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Good morning. As the year continues, the Fed’s hawkish stance appears to be unwavering and lenders aren’t thrilled. The CRE outlook could be better, but at least adaptive reuse retail and multifamily are standing strong. Meanwhile, in the office sector marathon, owners and landlords with more money are simply outlasting their competition.

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END OF THE TUNNEL?

Waiting for the Thaw in CRE Deal Flow

‘Good things come to those who wait’ isn’t exactly an investor mantra (perhaps it should be). But with more Fed clarity expected as winter thaws into spring, Northmarq's Farhan Khabani anticipates robust transaction volume from summer until the year's end.

Retail not quite roaring back, but revitalized: Improving occupancy rates and rents have resulted in more attractive underwriting this year. And adaptive reuse—converting unused offices into mixed-use, lifestyle, and fulfillment centers—is in high demand. Lenders are ready to whip out their checkbooks to fund these types of projects. But two consecutive quarters of slowing sales in the single-tenant net lease sector and a pull-back in multi-tenant retail are keeping many would-be market participants on the sidelines.

Multifamily still the reigning MVP: The outlook for multifamily hasn’t changed much. The winning sector is expected to stay on top for quite some time. Multifamily is still dominated by big-name lenders like Freddie Mac (FMCC) and Fannie Mae (FNMA), who have noted increased activity this year. But long-term take-out financing via life company businesses is also on the rise. And thanks to aggressive underwriting, multifamily lenders are expected to compress spreads to generate more activity this year.

Not out of the woods yet: At its last meeting, the Fed raised rates by 25 basis points to 4.75%. While this was smaller than the 50-point increase back in December, it’s clear more rate hikes are on the horizon. While weakening demand held back inflation in Q4, the Fed wasn’t thrilled. Powell and co. have all but said that deflation is just beginning, and there’s a lot more work to do in order to achieve long-term price stability.

➥ THE TAKEAWAY

Wait or act now? Everyone wants to know when the Fed will start lowering rates again. Will it be in the second half of the year? Will it happen next year? Trying to guess and time the market isn’t really helpful. What is clear is that the Fed will determine a clear course of action over the next one to two years. The rest of us just have to learn to live and invest with that uncertainty. And the best way to do that is to research all available lending options because opportunities are still out there.

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EVERYTHING'S RELATIVE

Apartments Sales Plummeted 71% YoY in January to $6.2B

After reading that headline, you probably think we’re nuts for claiming multifamily is still leading CRE’s recovery. But everything’s relative. And despite the deep dive, transaction volumes still look good compared to 2008.

The ugly: Nationwide apartment sales dropped 71% over the last 12 months in January to $6.2B, according to MSCI Real Assets. Garden-style apartment sales totaled $3.7B, while high-rise apartment sales brought in $2.5B, down 59% and 33%, respectively. Average prices slid 4.6% YoY and 10.3% since July when the drop began.

The bad: After the Fed pushed interest rates to 5.5% in Q4, garden asset cap rates and mid- to high-rise apartment cap rates are clocking in at 4.7% and 4.6%, respectively. And because apartment demand turned red last quarter, buyers can’t depend on income growth, so the bid-ask spread isn’t getting smaller anytime soon.

➥ THE TAKEAWAY

The good: Fortunately, there are reasons to be optimistic if you know where to look. Despite the sales slowdown, transaction volumes are still well above the $1B and $2B posted in the months following the end of the Great Recession in 2009. And public market valuations are up 9.4% from their low point in December. It’s definitely a buyer’s market for now, but it might not last as long as some would like.

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MORE TO COME

Office Owners Endure The Pain as $92B in Non-Bank Debt Comes Due

Office landlords who have been relying on floating-rate debt are now faced with rising borrowing costs, which could push more of them towards defaulting on their mortgages.

Office owners are officially over it: The rise of remote work has caused a significant problem for office owners nationwide. And while low interest rates have provided some relief for investors trying to manage their debt, office landlords are now facing a surge in borrowing costs. This has led to high-profile mortgage defaults from major industry players like Pimco’s Columbia Property Trust and Brookfield Corp (BAM).

“Et tu, Jerome?” The Fed's decision to raise its benchmark rate even higher isn’t helping the situation, either. Nearly $92B in debt from nonbank lenders comes due this year, with an additional $58B maturing in 2024. It gets better after that, but that’s not saying much.

