ARES Urbanexus Update #172
Real estate finance
U.S. commercial real estate borrowing
The Mortgage Bankers Association (MBA) forecasts that U.S. commercial and multifamily mortgage borrowing and lending will reach $583 billion in 2025, marking a 16% increase from the estimated $503 billion in 2024.
Multifamily lending, a segment included in the overall figures, is expected to rise to $361 billion in 2025 -- also a 16% increase from the 2024 estimate of $312 billion. By 2026, MBA forecasts total commercial real estate lending to reach $709 billion, with $419 billion attributed to multifamily loans.
Learn more here.
Regional and metropolitan trends
Best-performing metropolitan areas
Recognizing their critical role, the Milken Institute’s Best-Performing Cities (BPC) index evaluates the relative economic performance of 403 metropolitan areas, providing insight into the strengths and vulnerabilities of these economic powerhouses. The BPC index utilizes 13 key metrics, combining labor market conditions, high-tech industry growth, and access to economic opportunities.
This comprehensive approach captures emerging trends and significant shifts in the US economy, offering a detailed benchmark for metro performance. Metropolitan areas are the hubs of economic activity in the USA. In 2023, US metros collectively grew by 2.6 percent in real GDP, contributing to 91.1 percent of the nation’s overall economic growth.
The top ten BPC rankings for larger metropolitan areas include:
Raleigh, NC
Ogden-Clearfield, UT
Salt Lake City
Huntsville, Al
Colorado Springs, CO
Austin-Roundrock, TX
Fayetteville-Springdale-Rogers, AR, MO
Olympia-Tumwater, WA
Palm Beach-Melbourne-Titusville, VL
Boise, ID
The report and its interactive map may be accessed and downloaded here.
Which metro areas are vulnerable to artificial intelligence?
In the fall of 2024, Brookings published a report looking at possible patterns of artificial intelligence (AI) involvement in the labor market, focusing on how generative AI appears to intersect with particular occupations, regardless of location. The researchers found that more than 30% of all workers could see at least 50% of their occupational tasks affected by ChatGPT-4, while 85% could see at least 10% of their functions affected, with more significant impacts possible.
Most notably, the analysis, based on occupation-specific “exposure” data supplied by ChatGPT creator OpenAI, forecasted that, for the most part, the greater the education level or pay for an occupation, the greater its likely “exposure” (positive or negative) to generative AI tools will be (albeit with a dip at the very top). That’s because generative AI is especially well suited to the cognitive tasks of white-collar knowledge work—think coders, writers, financial analysts, engineers, and lawyers. And while generative AI puts at risk the “routine” tasks of customer service and clerical work (often handled by female-staffed call centers, customer service lines, and HR teams, for example), it is currently not equipped to handle the manual work of manufacturing, the skilled trades, construction, and many in-person service industries.
Below is a map of what the researchers call “AI exposure” – the percentage of work tasks likely to be taken over by AI. It’s a map of metropolitan areas. It’s easy to see the Northeast, coastal California, South Florida, the Texas Triangle, and other big urban areas where AI will likely have more significant influence. (They’re the darker colors.) The location most at risk is the San Francisco Bay Area, especially Silicon Valley – the most prosperous region in the country but the one most dependent on tech workers.
Learn more here.
World’s most walkable cities
In the urban neighborhood, residential streets are peppered with shops and cafés. Schools, museums, and theatres can all be reached on foot. Green spaces offer a quiet escape. Some cities, such as Copenhagen, Paris, and Tokyo, already function this way. These “walkable” cities—sometimes called “15-minute cities”—offer everything locals need within a small radius. A study published recently in Nature Cities, a journal, shows which places do this best.
Matteo Bruno and his colleagues at the Sony Computer Science Laboratories in Rome calculated the walkability of more than 10,000 cities worldwide. They first mapped how long it would take residents in various urban neighborhoods to reach “key amenities,” such as schools, hospitals, restaurants, and shops, on foot. They then calculated an average for the whole city.
