CRE is Waking Up from a Decade-long Cheap Money Dream

The US commercial real estate is at a crossroads, with lenders awaiting a Fed rescue that has yet to come.

CRE is Waking Up from a Decade-long Cheap Money Dream

The US commercial real estate is at a crossroads, with lenders awaiting a Fed rescue that has yet to come.

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Good morning. The US commercial real estate is at a crossroads, with lenders awaiting a Fed rescue that has yet to come. Meanwhile, PRP Real Estate Investment bought D.C.'s Market Square for $323 million, 2024's biggest office sale to date.

Today’s issue is brought to you by The Criterion Fund.

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CRE is Waking Up from a Decade-long Cheap Money Dream

America's CRE Sector Confronts Post-Pandemic Reality

US commercial real estate is facing a moment of truth. Lenders have rolled troubled loans, hoping for a miraculous future Fed rescue that has yet to come.

What happened: Just before Federal Reserve Chairman Jay Powell declared that the benchmark interest rates would remain between 5.25% and 5.5%, Colin Simpson, the CFO of Manulife, disclosed a 40% write-down in the valuation of their US office investments from their value before the pandemic.

Reality check: At first, a 40% reduction in investment value might seem alarming. However, this could actually be a positive signal for investors. Manulife, one of the largest CRE lenders with a loan portfolio over $30B, has deep enough pockets to withstand such a loss. More significantly, this shows a shift towards greater transparency in the American commercial real estate market as lenders begin to acknowledge the sector's challenges more openly.

Extend and pretend: This news is both welcome and overdue. As expectations for US rate cuts grew, property owners fell into an "extend and pretend" cycle, with lenders delaying action on troubled loans, hoping for a Fed bailout. Yet, the recent Fed meeting highlighted priorities shifting to controlling inflation over protecting the property market. Now, the trillion-dollar question is how many other players will now follow Manulife’s lead – and finally address one of the biggest hangovers from the past decade’s cheap money party?

Why it matters: Banks, during COVID-19's low-interest rate environment, contributed to a surge in cheap CRE loans. Post-pandemic, CRE values dropped by an average of 33%, with office buildings seeing declines of up to 60%, per Goldman Sachs. Despite this, the financial repercussions have been somewhat muted by the ongoing extension of troubled loans. For example, of the $163 billion in CMBS due in 2023, $83.3 billion remains outstanding. Moreover, the sector is grappling with rising delinquencies and increasing financial strain, putting over 250 of the 4500 US banks in jeopardy.


Big picture: The CRE market is on thin ice with $1.3 trillion in distressed debt, partly due to pandemic-era low-interest loans. Banks have pushed $270 billion of this debt into 2024, delaying a reckoning. Despite a more solid banking system post-2008, the current "extend and pretend" approach casts a shadow over economic growth. The real fix? Transparency about losses and a move to either repurpose or demolish outdated properties. As the Fed leans towards maintaining higher interest rates, it's a wake-up call for investors: the era of cheap money is officially over.

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✍️ Editor’s Picks

  • Tax tension: The future of a property tax incentive is at a deadlock, with real estate leaders and construction unions clashing over wage conditions despite proposals to enhance worker compensation.

  • Transformation: Brookfield Properties partners with Concord for a monumental redevelopment of the former Concord Naval Weapons Station, planning over 12,000 homes and extensive commercial space in a $6 billion, multi-decade project.

  • Market quake: The residential real estate sector braces for major shifts following a $418M antitrust settlement by the National Association of Realtors, while the commercial industry watches on, largely unfazed but cautious about indirect impacts.

  • Lending stability: U.S. local and regional banks have kept commercial loan-to-value ratios steady at an average of 66.4% in 2023, barely shifting from 66.7% in 2018, despite commercial real estate market downturns.


  • Deal of the day: A major student housing portfolio spanning six communities in Louisiana, Maine, South Carolina, and Texas is up for grabs at nearly $500M.

