he puts it, a building should be considered “too tall regardless of whether it is wide or narrow. If it’s too tall, it’s too tall.” Of course he is right in pointing out the absurdity of the rule, which has now been in place for four decades. Ironically, the sliver law often mandates the construction of short narrow buildings on city blocks filled with high-rise skyscrapers creating a significantly “out of context” development. Foolish rules that miss the mark are nothing new in NYC of course, but repealing them is often a challenge. That said, the city—more than ever—needs more apartments as developers have shelved new projects and more than 100,000 migrants (who have a legal right to shelter) have flooded the city putting immeasurable pressure on an already limited housing stock. The Adams administration is therefore looking to repeal the sliver law, which could pave the way for up to 65 million square feet of development, or 95,000 housing units, according to a study conducted by Rosenberg & Estis. If repealed, expect those long skinny buildings to be back in vogue.

Photo Credit:
Ennis, Buck. 211 Madison Ave. in Murray Hill. 14 Aug. 2023. Decades-Old Murray Hill “sliver” Building with Hollywood Ties Lists Its Final Units, Crain’s New York Business, Accessed 13 Sept. 2023. 

Website Source:
Brenzel, Kathryn. “The Daily Dirt Delves into NYC’s Sliver Law.” The Real Deal, 7 Sept. 2023, 
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Warning! If You Own Commercial Real Estate, Wall Street is Coming for You

Wall Street isn’t always right, but when a trend emerges on the street, it pays to take notice. And the latest trend should send chills down your back if you own commercial real estate in the United States. Firms such as Cohen & Steers, Goldman Sachs, and EQT Exeter, among others, are raising billions of dollars to target distressed assets and those slumping in value. The volume of distressed commercial real estate grew by $8 billion in the second quarter, according to data provider MSCI Real Assets. Commercial property values have fallen by 10%-15% from their peak in the third quarter of 2022 and are expected to drop another 10%, according to Rich Hill, head of real-estate strategy for Cohen & Steers. And it isn’t just the well-documented office market suffering steep declines: multi-family and mall operators have seen their properties decline in value and are now more vulnerable than ever as they face refinancing at much higher rates.

Given current market conditions, Wall Street expects owners to capitulate on pricing and an uptick in sales activity in the months and years ahead. In what may be a harbinger of things to come, Clarion Partners recently unloaded a downtown San Francisco office tower for $41 million—a painful discount from the $107 million they paid in 2014. Certain assets are so underwater that a restructuring of the capital stack isn’t worth the professional and other transactional costs to even try. In those cases, owners are handing—or more likely throwing—the keys back to their lenders. Also, expect regional banks—seeing the pending carnage if interest rates remain stubbornly high relative to where they were just a few years ago—to begin to unload much of their commercial loan portfolios at discounted prices. Wall Street investors will be ready, willing, and able to scoop up these under and non-performing assets.

Still, a world of distressed asset sales is not a foregone conclusion. It is possible the Fed tames inflation without tipping the economy into a recession but I wouldn’t count on it.  Even if the so-called soft landing is accomplished, interest rates may remain high and the Fed funds rate doesn’t always correlate with 10-year treasuries (at least in the short term) which is a better predictor of commercial mortgage rates. This isn’t a Gamestop short squeeze situation where Wall Street got beat at its own game; this time around the sharks smell blood and the feeding frenzy is inevitable. For those who still can, heed the words of Amazon founder Jeff Bezos and “batten down the hatches.”

Photo Credit:
Fabrice Cabaud

Website Source:
Grant, Peter. “Wall Street Is Ready to Scoop up Commercial Real Estate on the Cheap.” The Wall Street Journal, Dow Jones & Company, 16 Aug. 2023, 
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A Roadmap for Re-Igniting Development for American Cities in Decline

They say one vacant lot represents an opportunity, hundreds are a worry, and tens of thousands make for a crisis. With a national housing shortage, it is shameful and a grand failure of local governments to address thousands of undeveloped vacant lots perpetuating all that is bad with our cities: crime, drugs, and homelessness. In Detroit, Pittsburg, and Chicago (three former industrial hubs), the populations have fallen by roughly two-thirds, more than half, and about a quarter, respectively, since their heyday in the 1950s. The mass exodus over the decades decimated the housing market and the decay has been further exacerbated by outdated government policies. That is starting to change finally and, if successful, other struggling cities across the country should take note. 