Not surprisingly, European cities were the most pedestrian-friendly. In a ranking of big cities (those with more than half a million people), 45 of the top 50 spots were in Europe. Milan came first. The average Milanese needs to walk for only around seven minutes to reach amenities, and 98% of the city’s population live in 15-minute neighborhoods. In Asia Kyoto, in Japan, and Taipei, the capital of Taiwan, were among the most walkable cities.
North American cities were notably absent from the top 50. Many are designed around cars, with residential neighborhoods sprawling far from central amenities. Vancouverites had the shortest strolls in the region, but their city ranked only 53rd in the world. Manhattan was ranked as highly walkable, but other districts of New York City dragged the average down.
Here are the top 20 most walkable cities in the chart below
To see the complete list of the 50 most walkable cities and the walkability scores, go here.
Residential
State Farm denied an ‘emergency’ rate hike in California
State Farm General, already facing financial peril before the Los Angeles wildfires, asked state insurance regulators to approve an immediate price hike to prevent “a dire situation” for its policyholders and the entire California market. On February 14, 2025, California Insurance Commissioner Ricardo Lara announced Friday he will not grant State Farm General’s request for an emergency rate hike in the wake of the Los Angeles wildfires.
State Farm General’s preliminary financial results show its policyholder surplus was just $1.04 billion at the end of 2024 — down from $4 billion in 2016, according to the company. As of Feb. 1, the company has paid more than $1 billion in claims related to the Los Angeles wildfires, making it responsible for roughly a quarter of the total payments that have gone out to wildfire survivors so far. State Farm expects its payments to rise quickly once debris removal and rebuilding begin.
Insurance companies purchase their own reinsurance insurance to tap into following large catastrophes like wildfires. State Farm General, a California-only subsidiary, purchases most of its reinsurance from its parent company, State Farm Mutual Automobile Insurance Company. The company said it expects to recover billions through reinsurance — but even so, anticipates its losses to severely impact its financial state.
State Farm General is the largest insurer overall in California, collecting $20 of every $100 of home insurance premiums paid in California and insuring an estimated 15% of homes in the state, according to data from the company and the Department of Insurance. State Farm Mutual is similarly the largest insurance company in the U.S. If the company were to go insolvent — a concern it has signaled in the past — it could leave more than a million homeowners without insurance at a time when home insurance is more expensive and harder to find than ever, creating chaos in a market that is already in crisis.
U.S home prices
According to the National Association of Realtors' report for the 4th quarter of 2024, 89% of U.S. metro markets (201 out of 226) saw home price increases in the fourth quarter of 2024. During this period, the 30-year fixed mortgage rate ranged from 6.12% to 6.85%. Notably, 14% of tracked metro areas reported double-digit price gains, up from 7% in the previous quarter.
Compared to the same period a year prior, the national median price for single-family existing homes rose 4.8% to $410,100, following a 3.2% increase in the previous quarter. Over five years, from 2019 to 2024, median home prices surged by 49.9%.
Among major U.S. regions, the South accounted for the largest share of home sales (45.1%) in the fourth quarter, with prices rising 2.1% yearly. Other regions saw price gains of 10.6% in the Northeast, 8.0% in the Midwest, and 4.0% in the West.
The top 10 metro areas with the highest year-over-year price increases saw gains of at least 14.9%, with six located in the Midwest. Leading markets included:
Jackson, Miss. (28.7%)
Peoria, Ill. (19.6%)Chattanooga, Tenn.-Ga. (18.2%)
Elmira, N.Y. (17.6%)
Fond du Lac, Wis. (17.6%)
Cleveland-Elyria, Ohio (16.4%)
Bismarck, N.D. (15.8%)
Akron, Ohio (15.5%)
Blacksburg-Christiansburg, Va. (15.0%)
Canton-Massillon, Ohio (14.9%)
California remained home to some of the most expensive housing markets, led by:
San Jose-Sunnyvale-Santa Clara, Calif. ($1.92M; 9.7%)
Anaheim-Santa Ana-Irvine, Calif. ($1.36M; 4.7%)
San Francisco-Oakland-Hayward, Calif. ($1.32M; 5.2%)
San Diego-Carlsbad, Calif. ($985K; 5.7%)
Despite overall price growth, 24 out of 226 metro areas (11%) experienced home price declines, down from 13% in the previous quarter.
