How Banks Are Reviving Frozen CRE Deals With Incentives

Amidst a tough CRE market with escalating borrowing costs, banks like JPMorgan Chase and Morgan Stanley are employing seller financing to attract buyers and mitigate risk exposure.

How Banks Are Reviving Frozen CRE Deals With Incentives

Amidst a tough CRE market with escalating borrowing costs, banks like JPMorgan Chase and Morgan Stanley are employing seller financing to attract buyers and mitigate risk exposure.

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Good morning. Banks are offering incentives like seller financing to facilitate deals and provide liquidity to entice buyers and reduce exposure to riskier assets. Manhattan's sky-high apartment rents are finally leveling off. Meanwhile, according to CompStak data, major US gateway office markets are set to experience significant lease expirations from 2023–2025.

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Banks Amplify Incentives to Thaw Frozen Office Deals Amid Property Downturn

Banks Boost Incentives to Lure Buyers With Office Deals Frozen

The incentives are designed to help deals get done at a time when soaring borrowing costs are freezing out buyers and fewer lenders are issuing new debt. (Bloomberg)

As the US CRE market faces a downturn, major institutions like JPMorgan Chase & Co., Morgan Stanley, and Capital One Financial Corp. are using incentives like seller financing to attract buyers and counteract falling property values, even facilitating the sales of their own real estate loans or buildings.

Bridging the gap: In a market where high borrowing costs deter buyers, fewer lenders are issuing new debt, particularly for riskier assets like offices. Direct loans from banks eliminate the need for external financing, allowing sellers to offload risky assets and increase liquidity. Seller financing rates are currently around 5%, making them an attractive alternative for buyers who can save up to 50% compared to market financing. In 1H23, seller financing accounted for 1.9% of CRE lending, up from 0.5% in 2022.

Increasing urgency: For banks, the largely stagnant CRE market means enduring loans on their books for unanticipated durations, coupled with delayed and uncertain repayments. Instances like Capital One financing Fortress Investment Group's purchase of $1 billion of its office loans and JPMorgan seeking a buyer for a $350 million mortgage indicate a sense of urgency among lenders to expedite exits for performing assets before a further decline in property values.

Behind-the-scenes: Much of the activity in the CRE market is transpiring out of public view, as sellers strive to obfuscate the deeply discounted value of their assets. Engaging in seller financing helps to potentially avoid unsettling the broader real estate investment landscape and drawing regulator scrutiny. Banks are pushed towards seller financing not only to maintain pricing but also to shield from revealing stark value downgrades in a volatile market.


Double-edged sword: While seller financing seems promising for banks to mitigate risks tied to real estate, turning their focus towards the creditworthiness of buyers, it isn't without its challenges. Gerard Cassidy from RBC Capital Markets emphasizes the necessity of meticulous underwriting standards for buyers. While banks view this as a comparatively low-risk strategy, buyers, on the other hand, might find themselves cornered, needing to alter their investment strategies to align with the loan terms. For seasoned note buyers, this approach's mismatched financing duration and investment horizon can be a risky proposition.


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Manhattan's Rental Market Finally Catches Its Breath

Manhattan’s In-Demand Apartment Rental Market Hits Pause

Manhattan has some of the highest apartment rents in the United States. (Getty Images)

Manhattan's sky-high apartment rents are leveling off as vacancy rates exceed 3% for the first time in over three years, marking a significant shift in the city's real estate landscape.

Cooling off: According to a new Elliman Report, the median rent in Manhattan slipped by 1.1% to $4,350 in September, following a record high of $4,400 in August. Although the September rent was still 8.2% higher YoY, the vacancy rate rose to 3.07%, up from 2.34% in September 2022, indicating that renters are growing cautious. Landlord concessions also increased slightly to 1.3 months of free rent in September, and some renters opt for shorter lease renewals amid a plateauing, historically high rental market.