A vacant lot may look promising to the untrained developer eager to erect a multi-family property on the land but, dig a bit, and it isn’t so simple. More often than not, there are back taxes, unpaid water bills, demolition liens and unpaid fees making it an obstacle course of insurmountable hurdles to obtain clean title. And clean title is what developers need in order to build and without it, they won’t touch the land.

Decades of legislative neglect has resulted in more than 90,000 vacant lots in Detroit, 13,000 or so city-owned vacant lots in Pittsburgh, and roughly 26,000 in Chicago, some of which are caught in a limbo of back taxes and unpaid fees. What can be done? A few things it turns out: Detroit officials want to triple property tax bills to disincentivize owners from allowing lots to remain undeveloped. In Chicago, the Cook County land bank controls hundreds of vacant lots and, through the land bank, the city can more efficiently clear title on these encumbered lots and transfer them to developers or nonprofits more or less shovel-ready. The city often excuses the land banks from paying any back taxes, making it easier to move the land in a sale. Still, before land banks can transfer the lots with clean title, landowners are entitled to due process (it’s America after all) and must be given the chance to pay the taxes owed, settle demolition liens, water bills, and other outstanding fees. In Chicago, the chair of the Cook County land bank, Bridget Grainer, said the process of clearing title through the land bank has “eliminate[d] a market-killing impediment, and the market worked as it should” in the development of several projects. But, due process isn’t swift as it took years in Chicago before the land was transferred and the lots developed. And such victories in Chicago are counted in the hundreds compared with a supply of vacant lots in the thousands. But Rome wasn’t built in a day and neither will the resurrection of these beaten-down cities.     

Website Source:
Barrett, Joe. “Too Many Vacant Lots, Not Enough Housing: The U.S. Real-Estate Puzzle.” The Wall Street Journal, Dow Jones & Company, 20 Aug. 2023, 

Image Source:
Gomez, Juanje. “Satellite Images of Chicago. .” Too Many Vacant Lots, Not Enough Housing: The U.S. Real-Estate Puzzle, The Wall Street Journal, 17 Aug. 2023, Accessed 19 Aug. 2023. 
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Not Even the Multi-family Asset Class is the Safe Haven it Once Was

Warren Buffett once compared interest rates to Newtonian physics when he suggested “interest rates are to asset prices…[what] gravity is to the apple.” In fact, he went further declaring “interest rates power everything in the economic universe.” And of course, he is right: take commercial real estate as an example where nearly all acquisitions are financed using leverage typically with five to seven year mortgages. As those loans mature and need to be refinanced at rates now roughly double the rate of the initial loan, trouble ensues. In the last 17 months, the Fed has increased rates 11 times and is likely to keep going if we are to believe the Fed Chairman, Jerome Powell, hell bent on getting inflation back down to 2% (we aren’t there yet). According to CoStar, the value of multi-family buildings across the country have fallen 14% for the year ended June 2023, and why is that? As interest rates increase so does the investment yield, or capitalization rate, investors demand (which is typically higher than the cost of capital) resulting in a decline in asset values. In other words, if an investor can get a 5.25% yield on their money risk free, then the required yield with any amount of risk would need to be higher than that. 

