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Fund Managers Are Waiting to Deploy $100B+ of Dry Powder

With a sharp YoY decline in transactions and rising interest rates, CRE investors, especially in opportunistic funds, are holding back. Douglas Weill suggests that fund managers are conserving around $300 billion, awaiting a market reset.

Awaiting opportunities: Weill underscores that with an anticipated market dislocation on the horizon, LPs, pension funds, and sovereign wealth funds are eyeing the forthcoming years as prime for capital deployment. Given the current market dynamics, shaped by escalating interest rates and looming recession fears, these entities are tilting towards value-added and opportunistic strategies, sidelining core investments. Armed with approximately $120B in closed-end funds and another $116B in opportunistic investment funds, investors, according to Prequin, are strategically positioned to capitalize on the opportunities spawned from market volatility and dislocation.

A beacon of hope: The second quarter saw a significant resurgence in real estate fundraising, predominantly in North American markets, soaring to $46 billion—a fourfold increase from the first quarter. Blackstone notably secured a record $30.4 billion fund, while other key players like Brookfield Asset Management and TPG Real Estate are also dynamically raising opportunistic funds, emphasizing sectors like industrial, data centers, and life science. Concurrently, Harrison Street is targeting a substantial $3 billion for its largest-ever fund, concentrating on alternative real assets.

➥ THE TAKEAWAY

Slow and steady: Jeff Reder from CenterSquare Investment Management describes today's real estate market as the most complex in two decades, due to rising interest rates and recession concerns. Many investors are holding back, seeking clarity on the broader economic landscape. Despite low transaction volumes, experts suggest that targeted, strategic investments, especially in value-added acquisitions, can be profitable, with investors prioritizing control over asset value.

📖 Read: Learn about the top 15 CRE investing mistakes, including acquiring properties at low cap rates, buying properties with negative leverage, and not diversifying by property type, location, and industry.

🎧 Listen: Abigail Ross Hooper, President and CEO of the Solar Energy Industries Assocation, talks all things renewable energy with Selma Hepp, chief economist at CoreLogic, on this episode of The Tape.

📊 Download: CREFC's 3Q 2023 Board of Governors Sentiment Index survey reveals a cautious uptick from a reading of 78.5 to 82.7, although 58% of respondents still maintain a negative outlook on CRE finance.

US Hotels VS. Airbnb: The Battle For Extended-Stay Rental Dominance

The US hotel industry and Airbnb (ABNB) are engaged in a heated competition for market dominance, as major hotel brands like Hyatt Hotels Corp. (H), Wyndham Hotels & Resorts (WH), and Marriott International (MAR) ramp up their extended-stay options.

Theatre of war: Airbnb has outlined an improvement plan that includes the potential leasing of properties on the platform for a full year. The rise of extended-stay projects, which currently account for 32% of the hospitality construction pipeline and are expected to grow to 42% in the next 12 months, highlights the hotel industry's efforts to challenge Airbnb and Vrbo (EXPE) in the alternative accommodations market.

Hotels sally out: Hyatt rolled out its Hyatt Studios brand for North America, focusing on upper-midscale extended-stay lodging. Wyndham is also expanding its Echo Suites Extended Stay brand by adding 60 more properties in North America, while Marriott plans to launch an "affordable midscale extended stay brand" in the future.

Blurred lines: Traditional hoteliers are branching into new platforms, such as Marriott’s Homes & Villas by Marriott Bonvoy, which offers short-term rentals and currently has over 130K properties worldwide. This strategy aims to counter the threat posed by short-term rental companies like Airbnb and Vrbo. The lines between extended-stay and peer-to-peer rentals are blurring, as consumers seek home-like experiences with the amenities typically offered by hotels.

Growing investor interest: Extended-stay properties are highly sought after by investors, with a significant shortage in the market. The acquisition of Extended Stay America by Blackstone (BX) and Starwood (STWD) in 2021 further signifies the investment potential of extended-stay assets. Traditional hotels have also captured a portion of the extended-stay business.

➥ THE TAKEAWAY

Best of both worlds: Extended-stay hotels continue to thrive despite the growth of Airbnb and Vrbo. The demand for extended stays is evident, as travelers often choose conventional hotels when extended-stay options are unavailable. The battle between hotels and Airbnb will only continue to intensify as the lines between extended-stay and peer-to-peer rentals continue to blur, thanks to travelers seeking ‘home-like’ experiences with ‘hotel-like’ amenities.