  • Market Trends: The PNC Real Estate Multifamily Market Report for Q4 2023 highlights strong demand yet insufficient supply, with national rent growth stalling.

  • Insurance exodus: State Farm's decision to not renew 72,000 home and apartment policies in California leaves policyholders searching for alternatives, highlighting broader market challenges.

  • Lending milestone: JLL Income Property Trust's latest $48 million loan boosts its senior secured mortgage portfolio to over $100 million, spotlighting a move in Charleston's apartment sector.

  • Refinancing relief: Chicago's multifamily landlords are finding new hope in refinancing deals amid a steady market and more flexible lenders, offering a lifeline to some under the strain of recent rate hikes.

🏭 Industrial

  • Refinance: Blackstone secures a $2.35 billion refinancing deal for its industrial portfolio across 11 states, backed by major banks, highlighting the firm's confidence in the industrial property market.

  • Suburban revival: A former Rackspace HQ in Windcrest, acquired for $21M, is set for transformation into an international business park. The redevelopment will comprise a mix of uses, including light industrial, manufacturing, office, and retail.

  • Conversion comeback: Industrial conversions emerge as a strategy in Dallas-Fort Worth, repurposing obsolete office spaces into warehouses, potentially easing urban land shortages.


  • Slowdown: Darden Restaurants, parent of Olive Garden and LongHorn Steakhouse, scales back on new openings due to rising construction costs, projecting fewer launches and reduced capital spending into 2025.

  • Acquisition: First National Realty Partners expands its footprint with the purchase of Elements Horsham, a 50,353-square-foot shopping center in Pennsylvania, marking its continued growth in the open-air retail sector.

  • Tightening: Boston's retail real estate sector shows resilience with a low 2.9% vacancy rate, on par with Miami and Raleigh, amid limited new construction and consistent annual declines since the pandemic.


  • Stay in place: Legal office leases surged 50% as firms predominantly opt for relocation, energizing a sluggish market.

  • Downsizing: Bank of America is set to vacate 13 floors in a Charlotte office tower, preceding its lease end, marking another financial firm's real estate reduction in the city.

  • Design: Post-pandemic, employees desire more outdoor elements in their workplaces, prompting a leading architecture firm known for Apple’s HQ and the Gherkin in London to innovate.


StoneSteps Real Estate and DMJ Capital Partners are thrilled to present their latest investment offering, a value-add reposition of a 53 unit community in Imperial Beach, CA (San Diego County).

Key highlights include:

  • Acquiring at 20% less than recent sales comparable

  • Seller owned for 30+ years

  • Low leveraged acquisition at 35% LTC

  • Rarely available property in a desirable beach community

  • The team has successfully executed three other similar projects 

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D.C.'s Market Square Changes Hands in Landmark $323M Deal


In a major deal for Washington D.C.'s CRE scene, PRP Real Estate Investment has taken over the iconic Market Square office complex for $323 million, marking the city's largest office sale of 2024 to date.

Deal details: Situated on Pennsylvania Avenue, a prime location nestled between the White House and Capitol Hill, Market Square is known for housing the government affairs offices of over 30 Fortune 500 giants, such as Visa and Pepsi. According to PRP's president and CEO, Paul Dougherty, this positioning highlights the tenant base's resilience, even in economic downturns.

Some background: The deal has seen a transition from the previous ownership consortium of Blackstone and Columbia Property Trust, which had managed the property since a $611 million acquisition in 2011 and a following stake sale in 2015. The transaction was facilitated by clearing a $325 million loan and incorporating new debt financing.


Why it matters: PRP views the purchase as a “once-in-a-lifetime opportunity” to own a trophy asset amid the struggling D.C. office market, where values and occupancy have dipped post-COVID. This acquisition, the largest in D.C. for 2024, outdoes the previous year's top sale. PRP's strategy includes revitalizing the property's retail space and enhancing common areas, leveraging the advantageous purchase terms for flexibility in repositioning efforts.


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