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Distressed & Opportunistic CRE Funds Dry Up

Distressed CRE sales aren’t as bad as most expected, causing opportunistic and distressed funds to flag while direct lending thrives.

Distressed & Opportunistic CRE Funds Dry Up

Distressed CRE sales aren’t as bad as most expected, causing opportunistic and distressed funds to flag while direct lending thrives.

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Good morning. Billions raised for distressed real estate deals are still sitting idle, as the expected wave of opportunities hasn’t materialized. Today, we break down what’s holding back the market and where investors are shifting their focus.

Today’s issue is brought to you by Agora—one solution for all your investment management needs.

👉 Your perspective matters! Take 3 minutes to share your thoughts on the CRE market's pulse in the Q4 2024 Fear and Greed CRE Survey.

Market Snapshot

S&P 500
GSPC
5,917.11
Pct Chg:
+0.40%
FTSE NAREIT
FNER
813.36
Pct Chg:
-0.64%
10Y Treasury
TNX
4.382%
Pct Chg:
-0.024
SOFR
30-DAY AVERAGE
4.844
Pct Chg:
0.0%

*Data as of 11/20/2024 market close.

distressed assets

Four Years Later, Distress Funds Sit Idle as Investors Brace for a Debt Tsunami

Billions raised by real estate funds post-pandemic remain unspent as distressed opportunities fall short of expectations.

Not too distressed: The anticipated wave of distressed asset sales has failed to materialize, with the number of distressed properties reaching just $102.6B nationwide in Q3, according to MSCI. The pace of distress has also slowed down, with banks choosing loan modifications or extensions over foreclosures and sales. In other words, owners are holding onto their assets longer than expected.

Aggregate Capital Raised (USD BN)

Capital concerns: CRE opportunity and distress funds raised a staggering $70B in 2022, but contributions have dwindled to $31B in the first three quarters of 2024, per Preqin. Distress funds were hit harder, raising just $240M across two funds this year. Many funds are now nearing the end of their investment periods with a backlog of undeployed capital and limited deal flow.

Direct lending growth: Meanwhile, direct lending funds have taken the spotlight, offering 'equity-like returns' amid tighter credit conditions. Since 2021, 407 funds have raised $128B, including high-profile launches like Goldman Sachs’ $7B real estate credit fund and Madison Realty Capital’s $2B CRE debt fund. These funds are filling the financing gap left by traditional lenders.

Number Of Funds Created

➥ THE TAKEAWAY

Reading the room: Four years post-pandemic, distress funds are at a crossroads, struggling with undeployed capital and shrinking investor confidence. The future belongs to funds that can pivot quickly, capitalize on niche opportunities, or ride the growing demand for alternative lending.

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✍️ Editor’s Picks

  • Real resilience: Despite mortgage rates rising to 6.90%, the Mortgage Bankers Association reported 1.7% more mortgage applications last week, with purchase applications up 2%.

  • Happier builders: NAHB's November survey showed that US builder confidence has returned, with the Housing Market Index at 46, up from 43 MoM.

  • Pump the brakes: Nomura (NMR) analysts warn there may be no December rate cut, with Federal Reserve Chair Jerome Powell once again waffling (no surprise there).

  • Tale of two homes: In October, US single-family homebuilding dropped 6.9% from September, with the South seeing a 10.2% decline. Meanwhile, multifamily housing started to surge by 9.8%.

  • Banking blues: Speaking of the Federal Reserve, they also highlighted some concerns for CRE lending as office delinquency rates now exceed 10% at large US banks.

  • Mortgage troubles: Moody's downgraded Blackstone Mortgage Trust's credit ratings to B1, citing ongoing concerns over office loans and significant losses.

🏘️ MULTIFAMILY

  • Multifamily moves: In the first three quarters of 2024, multifamily demand reached 362K units nationwide, up 50% from last year and second only to 2021.

  • Bracing for impact: Billions more are expected in multifamily loan maturities by October 2025, which could peak at $5.4B for the year, or 25% higher than in 2023.

  • Legacy luxe living: The JCPenney HQ in Plano is set for a high-end transformation into a mixed-use development featuring 750 luxury apartments starting at $4K, office towers, a hotel, and more.

  • Exurbia explodes: ‘Exurbs,’ the outer suburbs of metro areas (as opposed to the inner suburbs), enjoyed growth in 2023 despite their distance from the largest city centers.

  • Loosening the Belt: Atlanta Beltline is planning a $270M mixed-use project in Bankhead with 1.1K apartments and townhomes, nearly 30% affordable, to boost connectivity and address housing needs.

🏭 Industrial

  • Evolving energy: The incoming Trump administration’s focus on AI data center growth—with a focus on fossil fuels and deregulation—is a stark contrast to Biden's renewable energy focus.

  • Revitalizing Dallas: Lincoln Property is replacing an old truck terminal near Dallas Love Field airport with a modern two-building logistics hub, set to be completed by October 2025.

🏬 RETAIL

  • Charging ahead: Investing in EV chargers has boosted margins for CRE owners, with increased traffic and charging revenue despite installation and insurance costs.

  • Bigger burritos: Chipotle is expanding rapidly, with potential growth of 8–10% annually, and is aiming for 7K North American locations, including Chipotlanes for faster service.

  • American Dream rising: The infamous American Dream mall in NJ, a $5B complex with unique attractions, finally saw rising sales and foot traffic in 2023.

🏢 OFFICE

  • Neumann's Florida fief: Former WeWork CEO Adam Neumann expanded his real estate holdings in South Florida, acquiring the Aventura office complex for $116.2M.

  • All roads still lead there: NYC's office sector is showing strength despite a national slump, with better vacancy rates, strong investment activity, and leading office-to-residential conversions.

  • Debt dodger: SL Green (SLG) extended a $742.8M loan on 1515 Broadway in Times Square (a potential casino candidate), pushing the maturity date out to 2028 with an interest rate of 3.93%.

🏨 HOSPITALITY

  • Dream deferred: The redevelopment of Bloomingdale’s shuttered Indian Lakes Hotel is at risk as investor Ruben Espinoza faces a $3.1M loan default and mounting legal battles over unpaid debts.

  • Changing hands: Sam Chang’s McSam Hotel Group sold a Chelsea Holiday Inn Express to Prospect Ridge for $59.8M, continuing his gradual portfolio selloff.

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*Please see the advertising disclosure at the bottom of this newsletter.

📈 CHART OF THE DAY

According to CoStar, developers are favoring extended-stay hotels, driving 3% average supply growth since 2022, highlighting the segment's resilience and steady demand. Over the next 3 years, the extended-stay pipeline in Dallas is expected to top the nation with around 1.55K rooms, followed by the Inland Empire (~1.42K rooms) and Texas East (~1.1K rooms).

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