So, how bad are things for apartment landlords? Mortgage delinquencies remain low but they are increasing (owners have defaulted in Los Angeles, San Francisco and Houston against thousands of apartments and even, Blackstone, the largest alternative asset manager defaulted on 11 apartment buildings in Manhattan though they say these buildings have unique issues). According to veteran real estate finance executive (and perhaps someone interviewed immediately after viewing the film Oppenheimer), Peter Sotoloff, multi-family property owners are facing a “hydrogen-bomb scenario” that the market may be overlooking. In the last decade, multi-family mortgages have doubled to about $2 trillion, according to the Mortgage Bankers Association and, more troubling still, is that nearly $1 trillion of that debt is set to come due between 2023 and 2027, according to real estate data provider Trepp. Not only is rental growth slowing from its peak, but investors borrowed up to 80% of the purchase price, in some cases, and certain private real estate firms turned to floating rate debt and add to those growing insurance premiums, higher property taxes, and fuel costs, the economics won’t work upon refinancing if rates remain where they are today. Exacerbating the situation further is the recent struggles of regional banks (with depressed loan portfolios due to mark-to-market requirements) that are less likely to lend today than in the past when they were a crucial source of real estate funding.

With multi-family properties, there are three fundamental pillars that matter most: 1. ownership’s ability to increase rents, 2. controlling and/or decreasing expenses, and 3. interest rates. With lower interest rates and increased competition amongst buyers before the Fed’s tightening, investors stretched overpaying for properties with the assumption they could increase rents faster than the rise in expenses but most groups—including sophisticated ones—underestimated the dramatic increase in interest rates. And perhaps they could be forgiven as the Fed for a long time called inflation transitory and suggested it would self-correct. That turned out to be wrong and here we are but such are the unforgiving whims of capitalism.

The next several years will be revealing as these multi-family loans come due and much will depend on interest rates at that time as well as the availability of capital more generally. In many ways, multi-family properties are facing the same financial challenges that other asset classes are, including office, retail and hotel-hospitality (as well as publicly traded equities). And this should come as no surprise to those who understand that interest rates power everything in the economic universe. The nonagenarian Warren Buffett has no doubt seen it all…at least twice. We should listen more often. 

Putzier, Konrad, and Will Parker. “A Real-Estate Haven Turns Perilous with Roughly $1 Trillion Coming Due.” The Wall Street Journal, 12 Aug. 2023, 

Levine, Richard B. “Investors Bid up Prices for Multifamily Buildings as Rents Steadily Increased.” A Real-Estate Haven Turns Perilous With Roughly $1 Trillion Coming Due, The Wall Street Journal, 7 Aug. 2023, Accessed 15 Aug. 2023. 
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American Consumerism, Inertia, and Human Nature is the Magic Mix Self Storage Facilities Thrive On…

Economics students are well versed in the rational choice theory, or the premise that individuals will make choices based on calculations that maximize their advantage and minimize their losses. The real economy, however, is riddled with examples where this is wholly untrue and perhaps there is no better example than the self-storage market. More than one in 10 Americans lease storage space, according to market research, and these customers are paying approximately $166 per month, an amount that over time is often far more than the value of whatever they are storing. Take the CEO of $56 billion property investor Harrison Street, Christopher Merrill, who estimates he has paid for his stored items “six times over” in the last six years.  Public Storage CEO Joseph Russell Jr. confirmed this reality stating, “statistically, once a customer stays with us for a year, they end up staying for five years.” There are of course self-storage facilities around the world, but nowhere have they been more profitable to own than in the United States thanks largely to Americans’ propensity to accumulate more stuff than they can squeeze into their homes.

From the storage owners’ perspective, the challenge is getting customers in the door, often with discounted starter rates, move-in specials, and algorithmic one-upmanship but, once committed, human nature generally takes care of the rest. It doesn’t much matter what someone pays when they move in as most stays outlast introductory rates. The business benefits from so-called price inelasticity where unwavering demand persists despite an increase in prices. Self-storage operator Extra Space issues about 130,000 rent-increase notices each month holding back some as a control group to ensure the increases aren’t prompting move outs. It turns out that, by and large, moving to a cheaper facility or simply disposing of stored items is just not what people end up doing and the industry knows it.

