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TBL Thinks: Multifamily Goes Bust, Chip War Wages On

TBL Thinks

Jun 7

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Dear Readers,

It’s Thinking time. This week we cover apartment building developers’ despair amidst a financing crunch, and the latest in the global chip war.

TBL Thinks is our way to summarize the most important paywalled, longer reads relevant to global macroeconomics, helping you cut through the noise. With that in mind, please enjoy.

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Credit crunch threatens multifamily

Developers Sit on Empty Lots After Historic Apartment Boom (WSJ) As market conditions deteriorate, and interest rates and construction costs rise, a growing number of apartment developers are unable to get started on their projects or get the money to complete them. Tighter lending conditions and flattening rents in some parts of the country only add to developers’ woes.
Developers are launching fewer projects: ’multifamily building starts fell to an annual rate of 322,000 units in April, the lowest April rate since 2020, according to the Census Bureau.’
Some of the decline was expected and inevitable, with approximately half a million new apartments opening up in 2023, the most in 40 years. It is estimated that a similar number will be completed in 2024, taking into consideration already under construction buildings.
Developers are also facing a financing crunch as banks brace themselves for the maturing of a record number of commercial real estate loans and the prospect of defaults or refinancing loans at higher rates.
With banks not a viable option, developers turn to investors for cash to build, but investors too are wary as rent growth flattens and new projects look less profitable in the face of higher rates and increased construction costs.
We continue to see very clear signs of 5%+ policy rates for nearly a year catch up with the real estate sector. How it plays out is yet to be seen, but we think that more defaults and writedowns are on the horizon. The Fed will need to assist banks, or the government might have to. Pick your bailout.

Global battle for chip supremacy

Asia’s Chip Giants Hustle to Maintain Their Edge Over the US (WSJ) The battle for global chip supremacy wages on. South Korean President Yoon Suk Yeol likened the race for supremacy to an “industrial war” while discussing his government’s plan to support the global world’s biggest chip-making cluster in the country, planned as far out as 2050, “encompassing 37 factories, spanning eight cities and creating more than three million jobs.”
South Korea and Taiwan have clear advantages in the chip race, with lower costs, faster production times, and an established supply chain.
“American companies such as Nvidia, Apple, and Qualcomm design the best chips in the world, but in recent decades the ability to manufacture these chips has resided overwhelmingly in Asia”.
Intel remains the sole American company in a three-way race to produce advanced logic chips with Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung.
Governments for all three countries are working to bolster chip production. The US government signed the Chips and Science Act, the South Korean government recently announced a package worth $19 billion to boost its chip industry, while Taiwan enacted tax breaks for research and development expenses.
Not one to be left behind, China pledged approximately $48 million to its semiconductor fund, its largest installment ever. However, as China must contend with US sanctions, its ability to compete with Taiwan and South Korea is likely limited.
We ultimately see the chip war as a positive for the world. More factories means less reliance on Taiwan to produce the world’s chips. Additionally, with American facilities on the horizon, the US can be bolder in its stance around trade wars. Trends of “onshoring” and “reshoring” appear to be real and driven by policy.