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10 Must Reads for the CRE Industry Today (Nov. 2, 2022)

Multiple publications look at the impacts of rising interest rates on various aspects of the commercial real estate business, including debt availability and office valuations. Apartment evictions are back on a grand scale as federal emergency measures have run out, reports Bisnow. These are among today’s must reads from around the commercial real estate industry.

  1. Rising Interest Rates Threaten to Expose Office Buildings’ Inflated Values “Cheap debt fueled a decadelong boom in U.S. office values, offsetting the impact of years of rent increases that didn’t keep pace with inflation. Now that the long period of easy credit is over, office-building owners are bracing to see how much less their properties are actually worth. The prices of some aging office towers in places such as New York and Chicago have already fallen by about a quarter as potential buyers struggle to land financing with interest rates rising fast, brokers and lenders say.” (The Wall Street Journal)
  2. Fed Pivot Could Bring Relief for Real Estate Stocks, Funds “Real estate equities and the related funds are slumping this year against the backdrop of five interest rate hikes by the Federal Reserve. Those are the breaks for rate-sensitive asset classes. However, talk of a “Fed pivot” is increasing, indicating that funds such as the Virtus Duff & Phelps Global Real Estate Securities (VGISX) could be poised for a rebound. Moreover, the central bank taking its foot off the rate hike accelerator could renew the status of the real estate sector as an inflation-fighting destination. ‘Hopes for a forthcoming policy pivot from the Federal Reserve and a modest U.S. stock market rally in October following months of losses have sparked optimism that equities’ bear market days may be numbered,’ noted S&P Global Market Intelligence.” (VettaFi)
  3. CRE Debt Markets Hit Stormy Waters as Amid Rising Interest Rates “If the commercial real estate lending climate from 2012 to mid-2022 was the Titanic out of Southampton, England — sleek, agile, strong and seemingly invulnerable — the last six months have been the first hour after the ship hit the iceberg. Panic has set in, and the band’s striking up ‘Nearer My God to Thee.’ One year after record lending volume during what seemed like a joyous recovery out of COVID, the debt markets began to tighten in the second half of 2022. The culprit, of course: uncertainty over how high the Federal Reserve will raise interest rates to fight inflationary pressures and an impending recession.” (Commercial Observer)
  4. CRE Braces for Interest Rate Hike No. 6 “On Nov. 2, as part of its continued effort to combat inflation, the Federal Reserve will raise the baseline interest rate by yet another 75 basis points, its sixth increase this year, following hikes of the exact same margin in July and September. With the borrowing costs increasing and inflation at its steepest in 40 years, nearly all commercial real estate sectors, types and markets are feeling or will experience their effects in some form or another, from borrowing costs and capital markets to the development and construction of new properties.” (Commercial Property Executive)
  5. Apartment Investment Sales Grind to a Halt as Capital Costs and Vacancies Rise “Sales of U.S. multifamily assets essentially collapsed during the third quarter of 2022, according to the National Multifamily Housing Council Quarterly Survey of Apartment Market Conditions. NMHC Chief Economist Mark Obrinsky cited the higher cost of debt and equity, along with generalized economic uncertainty, as the drivers of the slowdown. The survey also reported higher vacancies and slower rent growth compared with the second quarter.” (Bisnow)
  6. Evictions Are Back in Force as Housing Advocates Rue ‘Missed Opportunity’ “In the months since federal funding from the Emergency Rental Assistance Program ran out in jurisdictions across the U.S., eviction rates are back to their pre-pandemic levels or even worse in most of the country.” (Bisnow)
  7. The Case for Private Real Estate “Real estate is one of the oldest and most established investments. Most investors own a home and can appreciate how its value fluctuates based on improvements, market conditions, and supply and demand. It is often a family’s largest single investment. Real estate investment trusts (REITs) have also emerged as valuable tools in providing growth and income. REITs have become a mainstream response to investors seeking yield in their portfolios or hedges against inflation. However, owning a home or owning publicly traded REITs is very different from investing in private properties.” (Financial Advisor)
  8. Top New York Owners Grade Mayor Adams and Gov. Hochul “Commercial Observer asked the 32 owners we spoke to for our annual Owners Magazine to grade the performance of the governor and the mayor of New York. To add an incentive for honesty, we promised to keep all answers anonymous. But here are their grades.” (Commercial Observer)
  9. First Look: Kohl’s Opens Concept Store with Self-Checkout, Other New Elements “Kohl’s has unveiled a one-of-a-kind “concept” store designed to provide a more localized and modern shopping experience. Located in Tacoma, Wash., the 35,000-sq.-ft. store is much smaller than a traditional Kohl’s, which averages about 80,000 sq. ft. and is “too large” for many small markets, the retailer said.    Kohl’s said the new Tacoma outpost is intended to give the retailer the opportunity to test (and learn from) new ideas and store experiences which may be used in new or existing locations in the future. In May, Kohl’s revealed plans to open about 100 small-format locations during the next five years or so in markets untapped by existing Kohl’s stores.” (Chain Store Age)
  10. From Gap to Zara, Returning Things You Don’t Want Gets Harder “Shoppers became accustomed to using their homes as dressing rooms during the pandemic, as retailers let them buy several items online and then decide what to keep. Stores are now trying sharp measures to curb that habit. Retailers bent over backward to make returns easy so that people would keep shopping through Covid-19 shutdowns, says Erin Halka, a retail strategist at supply-chain consulting firm Blue Yonder. But that fed a pattern of buying and returning that grew costly for companies.” (The Wall Street Journal)
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