Self-storage facilities in the United States have benefitted for the last 25 years but is the party coming to a close? During the pandemic, profits soared as bedrooms became offices, basements transformed into home gyms, and the displaced items needed a place to go. More recently, however, return rates to the office have increased and home sales are declining; two factors that could impact the demand and value of self-storage facilities going forward. The CEO of CubeSmart Christopher Marr suggested the period between the summer of 2020 and 2022 may, in hindsight, be “the best 24 months in the history of this business.” Shares of CubeSmart, Public Storage, and Extra Space Storage are mostly down in 2023 while the broader market is up double digits, but M&A activity is thriving suggesting a consolidation within the industry. Specifically, Extra Space acquired rival Life Storage for $11.6 billion creating the largest storage operator in the country with 3,500 locations and 270 million sq. ft. Public Storage will buy 127 facilities from Blackstone for $2.2 billion and corporate takeover KKR determined the business is still viable and has spent more than $400 million on self-storage buildings. 

In 2022, institutional investors such as university endowments, insurers, and pensions plowed $2.5 billion into a fund raised by privately held storage specialist Prime Group Holdings. And Prime’s CEO Robert Moser (still only 46 years old) got to work scooping up nearly 100 properties with the fund. And Moser’s story is a dream big rags to riches American fairy tale: he started his business out of his college fraternity room while at Union College (a Michael Dell of sorts) and wrote his thesis on income-producing properties. He spent weekends visiting and photographing properties after sorting through volumes of documents looking for acquisition targets. With so much conviction about his future in real estate, he didn’t bother looking for a job when he graduated and his mother—the story goes—borrowed against the family home to stake him. It certainly didn’t hurt that Moser showed up first semester already a licensed real estate agent and no doubt skilled in the due diligence required for success.

The self-storage industry isn’t going anywhere but the mom-and-pop players will have a tough time competing with the institutional ones. And the recent decline in share prices is perhaps a healthy cooling off from a record run (rather than any existential demise of the self-storage industry) and an opportunity for further consolidation. Until Americans adopt a “tidying up” strategy of decluttering their life of items that no longer spark joy or somehow manage to avoid death, divorce, and disaster (and good luck with that), expect this asset class to be around for generations to come.

Dezember, Ryan. “Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope.” The Wall Street Journal, 8 Aug. 2023, 

Morris, David Paul. “A Dixon, Calif., Facility Owned by Life Storage, Which Was Bought Last Month by Extra Space Storage in an $11.6 Billion Deal.” Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope, Bloomberg News, 6 Aug. 2023,  
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Are We on the Brink of a Major Recession? Several Somewhat Quirky Indicators Reveal the Answer…

If you’ve been following the news, you could be forgiven for having no idea if the US economy is on the brink of a recession, in the midst of one, or humming along nicely. Perhaps we should start with a widely accepted definition of a recession but the trouble is that too is easier said than done. The common definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP) but it’s flawed as it’s backward-looking as opposed to predictive. It would be like placing your bets on Sunday’s football game the following Monday morning. Turns out that the formal arbiter of calling a recession is the National Bureau of Economic Research (NBER) and they use ambiguous language such as a “significant decline” in economic activity taking into account employment, GDP and consumer spending figures in order to make the call. But this too isn’t terribly helpful and the two definitions can conflict creating confusion and keeping everyone befuddled. Let me give you an example: the last time we had two quarters of consecutive negative growth was in the first and second quarters of 2022 when the GDP declined by 1.6% and 0.9%, respectively. Lay folks and certainly a handful of experts cried “recession” (using the two consecutive quarter definition) but Treasury Secretary Janet Yellen pointed out that “when you’re creating almost 400,000 jobs a month, that is not a recession.” President Biden also cited record job growth and strong foreign business investment to come to the same conclusion as Yellen (both implicitly embracing the NBER definition that there has been no significant decline in economic activity). Still, both definitions lack practical application as investors are forward-thinking and are looking for predictive indicators to infer whether broad-based weakness in the economy is on the horizon. Folks smarter than I have put forth different hypotheses (some quite quirky) to predict any pending downturn and one was widely followed by former Fed Chair, Alan Greenspan. Let’s review what some of these are (in no particular order):

