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11 Midweek Must Reads for Real Estate Investors (June 7, 2023)

Historic levels of new multifamily construction might threaten the profits of large REITs with holdings in the Sunbelt, reported The Wall Street Journal. Delinquencies on CMBS loans backed by office buildings rose the most in five years this May, according to Trepp figures. These are among today’s must reads for real estate investors.

  1. Sunbelt Construction Boom Threatens Top Apartment Building Owners “Historic numbers of new rental apartments opening over the next 18 months are poised to decrease profits for the largest publicly traded landlords, who are already contending with slower or declining rent growth. Nationally, more than 950,000 multifamily units are under construction, according to the U.S. Census Bureau. That equals three times the number for apartment construction from two decades ago. Sunbelt cities are the most exposed to the recent ramp-up in new supply, according to a May report from real estate analytics firm Green Street.” (The Wall Street Journal)
  2. Office CMBS Delinquency Rates Jump by Most in Almost 5 Years “The office delinquency rate, which increased 125 basis points to 4.02% in May, hasn't been above 4% since 2018, according to a report by CMBS data firm Trepp. Offices typically run on 10-year leases and loans, which means defaults and delinquencies in 2018 included CMBS debt originated during the financial crisis. ‘Office has been the most heavily watched part of the market as firms look to aggressively reduce space,’ according to the Trepp report. ‘Sublease space is at or near record highs in many markets as demand from big tech firms has eroded sharply. In addition, many companies are letting leases expire or are renewing with smaller footprints.’” (Investopedia)
  3. Retail’s Latest Lifeline? Equity “Sure, retail has weathered multiple market disruptions. E-commerce, anyone? Pandemic lockdowns? Whatever its resiliency in the past, experts say it will now likely need to lean heavily on equity investments to spur deal activity amid today’s economic headwinds. Lenders and finance brokers who gathered at the annual ICSC conference in Las Vegas late last month expressed confidence that many retail properties, particularly shopping centers with grocery stores as anchor tenants, are better positioned than other commercial real estate sectors in a higher interest rate environment with generally healthy cash flows.” (Commercial Observer)
  4. Banks Cutting Losses on Distressed Office Loans “Banks are facing up to the office sector’s decline, ditching the extend-and-pretend strategy for cut-and-run.” (The Real Deal)
  5. Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due. “Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured. Unlike most home loans, which get paid down each year, many commercial mortgages are known as interest-only loans. Borrowers make only interest payments during the life of the loan, with the entire principal due at the end.” (The Wall Street Journal)
  6. Half of the World’s Largest Firms Plan to Cut Office Space “A Knight Frank poll of 350 real estate leaders at international firms found that half of the largest companies surveyed — those with more than 50,000 staff — expect to shrink their global portfolios, with most expecting to shrink by between 10% and 20%. By contrast, more smaller businesses — those with fewer than 10,000 employees — said they expect to grow, with 55% saying their office footprint would expand, the survey data show.” (Fortune)
  7. AR Global and Blackwells Capital End War Over GNL and RTL “After extensive disagreements and lawsuits, under the terms of the cooperation agreement, the Blackwells parties will withdraw their nomination notices and proposals at both GNL and RTL and have agreed to vote in favor of the share issuances for the previously announced merger of GNL and RTL and internalization transactions at the GNL special meeting. Under terms of the settlement agreement, GNL will pay or otherwise irrevocably deliver or transfer a settlement fee comprised of 495,000 newly issued shares of GNL common stock in the aggregate (valued by the parties at $10.97 per share) to Blackwells Capital.” (The DI Wire)
  8. Artemis Real Estate Partners Closes $2.2B Fundraising Round “And the supply of dry powder from private equity grows even larger. Artemis Real Estate Partners, a national real estate investment firm, announced Monday that its fourth value-add fund, Artemis Fund IV, closed with $2.2 billion in equity commitments. Together with the $1 billion the firm’s Healthcare Fund II raised in June 2022 and a $500 million core credit platform, Artemis now has roughly $3 billion on hand to invest in distressed real estate opportunities.” (Commercial Observer)
  9. Hotelier Writes Off San Francisco, Citing ‘Major Challenges’ “Park Hotels & Resorts, the operator of two of the most prominent hotels in San Francisco, is handing in the keys on the properties — and, in essence, giving up on a city that has fallen on hard times. Park Hotel stopped making payments on a $725 million loan tied to the Hilton Union Square and Parc 55, the real estate investment trust said on Monday. The hotels, a few blocks from the once-bustling Moscone Center conference hall, have a combined total of nearly 3,000 rooms.” (The New York Times)
  10. ‘We’re Mowed Over’: Colossal Data Centers Are Taking Over the U.S. Countryside “As you drive west from Washington DC, an imposing cluster of rectangular buildings emerges from the countryside. They emit a whirring sound, and could be confused for warehouses. But, in fact, this is the home of the cloud internet. These are data centers, where companies such as Amazon, Google and Microsoft store and distribute information. Prince William county, 40 miles (65km) from the US capital, is set to become the world’s capital of cloud storage if an ambitious but controversial project goes through.” (The Guardian)
  11. Pot Farmers Are Going Broke Growing for New York Legal Weed Market That’s Not Taking Off “Seth Jacobs has about 100 bins packed with marijuana flower sitting in storage at his upstate New York farm. And that’s a problem. There aren’t enough places to sell it. The 700 pounds (318 kilograms) of pungent flower was harvested last year as part of New York’s first crop of legally grown pot for recreational use. He also has roughly 220 pounds (100 kilograms) of distillate. Months later, there are only a dozen licensed dispensaries statewide to sell what Jacobs and more than 200 other farmers produced.” (Fortune)
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