When insurance becomes a gamble: Financing challenges are particularly problematic for real estate, given the prevalence of floating-rate loans with frequently resetting interest rates. Owners often purchase rate caps to limit payments, but these have grown far more expensive. In February, the price for one-year protection on a $25m loan with a 2% rate cap surged to $819,000 from $33,000 in early March 2022, according to Chatham Financial.

Holding on even when it hurts: Even for owners who haven’t defaulted, the math is getting murky. Blackstone's (BX) Willis Tower in Chicago has seen monthly payments on its roughly $1.33B CMBS loans rise nearly 300% YoY in February, according to Bloomberg. Many landlords are also struggling to attract workers back into offices due to remote work trends. Over 330 MSF of US office space will be empty by 2030, according to Cushman & Wakefield.

➥ THE TAKEAWAY

Looking for silver linings: Defaults do not necessarily mean giving up on offices entirely, as some landlords are negotiating better terms with lenders or exploring building conversions, which are surging in popularity. The appropriate course of action varies based on factors such as leasing and location, ownership type, and access to liquid capital. There is a silver lining, but many are looking hard to find it.

✍️ Editors' Picks

• Diversify your portfolio: Ready to delve into the world of private credit? CRE Daily readers can earn up to $500 on their first investment with Percent.

• BREITer tomorrow: Blackstone’s BREIT made good on a third of its February redemption requests, returning $1.4B to investors. Redemption requests were also down 26% from January.

• More ambitious by the day: NYC Mayor Eric Adams and Gov. Kathy Hochul are now aiming to turn Midtown’s empty office blocks into 20,000 new affordable apartments.

• Another one bites the dust: Blackstone has defaulted on a €531M ($562M) bond backed by a portfolio of Finnish properties as values plummet across Europe.

• Rethinking old habits: While many US businesses are planning on leasing more office space this year, up to 88% are looking for shorter-term leases than before.

• Lean times call for lean measures: CBRE Group (CBRE) and Cushman & Wakefield (CWK) reported capital markets income drops between 46–52%, and CBRE plans to cut $400M in costs.

• Up and down and up again: US mortgage rates are back at 6.71%, their highest level since November. Applications also fell for a third week and are at their weakest reading since 1995.

• Well, at least they tried: Although the Fed keeps raining on our parade with rate hikes, the NY Fed at least had the decency to tell college students which six college degrees are the worst.

• Stalled on the side of the road: Rising capital costs (loans are 350–400 basis points above SOFR) are expected to stall most CRE development in 2023, according to Marcus & Millichap.

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🤝 Deals & Dealmakers

• Buyer, meet Seller: Greysteel has arranged the sale of a 14-building Whittier Ave. portfolio in Baltimore between an MD seller and an NY and NC JV.

• Fingers crossed: NY-based ESG Kullen has hired Jones Lang LaSalle (JLL) to sell a converted 389-unit lakefront condo tower three years after buying it. But it won’t be easy.

• Deal of the day: CIM Group just sold Hartland Plaza in Austin, alongside a 4.6 MSF portfolio of retail and industrial properties, for $894M, setting a YTD record.

• Easier money: MIG Real Estate sold a 156.7 KSF industrial site in Inland Empire, CA for $26M—23% more than it bought it in 2021.

• Doesn’t it grow on trees? Dollar Tree (DLTR) plans to open up to 650 new stores this year, nearly 200 more than the 455 stores it opened in 2022.

• Signs of the future: CT-based Armada ETF Advisors, a multifamily REIT asset manager, merged with machine-learning data analytics firm Arialgo Ltd. Eyebrows went up.

• Glamp on! Austin-based Summit Hotel Properties (INN) is expanding its ‘glamping’ offerings by expanding a recent acquisition while developing another one.

• What dreams are made of: Menesse Intl. paid $6M for a 17.5 KSF site on Miami’s Brickell Ave. and plans to build a high-end boutique condo development with asking prices of $3K per SF.

• No one was surprised: After jipping Columbia Property Trust, Twitter has listed 200 KSF of NYC office space for sublease at 245 and 249 W. 17th Street. No, Elon does not feel bad about it.

📈 Chart of the Day

In this eye-opening chart, it’s easy to see that we’ve recently passed an inflection point in housing prices and mortgage rates, which have flipped again for the first time since H1 2019.

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