Inverted Yield Curve

Pundits often cite the reliability of the inverted yield curve as one of the best indicators of a recession, so what is it exactly?  From time to time, short term interest rates can be higher than longer term interest rates for an instrument) with the same credit risk profile (typically the two and ten-year treasury bills). This is unusual as the risk inherent in time suggests that longer term debt should reward investors with higher yield given the greater risk they are taking on. Inverted yields impact banks hard as they make their money paying lower interest rates on deposits and lending out that money at higher rates but when the yield inverts the business model for banks do as well. As a result, they stop lending and credit dries up for businesses and investors causing the economy to retrench. The theory makes sense but how well does it hold up in practice? Since 1978, inverted yields have happened six times (excluding the current inverted yield we are experiencing today) and, in every instance, the US economy entered a recession.  That doesn’t bode well for the current inverted yield curve environment we are in but how long after the yield curve inverts does a recession typically follow? Approximately fifteen months is the answer and given that the most recent yield curve inverted in July 2022, we might be facing a recession three months from now in October 2023. And a yield curve that inverts for an extended period of time appears to be a more reliable recession signal than one that inverts briefly. But is this time different, some say yes? The lower interest rates on ten-year vs. two-year bonds could suggest that investors believe the Fed has tackled inflation and the further out we go timewise, lower interest rates are “normal” suggesting we are past the worst. You can forgive Harry Truman for wanting a one-handed economist on his staff. For firm believers of the inverted yield curve as a predictor of our economic fate (and there is more than anecdotal support to get on board this train), what should you do? You’ve heard the refrain “Don’t fight the Fed” and you shouldn’t. T-bill rates with three and six-month maturities are offering more than 5% risk-free to investors, easily exceeding the inflation rate running in the mid 3% over the past six months measured by the consumer price index. Perhaps it’s time to place that cash in short term treasuries. Many folks are with investor demand for T-bills surging to $13.4 billion in April 2023 compared to $1.6 billion in January 2022.

Champagne Index

Like a good New Year’s Eve party, good economic times are often reflected in the volume of champagne consumed. It’s widely known that Americans tend to reduce their purchases of champagne during economic downturns and this bears fruit in the numbers. In 2009—during the midst of the 2007-08 global financial crisis dubbed the Great Recession—a mere 12.6 million bottles were shipped, compared to 23.2 million bottles in 2006. Some of you may recall the dot-com recession where publicly traded internet companies were valued, in part anyway, by the number of monthly eyeballs on the site. When that bubble burst in 2001 so did the volume of bubbly sold, which fell to 13.7 million bottles—a drop of 42% from the year prior. In 2021 and 2022, consumers splurged purchasing approximately 34 million bottles each year, suggesting the government stimulus checks kept the party going. It’s too early to tell whether consumers will pull back in 2023, but this index is worth keeping an eye on. 

Restaurant Performance Index

Historically, Americans tend to eat out less when times are tough stretching their budgets by cooking at home instead. In 2008 at the height of the global meltdown, the Restaurant Performance Index dropped to 96.4 (anything below 100 indicates a contraction). In April 2020, the index was below 95 (but many restaurants were closed) and one year later (post pandemic) the index was in excess of 106. The dining out index is arguably less helpful today than it was a decade ago as dining out and getting meals for takeout has become more central to our lifestyle suggesting restaurants will be more resilient than they were in previous generations.

Men’s Underwear

Of course we hope the Federal Reserve relies on better economic data than the sale of men’s underwear, but former Fed Chair Alan Greenspan revealed to an NPR correspondent that he monitored sales of men’s undergarments to help forecast economic downturns. Let’s hope he let that slip long after he was no longer in the role. The theory is somewhat sound, when the economy suffers and you need to cut back, why spend on things that aren’t seen?  During 2008-2010 during the global financial crisis, men spent approximately $4 billion each year, compared to nearly $7 billion in 2023. During the global pandemic, sales slipped to $5.4 billion, compared to more than $6 billion the previous year. The index is of course flawed as dollars spent year to year fail to take into account inflation and the higher cost of underwear in 2008 compared to 2023 but, according to Circana, unit count dropped by 12% from 2021 and 2022 and households earning less than $50,000 per year spent significantly less on men’s underwear during that same time period. The men’s underwear index could use an upgrade with a focus on unit volume as opposed to dollars spent and further break down those numbers by household income. 