Immigrant deportation could deplete construction labor
According to a 2024 labor market report by the Home Builders Institute, immigrant workers made up a historically high 25% of construction workers and 31% of construction trade workers across the USA. In California, immigrants account for nearly 40% of the state’s construction workforce, the report said.
As U.S. Immigration and Customs Enforcement arrests thousands of undocumented immigrants in major cities — including people without criminal records — immigrant-rights advocates in the region say day laborers are among the most vulnerable because they are among the most visible. Day laborers — a majority of whom are undocumented and Latino — make themselves available for construction and other manual labor gigs by waiting in public spaces like street corners, gas stations and in the parking lots of home improvement stores. But since President Donald Trump’s inauguration, immigrant-rights activists say day laborers around the country are thinking twice about looking for work or returning to job sites because of a mass deportation agenda that is picking up steam.
Often, undocumented workers handle the lower-skill jobs in a housing construction project (e.g., general labor). If those jobs aren’t done, then there isn’t demand for the higher-skill jobs more commonly done by US-born workers (e.g., electrician or plumber). Further, there is no evidence that the recent increase in immigrant numbers is the cause of our current housing market strain, nor is there any research showing that mass deportations would free up housing and lower costs.
A modular home horror story
A group of California homebuyers left waiting for modular housing units from Connect Homes and the firm has not responded to repeated inquiries. The homebuyers say the company took their money while failing to deliver the product and has repeatedly dodged their questions about delivery. It’s not an uncommon story in the modular housing construction space, which, in recent years, several companies backed by top investors seeking to disrupt the trillion-dollar construction industry face sudden financial turmoil and even bankruptcy.
Perhaps the most prominent fallen star was Silicon Valley startup Katerra, valued at more than $4 billion at its peak in 2019. The company had set out to revolutionize multifamily housing construction by handling all aspects of the process in one factory. By the summer of 2021, Katerra filed for bankruptcy.
Other modular housing companies that encountered funding difficulties include:
Anchored Tiny Home, which sold accessory dwelling units out of Fair Oaks (Sacramento County), filed for bankruptcy in October.
Modular startup Veev, which had a manufacturing facility in Hayward and offices in Israel, had raised some $600 million before folding in 2023.
Vallejo’s modular home builder Factory OS is still building affordable housing, but a private equity consortium acquired most of its assets last year.
Connect Homes’ apparent collapse comes when housing advocates and policymakers look to factory-built housing as a potential solution to the high cost of building everything from supportive housing for the homeless to higher-end apartments. Yet many contenders have fallen short of profitability, wiping out billions in investment.
Learn more here.
Office
Office valuations drop as market has yet to find bottom
Office valuations continued to slip in 2024, and it's not totally clear when the market will hit bottom. An analysis by CommercialEdge — part of real estate software company Yardi Systems — found the average sale price of office buildings in 2024 fell 11% from the prior year across all building types, locations, and quality. The average price fetched by buildings traded last year was $174 per square foot, down from $196 per square foot in 2023.
In 2024, the average sale price of office buildings in central business districts fell by 28%, compared to a 15% decline among suburban properties, according to Yardi. But properties in urban submarkets — situated within a city center but outside the CBD — saw their average sale price rise by 7%. This echoes a trend many in real estate have observed: a preference for trendy, mixed-use urban neighborhoods that are not core, single-use financial districts or CBDs.
In the past five years, CBD office property prices have dropped 60%, compared to a 32% decline among buildings in suburban submarkets and a 24% slump for urban-submarket office properties.
Learn more here.
Record vacancies in downtown Seattle
Seattle's office market is sitting at record-high vacancy and availability levels, raising fresh doubts about how quickly the city's downtown can bounce back, even as return-to-office mandates kick in. Prolonged vacancies, plummeting property values and fire-sale deals on major buildings signal ongoing financial distress for landlords and developers, with potential ripple effects across the city's real estate market.
In 2024, Seattle's financial district was listed as among the most vulnerable in the U.S., along with San Francisco's and Houston's, according to a Kaplan report showing defaults on commercial real estate loans climbing amid soaring office vacancy rates.
Learn more here.
