Another Major SF Landlord Sells Housing Portfolio

Plus: Powell thinks that CRE loans are a manageable problem. this year.

Another Major SF Landlord Sells Housing Portfolio

Plus: Powell thinks that CRE loans are a manageable problem. this year.

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Good morning. San Francisco's rental market is suffering due to pandemic-related factors, causing landlords to sell properties at reduced prices. Meanwhile, after his recent rate cut remarks, Jerome Powell still believes that CRE loans are a ‘manageable’ problem this year.

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Market Snapshot

S&P 500
GSPC
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FTSE NAREIT
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10Y Treasury
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SOFR
1-month
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0.0%

*Data as of 2/05/2024 market close.

MULTIFAMILY MAYHEM

San Francisco's Rental Market Woes Continue as Top Landlord Sells Major Housing Portfolio

San Francisco faces a new real estate crisis as another major landlord offloads 459 units across 12 buildings, a stark indicator of the city's faltering residential market amid soaring crime rates and plummeting occupancy.

Downturn deepens: San Francisco's multifamily sector has joined the office market in a steep downturn. Property owners are reeling under the weight of high interest rates, sinking occupancy rates, and dwindling rental incomes, signaling a widespread crisis in the city's real estate landscape.

Another one: Mosser Companies' recent default on a 2018 loan for $88 million loan, backed by 459 rental units, exemplifies this trend. With an 85% concentration in the Civic Center neighborhood, the company's portfolio, once valued at $154 million (94% occupied), has depreciated significantly. The company's creditor has now hired real estate firm Cushman & Wakefield to sell the multifamily home properties, The San Francisco Chronicle reported.

Zoom out: This trend isn't isolated to Mosser Companies. Other major players like Veritas Investments have faced similar crises, indicative of a broader sectoral shift. The Mortgage Bankers Association estimates that $2.6T of real estate loans will come due nationally through 2028, with multifamily accounting for 38% ($988B). More than $1B in CMBS loans tied to multifamily in San Francisco will mature between 2024 and 2028. The combination of maturing debt and challenging conditions poses significant obstacles for multifamily landlords.

➥ THE TAKEAWAY

Boom, bust, recovery: San Francisco's real estate crisis is more than a financial predicament; it's a reflection of deeper social challenges. The city's struggle with crime, drug abuse, and homelessness is not just a backdrop but a driving force behind the changing real estate landscape. While the market is resetting, new groups are seizing distressed opportunities, leading to a changing of the guard.

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✍️ Editor’s Picks

  • Banking on alternatives: BlackRock Real Estate Research (BLK) urges CRE investment, but concerns over lending may mean more of a focus on finding alternative funding sources.

  • M&A of the day: CBRE Group (CBRE) acquires J&J Worldwide Services for $800M in cash, with a potential additional payment of $250M in 2027.

  • Hospitality headaches: In a survey conducted by AHLA, 67% of U.S. hotels are experiencing staffing shortages and 82% have raised pay, but 72% still can’t fill open positions.

  • Rail relocation: The Transbay Joint Powers Authority is budgeting $170M to acquire downtown properties for a rail extension.

  • Bill of the day: The U.S. House of Representatives just passed a $78B tax bill to boost the low-income housing tax credit (LIHTC) program.

  • Long overdue: Detecting: NYC will require the installation of natural gas detectors in residential buildings by May 1, 2025, costing less than $20 each.

  • Hotel hopefuls: Ashford Hospitality Trust (AHT) seeks to sell more U.S. hotels to pay off pandemic-related loans before they mature.

🏘️ MULTIFAMILY

  • Multifamily maverick: Brooklyn real estate developer Isaac Hager is making an impressive comeback, despite facing foreclosure and burning bridges with lenders.

  • Pretty penny: A&R Kalimian Realty sold 310-unit The Aire in the Upper West Side to the Gotham Organization and Carlyle Group for $265M for nearly $855K per unit.

🏭 Industrial

  • Parking paradise: Prologis (PLD) purchased a 16-acre Brooklyn site for $51M and plans to use it as a parking lot for delivery vehicles.

  • Vertical warehouses: Logistics Property is building the first multistory warehouse in Chicago, featuring two levels for product storage and five levels of parking, targeting e-commerce.

  • Minimal Millennials: Approximately 18% of Americans have a storage unit, with millennials showing the highest usage rates, according to StorageCafe data.

🏬 RETAIL

  • Retail Renaissance: When did retail go from being a plague victim to the darling of the CRE sector? What changed, and why?

  • Revolutionizing retail: Panther Development acquired a 135KSF shopping center in North Adams, MA, and is actively pursuing value add retail properties.

  • Dividend delights: Retail REITs have been offering high yields, with Simon Property Group (SPG) at 5.5% and Tanger (SKT) at 3.8%.

🏢 OFFICE

  • Riddle solved: Intercontinental Exchange (ICE) signed a 15-year lease for 143KSF at 1345 Avenue of the Americas in New York.

  • Sure, why not? The City of LA secured a massive 15-year, 310KSF lease at Gas Company Tower, paying over $14.8M per year.

KEEPER OF THE KEYS

Powell: CRE Problem Manageable Despite Small Bank Challenges

Commercial real estate a 'manageable' problem but some banks will close: Powell

Federal Reserve Board Chair Jerome Powell. (Alex Brandon/AP Photo) (ASSOCIATED PRESS)

Federal Reserve Chair Jerome Powell foresees more small bank closures due to commercial real estate challenges but maintains the situation is “manageable,” contrasting to the 2008 financial crisis.

Crisis in motion: In a recent "60 Minutes" interview, Powell expressed concerns about regional banks, sparked by troubles at New York Community Bancorp's (NYCB) 70% dividend cut and quarterly loss, which has raised concerns about the vulnerability of regional banks.

Zoom in: These banks have a greater exposure to CRE, accounting for 44% of their total credit compared to 13% for larger banks with assets over $100B. Loans tied to offices and certain multifamily properties are very vulnerable.

Tightening the screws: U.S. banks witnessed weakened demand for CRE loans in Q4. Bank officers tightened lending standards, except for residential real estate loans. While this course may alleviate some risks, it could also limit credit access for businesses in need.

Managing the problem: Despite the challenges faced by smaller banks, experts suggest that the CRE problem should be manageable for the industry as a whole. Analysts note that other banks may handle their exposure to CRE better than New York Community Bancorp, which was under-reserved relative to the risk in its portfolio. The severity of the issue may depend on factors like inflation, interest rates, and the overall state of the US economy.

➥ THE TAKEAWAY

Fed’s future outlook: The CRE problem facing U.S. banking may present challenges, particularly for smaller banks with high exposures. To weather these challenges, banks need to assess their risk exposure, strengthen reserves, and formulate comprehensive plans to manage expected losses. Banks can seize temporary opportunities offered by the sector's recovery by taking proactive measures.

CHART OF THE DAY

Given what's happening across the country, you’d think that office developers in Austin would be a bit more prudent. But it seems like they’re not paying attention. Since H219, more offices are being built in the city that are being absorbed, with nearly 20MSF up for grabs.

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