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Good morning. In the wake of a US housing affordability crisis, Goldman Sachs (GS) purchased a $1.15B affordable housing portfolio to capitalize on the stressed sector. CRE legend Sam Zell told a crowd of NYU grad students what he thinks about working from home (spoiler: he’s not a fan).

Meanwhile, the mezzanine lender of one of Blackstone's portfolios is up for sale. Could a foreclosure be on the horizon?

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Goldman Sachs: Housing Affordability Biggest Challenge & Opportunity For Market

Goldman Sachs (GS) believes the global housing market will face headwinds for the foreseeable future as higher mortgage rates continue to impact housing affordability. To counter this, they'll invest $1.15B with Michaels Org. and Community Dev. Trust in 10,000+ US affordable apartments.

Housing fizzle: Home sales during the pandemic were booming when mortgage rates were at all-time lows. But ever since mid-2022, when central banks started hiking rates to combat inflation, global markets have been cooling off. With recent banking troubles leading to even tighter lending standards, the future of home sales doesn’t look too hot right now.

How we got here: The rise in mortgage rates is likely to impact housing affordability further, with GS Research estimating rates will go up another 100 bps, resulting in a 6% decline in residential fixed investment after 3–4 quarters and a 2.5% drop in house prices after 10 quarters, depending on the economy.

Where we are going: GS Research suggests that since mortgage rates have only recently peaked in many countries, the global housing market may not have reached its lowest point yet. Their interest rate forecasts indicate that mortgage rates will likely remain elevated, leading to slower investment growth in G10 economies until at least the end of 2023.

Housing outlook: GS Research team predicts significant declines in home prices in New Zealand, Canada, Sweden, and Australia due to decreased housing affordability following the pandemic. The team also predicts moderate declines or stability in Italy, France, and Switzerland due to slower increases in mortgage rates. And in the US, home price declines are expected to be “relatively tame” thanks to its low vacancy rate.

➥ THE TAKEAWAY

Bet the house: Goldman's affordable housing JV with Michaels Org. and Community Dev. Trust aims to seize the opportunity of the lowest home affordability in recent memory. The deal comprises over 10,000 units with average rents of less than $1,000 per month and is under long-term, fixed-rate agency financing. The $1.15B portfolio includes multifamily and senior-living properties, targeting core to core-plus returns of 6-12%.

The 2023 Dividend Kings List

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Click here to download your free spreadsheet of all 48 Dividend Kings now.

📖 Read about the importance of tenant improvement (TI) and common area maintenance (CAM) in CRE and how they affect the tenant-landlord relationship.

🖥️ Watch as experts provide insight on the upcoming Biden administration rule, which will require responsible home buyers with good credit to pay higher mortgage rates to support loans for higher-risk borrowers.

🎧 Listen to this week’s episode of The TreppWire Podcast, where they discuss all things banking, economy, and office (and this time, it’s not all negative).

📊 Download this March 2023 report from the US Census Bureau on monthly new residential construction statistics.

Sam Zell Doesn’t Believe in Work From Home

Chicago CRE pioneer and real estate legend Sam Zell told NYU grad students to forget about working from home if they want to be successful in CRE.

No holding back: Zell, known as someone who doesn’t hold his tongue, thinks working from home is “a bunch of BS.” He believes that if you want to succeed and be recognized, you must be in an office. He put his money where his mouth is, too, since he and his team returned to the office merely 6 months into the pandemic.

Generational divide: Although Zell’s message was applauded by the real estate execs in the room, the younger crowd did not respond quite as favorably. Attitudes about working from home vary depending on the generation, with many older folks staunchly adhering to the belief that in-office productivity is greater with fewer distractions (they must be great at avoiding the water cooler).

➥ THE TAKEAWAY

Working from…somewhere: Zell doesn’t believe the work-from-home trend will last much longer. Young people need to develop and hone real-world skills in a real-world office setting—which is certainly a point in his favor—and executives need to show their faces to gain respect and recognition among peers. Overall, Zell believes that people work better together than over Zoom. But is he missing the forest for the trees? It’s up to the younger generation to decide eventually.

Blackstone’s $50M Mezzanine Debt Up For Grabs

The mezzanine lender on a Blackstone (BX) multifamily portfolio is looking to offload its debt, which may be a signal that foreclosure is on the horizon.

The details: Inmark Asset Management, a Korean fund manager, holds the $50M mezzanine B note, which is the most junior of the $364M financing piece backed by 11 Manhattan buildings. This is the same portfolio that had $271M of CMBS debt go into special servicing in February and which got downgraded by Moody’s since cash wasn’t covering the debt service.

Red flag: Back in 2019, the debt service coverage ratio (DSCR) was projected at 1.45. However, as of March, it’s plummeted to 0.87. And if you factor in the mezzanine loan, it’s even lower at 0.58 (oof). This doesn’t look good for Blackstone, as the likelihood of a default on both the senior loan and mezzanine loan seems imminent.

Buyer beware: Anyone looking to buy the mezz debt would be looking at property value vs. loan balance to determine if it’s a worthy purchase. If Blackstone defaults, the mezz buyer would expect to take control of the properties and recap them at a valuation that’s more than the CMBS debt plus their mezz piece.

➥ THE TAKEAWAY

Stop the bleeding: Inmark is looking to sell its mezzanine loan to cut its losses and move on. They most likely don’t have the resources to take over the portfolio if a default occurs. Hopefully, they can get out before things get worse.

• History doesn't repeat itself: Despite recent headlines, the recent regional banking crisis shouldn’t be a repeat of 2008.

• Tax day blues: The US Treasury saw an influx of only $108.47B on April 18th, which some analysts don’t believe is enough to get us through the summer.

• Miami wins again: Once again, Miami tops the list, this time for attracting the most Gen Z tech workers among 150 US cities.

• Liquidation sale: A portfolio of 14 warehouses and manufacturing facilities of Lane Furniture, one of the biggest US furniture makers, are up for sale as part of its bankruptcy.

• Sailing Savannah: Colonial Group sold the Savannah Yacht Center, a superyacht repair center that provides special tax breaks to yacht owners, to Safe Harbor Marinas for $100M.

• Earnings report: Blackstone (BX) reported falling earnings in Q1 due to slower transaction volumes.

• TikTok troubles? Despite its growth, TikTok is choosing to sublease 6 floors totaling $126,400 SF in its downtown Austin office (that it’s never occupied).

Apartment rents are forecasted to grow only 0.8% in 2024, which would be the lowest since 2020, compared to 4.0% this year. However, some markets are expected to do better than others, with the Sunbelt and other tertiary markets projected to outperform the top 100 average.