Retail
Joann closing stores
Hudson, Ohio-based Joann Inc., which is in the midst of a Chapter 11 bankruptcy reorganization, plans to close nearly two-thirds of its 800 stores, according to documents filed with the court on Feb. 12. That cut of approximately 530 locations is spread across the USA.
Joann, which filed for bankruptcy in January, has said it is in danger of going out of business if a buyer does not acquire it. It has filed Worker Adjustment and Retraining Notification Act letters with the state of Ohio in the event of a total closure. That would mean 661 jobs lost at the corporate headquarters.
Gordon Brothers Retail Partners LLC – the same firm that recently saved between 200 and 400 Big Lots stores from being liquidated – is serving as the "stalking horse" bidder for the Joann Inc. assets in bankruptcy court, providing a floor for any future bids.
Learn more here.
Redevelopment of a retail mall in Santa Barbara, CA
Located in the heart of the city’s upper State Street corridor, the La Cumbre Plaza shopping center is near both Highway 101 and State Route 154. It opened in 1967 with two anchors: Sears and a J.W. Robinson’s department store, which was part of a small upscale chain based in Los Angeles and would later become the Macy’s.
Pending project approval, the Macy’s is set to be demolished after its lease expires in 2028. That parcel is slated to be redeveloped into 689 apartment units by local developers Jim and Matthew Taylor, who acquired the Macy’s building for about $63 million in December 2021.
The proposal for the Sears portion of the mall is slightly smaller and more congruous with the footprint of the property. The project would include 36 studio apartments, 183 one-bedroom units, 201 two-bedroom units and 23 three-bedroom units. It will also feature 466 parking spaces.
While Kennedy Wilson, the developer for the Sears project, is not local like the Macy’s developers, the international firm has a track record in Santa Barbara. Friedman noted that the firm recently transformed an old hotel near La Cumbre Plaza into 73 housing units.
Source: Google Maps
Industrial
Amazon expands
Amazon bought more than 10 million square feet across North America for its warehouses and data centers in 2024. While Amazon’s leased square footage largely stayed the same, the tech giant now owns 36.8 million square feet of property dedicated to its warehouse and data center facilities, up from the 25.6 million square feet it reported last year. It’s Amazon’s most significant expansion in years, public filings show, giving an inside look into how much space the Seattle tech giant is gobbling up across the continent as it grows its data center and delivery network.
Learn more here.
Mixed-use development
Miami developer breaks ground on a transit-oriented project
The Upland Park project aims to transform the area around West Miami-Dade County’s Dolphin Park-and-Ride Transit Terminal Facility into a 47-acre transit-oriented community. Development is anticipated to occur in multiple phases, eventually delivering over 2,000 new mid-rise and garden-style multifamily units, 282,000 square feet of retail, and 414,000 square feet of commercial space. The first phase encompasses 578 apartments to be delivered in 2026,
Doral, Florida-based PPK Architects provided the designs, collaborating with master plan architect Arquitectonica and urban planner Plusurbia Design. Both firms are based in Miami.
Asset Management
How AI can help
Developing the capabilities to gather, organize, and utilize the right data for asset management presents a significant challenge. However, it becomes much easier when leaders understand the questions they are attempting to answer. McKinsey associate partner Jules Barker provides examples of how real estate companies can initiate AI-driven data-gathering and analysis.
Let’s say you’re an asset manager whose teams are bogged down by hunting for information about properties, leases, and other asset information. Multiple programs and systems are slowing down your teams and creating risks in errors, various checks, and rework. You want to make your people more efficient and effective by providing them with a single source of truth that’s accurate and easily accessible.
The solution could begin by utilizing AI to analyze stacks of paper leases, including those written in different handwriting types and with handwritten notes. Digitizing and organizing this data into a single, secure, and governed environment can often uncover various issues, such as inconsistencies regarding a property's precise square footage or the actual lease expiration date. Once these discrepancies are identified, they can be addressed.
Correct and coherent data will allow a company to move faster and more confidently. Instead of spending hours on data gathering and validation, people can reinvest their time into making quicker and better decisions, ultimately enhancing company performance.
Barker offers other examples, which may be accessed here.