French Fry Attachment Rate

Few patrons like the restaurant “upsell,” or the suggestion by wait staff to add a side to your meal or get a combo for only a few dollars more, but it turns out that the fast food industry pays close attention to this metric. It’s the so-called fry attachment rate and it tracks the rate at which consumers order a side of fries with a meal. For now, the data is more qualitative than quantitative and the message is mixed with the CEO of fry producer Lamb Weston ironically referring to French fry demand as “healthy” and the fry attachment rate as “solid” on the company’s last earnings call. McDonald’s CEO on the company’s April earnings call had a different view, however, saying the fry attachment rate is going down “slightly” in most markets around the world. This may be another metric to monitor closely as it provides insight into those households earning less than $50,000 per year.

Library Index

It should come as a surprise to no one that when times get tough, people seek out free services. New York runs the nation’s largest public library system and customer attendance at New York’s libraries peaked during the Great Recession, dropping every year since and falling off a cliff during the pandemic, which had more to do with library closures and lack of access than any sort of improvement in the economy. In 2022, in New York City library attendance has ticked up for the first time in more than a decade though numbers are still well below pre-pandemic levels.  We will continue keeping an eye on library attendance as meaningful upticks are suggestive of trouble ahead.

Some of these metrics may be better indicators of a recession than others but there is enough data in all of them to suggest investors should proceed with caution. I know I am.

Liberto, D. (2023). Inverted Yield curve: definition, what it can tell investors, and examples. Investopedia. Gura, D. (2022, July 28). U.S. economy just had a 2nd quarter of negative growth. Is it in a recession? NPR.

Baron’s, and Dreamstime(5). “Sales of Champagne, Lipstick, and Briefs All Form the Basis of Oddball Economic Indicators That Track Real-World Behavior.” Is a Recession Coming? Better Check Men’s Underwear Sales., Baron’s, 12 July 2023, 
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The Bronx is Burning, Again. Only This Time It’s a Good Thing

Brookfield Properties, This Bronx Neighborhood Is One of NYC’s Hottest Apartment Markets. 17 July 2023. 

During a 1977 World Series game between the New York Yankees and the Los Angeles Dodgers, the blustery sports broadcaster of that era, Howard Cosell, remarked that the “Bronx is Burning,” and he wasn’t being figurative. During the televised broadcast, an ABC aerial camera panned away a few blocks from the stadium where the roof and top floors of a nearby vacant building were ablaze. Today, it’s the rental market in the Bronx that is on fire as NYC residents are getting priced out of Manhattan and Brooklyn. Rents in the Mott Haven section have grown by nearly 31% since May 2019 currently at $2,950, according to StreetEasy. In addition, online traffic for Bronx rental listings in June 2023 ranked the highest for any location in the Northeast, increasing nearly 50% from last year, according to the apartment search company, RentCafé. To be fair, much of the new supply is along the Harlem River in the Mott Haven neighborhood where developers are pouring money into new buildings. The most notable projects are from Brookfield Properties and RXR, the former building seven (7) high-rise towers collectively referred to as the Bankside project, which will include nearly 1,400 luxury apartments, five (5) retail spaces and a public park along the river with a price tag of approximately $950 million give or take a few shekels. A bit more modest but not too shabby is the 27-story 200-unit RXR project.

What’s driving the development and renter demand in the Bronx? A few things in fact. First, the apartment inventory in Manhattan, Queens, and Brooklyn has been declining in 2023 leaving few options and, for most, a decision between the Bronx and the so-called Forgotten Borough is no decision at all (apologies to my brothers and sisters in Staten Island). Second, the median Manhattan and Brooklyn rents continue to smash records hitting $4,395 and $3,400, respectively, and there was no solace across the Hudson River either as the rents in Jersey City saw double-digit percentage hikes. Lastly, these new projects in Mott Haven benefit from coveted waterfront views and short commutes to Manhattan, and this duo is what people want (or more honestly, demand, if leaving preferable boroughs like Manhattan or Brooklyn). It turns out, however, that there are only a few concentrated pockets in the Bronx that are seeing rent growth. In addition to Mott Haven, it is neighborhoods with easy access to transit, such as University Heights, Pelham Parkway, Concourse, and Fordham.