Data Centers Raise Record $1.35B Through Securitized Offering

Vantage Data Centers, a global owner of digital network real estate, has successfully raised $1.35B through a securitized offering of tenant lease payments. The funds will mainly be used to refinance Vantage's existing debt tied to its data centers in Northern Virginia and Quebec.

Explosive growth: This deal, considered the largest of its kind this year, highlights the strength of data centers in the CRE bond market. Data centers have raised a remarkable $7.3B across 12 offerings this year, making it a highly active segment in the CRE bond market. The exponential increase in data usage, adoption of AI, migration to cloud storage, and transition to a fully digitized economy continue to drive demand for data centers. Vacancy rates remain low in key markets while rents show YoY growth, according to S&P Global Ratings.

AI-driven demand: The demand for data center properties is intensifying due to the AI arms race and increasing computing power requirements. Leasing activity surged in 2Q23 as more businesses seek higher density data centers. Major institutional investors, including Blackstone (BX), are recognizing the growth potential in data centers and investing heavily in this sector.

Environmental considerations: Data centers, known for their energy-intensive operations, have faced criticisms for their water consumption and carbon emissions. However, Vantage has committed to achieving net-zero carbon emissions, minimizing water usage, and reducing waste. The company's securitized offering received a green bond designation from Morningstar Sustainalytics.

➥ THE TAKEAWAY

Sustainable data dominion: Vantage Data Centers raised a record $1.35B to refinance existing data centers, reflecting the rapid growth in the sector. Of course, ever-increasing demand for computing power has led to growing environmental sustainability concerns. While data centers face challenges regarding water consumption and carbon emissions, Vantage Data Centers is taking proactive steps to reduce its environmental impact.

• Thriving in multifamily: Multifamily faces a supply pipeline at a 50-year high, harder refinancing, and slowing rental growth. Industry experts share strategies for adapting to the market.

• Proptech in the storm: The CRE downturn creates new opportunities for proptech to add value, reduce costs, and capitalize on sales cycles.

• StoryBuilt's struggles: StoryBuilt's portfolio of 28 developments in Austin, Dallas, Denver, and Seattle is up for sale, valued at $2B, as the financially struggling developer seeks to recover funds.

• Senior living rebound: Sustained supply-demand trends may drive senior living occupancy to pre-pandemic levels by 2024, according to NIC MAP Vision and National Investment Center.

• Witnesses to the stand: NY civil fraud proceedings against Trump are underway; witnesses include Allen Weisselberg, Steve Witkoff, and Lawrence Moens.

• Retirees relocate: Baby boomers are retiring at a record pace of 10,000 each day, and cities like Austin and Boise are seeing significant increases in their retiree populations.

• Broadway bargain: Extell Development sold the development site at 1710 Broadway for $173M, taking a sizable haircut from the $268M they paid in 2017.

• Survey says: According to the CORFAC survey, inflation and rising interest rates worry CRE professionals as recession fears grow and the industrial sector leads transactions.

• Unmasking landlords: Office tenants are demanding transparency from landlords as financial distress grows, potentially leading to market upheaval.

• Fare thee well: SL Green Realty (SLG) President Andrew Mathias will leave at the end of the year, after nearly two decades; his replacement is undisclosed.

• Tax traps uncovered: Navigating real estate taxation's passive loss limitations requires understanding the rules, exceptions, and meticulous record-keeping for optimizing investments.

• By the numbers: The average prime multifamily cap rate has risen by 155 bps to 4.92% since Q1 2022, according to CBRE.

• Too rich for my blood: Shell Bay Club, a new South Florida golf course, offers a unique, Greg Norman-designed 7,254-yard course for a meager $1M membership.

• Grand non-opening: Amazon's (AMZN) largest distribution center in South Florida, which it spent $129M on, remains closed due to low online shopping demand.

• The best submarket? Century City's office market in Los Angeles boasts high asking rents, stable ownership, and a prime location near executives' residences.

• Unlocking profit: Implementing a well-designed revenue management plan is crucial for self-storage operators to achieve profitability and success. Technology can help optimize things.

• Migrating up north: Blackstone (BX) plans to increase investments in Canadian logistics and residential due to the country's growing population, increasing 5x faster than the US.

• Tale of several sectors: Office buildings continue to face challenges, while multifamily, industrial, and healthcare offer investment opportunities.

Don’t Overlook Manufacturing Construction Spending

Moody’s Analytics data reveals a spike in private and public office construction that began in March 2023 that just keeps going up, especially for public projects, which have rebounded from a month-over-month spending rate of -2.0% in March (compared to December 2022) to 11.5% by the end of August.

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