Leasing lull: The number of new apartment leases in Manhattan fell by 12.3% in September compared to August. The luxury rental market also saw a 12% drop in new lease signings and an 11% decrease in the median rental price, settling at around $11,000. This decline in new leases is attributed to landlords focusing on lease renewals and a belief that the market is peaking, with one-year lease signings increasing in the past three months as tenants anticipate weaker pricing.

Rising vacancies: Manhattan saw a significant increase in listing inventory in September, up by 61.2%, resulting in a drop in median rent and a rise in vacancy rates. This trend isn't exclusive to Manhattan, as Brooklyn and Northwest Queens also experienced slowed rent levels due to increased leasing inventory. Nationwide, the multifamily vacancy rate rose to 6.8% over the past 90 days, a 2.1% increase from its record low in 3Q21, due to an imbalance between supply and demand.


Renter's rebellion: Renters are beginning to push back against historically high rents, and some renters are opting to renew leases instead of moving due to increased flexibility in hybrid work arrangements. While the market has plateaued at historically high levels, it's unlikely to see the same level of concessions during the pandemic, indicating a need for a market reset in the face of soaring rents.


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Navigating Sea of Lease Expirations in US Gateway Office Markets

According to CompStak data, major US gateway office markets are set to experience a significant number of lease expirations from 2023 to 2025. These expirations bring uncertainties in a market still grappling with hybrid work trends and potential economic challenges.

Historical perspective: The majority (87.5%) of these leases were signed before the pandemic, with 2018 and 2019 being peak signing years. These leases, signed during a market peak, may face challenges as tenants could seek to downsize, move, or demand more concessions in their renewals. Compounding this is the fact that many office properties were traded at the peak and a significant number of office loans are set to mature.

Deep dive: New York City, a significant gateway office market, mirrors this overall trend with 2024 and 2025 as peak expiration years. However, NYC stands out with longer average lease terms and its peak signing years for upcoming expirations were 2014 and 2015. 2019 still played a crucial role, making up over 7.6% of the expiring leases.

Rent rates and their impact: Using CompStak's Market Rent Index, it's evident that NYC's office market has witnessed a decline since 2019. Leases from 2019 would now experience approximately 7.9% lower rates. The potential for adjusting rents provides opportunities and challenges for property owners, especially within the context of current market dynamics.

High-risk properties: Leveraging CompStak’s datasets, potential high-risk properties with significant upcoming lease expirations and maturing loans can be identified. In NYC, buildings with 30% of their square footage set to expire between 2023–2025 were identified, and criteria narrowed to properties with loans maturing by 2025 or traded in 2018 or 2019. One property emerged that fit these high-risk criteria.


Big Picture: While the impending lease expirations present undeniable challenges, they concurrently unveil opportunities for reinvention and strategic realignment in the gateway office markets. Savvy investors utilizing comprehensive datasets could potentially harness this seemingly precarious scenario to recalibrate, reimagine, and robustly navigate through the future of the U.S. gateway office markets.


  • Beyond conventional: If a traditional mortgage isn’t an option, alternative options exist to finance a luxury home that doesn’t involve a lump of cash.

  • Mansion maneuver: In a bid to thwart CIM Group's foreclosure auction of his personal residences, Harry Macklowe initiated a bankruptcy proceeding for his equity stake, providing him with additional time to refinance or sell his luxury tower units.

  • Mega deal: Exxon Mobil's (XOM) $59.5B acquisition of Pioneer Natural Resources (PXD) is set to more than double its land holdings in the Permian Basin and reduce costs by about $2B.

  • Nightclub scandal: Investors are suing BHL Capital and its principal, Nolan Schutze, over allegations that Schutze took a $3M down payment for himself in a failed deal to purchase Austin nightclub RIO.

  • Got milk? Walmart (WMT) is building a $350M milk-processing plant in GA to enhance control over its supply chain and reduce consumer costs.

  • Lone Star strategy: Goldman Sachs (GS) is building a $500M office campus in Dallas, making it the firm's second-largest location after NY.


The rapid population increase in Florida, particularly since the pandemic's onset, has sparked unparalleled development across the state, with the multifamily sector reaping significant benefits from the expansion.

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