A larger issue at play as well that should not be overlooked and undoubtedly another reason for rental increases across the city, including the Bronx, is the massive drop off in rental projects coming online across the city. With the sunsetting of the 421-a program in June 2023, rental projects no longer pencil for developers so they simply aren’t getting built and with an increase in housing demand, including nearly 80,000 migrants, NYC is simply running out of apartments. Thank your legislators in Albany and let’s not forget that these mistakes have long-lasting shelf lives as any “righting” of the ship has a three-year tail before newly completed construction projects come online.

Are we witnessing a rebirth or resurrection of the Bronx and is it sustainable? Probably not, every few years, the Bronx receives favorable media coverage only to fizzle out and largely be forgotten again by Manhattanites and Brooklynites so is this time different? Hard to say, but these projects by Brookfield and RXR are meaningful financial commitments, at least in one of the most desirable neighborhoods within the borough, and that’s a start. Though average rents in the Bronx may not be sustainable at current levels if Brooklyn and Manhattan rent cool over time as those boroughs are preferred by young professionals and hip artsy folks…at least for now.  So maybe this piece should be retitled to something along the lines of Mott Haven Catches Fire While Much of Bronx Remains Lukewarm. Not as catchy though. 

Eastland, M. (2023, July 17). This Bronx neighborhood is one of NYC’s hottest apartment markets. WSJ.
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I Know a Secret…The Best CRE Asset Class to Invest in Today

BREHMAN, CAROLINE. Commercial Real Estate Finds a Rare Bright Spot by Campuses, Shutterstock, 4 June 2023, 

It’s no secret that it’s slim pickings these days when it comes to finding compelling CRE acquisition opportunities. And with several expected interest rate hikes on the horizon, investors are wise to pause before pulling the trigger on their next acquisition as its value could fall further in the months ahead. But catching a falling knife or timing the bottom is a fool’s errand and as an investor, you invest. It’s what you do. So where are today’s opportunities? It turns out one of the few bright spots is multifamily housing geared to college students but not all schools are benefitting equally. Rents for student housing are expected to grow at top research universities and schools in the five highest-earning athletics conferences for college football while those smaller schools with lesser name recognition are and will continue to suffer.  One reason you can bet your sweet baby is that athletic scholarships are here to stay and not go the way of affirmative action.

Despite rising interest rates last year, student housing sales reached a record high of $22.9 billion, according to CBRE Group. Furthermore, though multifamily rents increased by only 2.3% during the twelve months that ended in May 2023, student housing rents have been growing by 9%, according to RealPage, an online firm that tracks the apartment market. Institutional real estate owner and investor, Blackstone, clearly agrees as they bet big—$12.8 billion big—on the acquisition of the student housing REIT, American Campus Communities (“ACC”). ACC has over 200 properties with more than 140,000 beds, according to its 2021 annual report.  Even for Blackstone, this is a significant purchase best explained by the co-head of America’s acquisitions, Jacob Werner, who said that “in good times, people go to school…[and] in bad times, more people tend to go to school.” And at least anecdotally I concur with Werner’s views as we all know our fair share of “professional student” types who delay adulthood and the workforce as long as possible by staying in school or those who return to school when the job market offers little opportunity.

Other tailwinds for student housing include lack of financing for developers to increase supply and, at many schools, a dearth of sites both of which allow landlords to continue to raise rents. Even the pandemic couldn’t torpedo the value of student housing as students preferred to live near their college campuses rather than shack up with mom and dad despite attending classes virtually. But it is a tale of two markets out there with certain college campuses thriving financially with increasing student enrollment and other universities suffering from weakened demand and, as a result, are suboptimal for investment. So be careful, and as always, do your homework as luck tends to happen when preparation meets opportunity. 

Inline XBRL Viewer, Accessed 7 July 2023. 
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