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Eight Must Reads for Real Estate Investors Today (April 14, 2023)

Financial Times lays out the case for why the extent of the likely troubles in the commercial real estate sector is exaggerated. Shadow lenders are getting ready to fill the debt gap left by banks and CMBS shops, according to Bloomberg. These are among today’s must reads from around the commercial real estate industry.

  1. Commercial Real Estate Is Bruised, But Not Broken “There is a clickbait argument that because the Federal Reserve has raised US interest rates so far and so fast, small banks — which provide almost 70 per cent of commercial real estate lending — are likely to see significant defaults, and when those loans go bad they will face solvency issues. But to paraphrase Mark Twain, ‘reports of bank deaths are greatly exaggerated.’ CRE does pose risks for US lenders, but they should be manageable.” (Financial Times)
  2. Shadow Lenders to Bridge Real Estate Void Left by Banks, Bonds “Shadow lenders are circling commercial real estate, a large asset class that traditional banks and the bond market are increasingly backing away from, potentially forcing borrowers to start paying up for deals. Regional banks make up about 70% of the commercial real estate loans made out by US banks. But the turmoil sparked by the US regional bank crisis combined with rising loan defaults on troubled properties has burned small banks, prompting them to scale back on commercial real estate lending as they reduce risk and shrink balance sheets.” (Bloomberg)
  3. Property Has an Open-Ended Problem “An old design flaw in the commercial real-estate industry is back, and this time it is bigger and broader. Property investment funds have ballooned in size since the 2008 global financial crisis, and not just in the U.S. According to the European Central Bank, eurozone real-estate funds had assets under management of 1.04 trillion euros at the end of 2022, equivalent to $1.14 trillion and up from €200 billion in 2007. Some 80% of these funds by value are open-ended, giving investors the option to cash out daily, weekly or quarterly.” (The Wall Street Journal)
  4. Distress Sales Remain Low, But They Are Coming “How much distress will come to market is still an open question. More than $2 trillion of debt maturities are due by 2027, per MSCI estimates. Unlike the years after the GFC, interest rates are higher as the U.S. and the broader global economy are battling inflation. This scenario prevents the Fed from cutting rates to zero or providing substantial quantitative easing. Plus, the Fed’s balance sheet is significantly larger than in the pre-GFC days. “Kick the can” and “extend and pretend” were common refrains in the years following the GFC. The banking industry has been volatile of late, and lending is likely to pull back as a result. This will make refinancing maturing debt more challenging.” (Colliers)
  5. U.S. Manufacturing Boom Has a Real Estate Problem “The 'megasite' issue: While the U.S. has plentiful land, there are not that many places to quickly plunk a billion-dollar-plus factory. Volkswagen's off-road brand Scout Motors studied 74 different parcels of land across the U.S. last summer as it hunted for a place to build a $2 billion assembly plant.” (Reuters)
  6. 4 Ways That Recent Banking Failures Are Going to Impact the Multifamily Sector “The recent failures of Silicon Valley Bank and Signature Bank, among others, have rocked the business and real estate lending world. The multifamily sector hasn’t been immune from the fallout. Signature was the third-largest lender of apartment loans in New York City. In addition to funding proptech start-ups, SVB also funneled more than $2 billion into affordable housing investments, according to Bloomberg. Even apartment executives who don’t work with those banks wonder what’s next.” (Multifamily Dive)
  7. As the Office Market Craters, Support for Penn Station Plan Evaporates “In 2020, when Gov. Andrew M. Cuomo unveiled a grand reimagining of Pennsylvania Station to be funded largely by new office towers around the train hub, one landlord stood to reap most of the rewards: Vornado Realty Trust, one of the nation’s largest owners and managers of commercial real estate. But three years later, the commercial development that would jump start the Penn Station plans has been indefinitely delayed — first by a pandemic shift to remote work, then by rising interest rates and growing fears of a recession.” (The New York Times)
  8. JLL: Restaurant Sales Top $1 Trillion in 2022 “There’s a good reason why retail real estate developers vie for restaurant tenants like The Cheesecake Factory and Olive Garden. Consumer demand for full-service eateries is now higher than it was before COVID took root. Food-and-beverage category sales topped one trillion dollars in the United States in 2022, up 24% from 2019 and 14% from last year, according to a report from the global real estate services JLL.” (Chain Store Age)


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