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Good morning. The impending bankruptcy filing by Bed Bath & Beyond Inc. could lead to hundreds of empty retail stores, due to their announcement to close 90 more locations. However, landlords are more confident in finding new tenants compared to past years. Meanwhile, most CRE asset classes (except land) shrank in December—and there’s no sign of a turnaround anytime soon.

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📖 Read about how David Malm built up a property portfolio worth nearly $100M on Martha’s Vineyard and Nantucket over a 5-year buying spree.

🖥️ Watch how the record-breaking performance of multifamily sales in 2021 set up the market for a serious correction in 2022 and beyond.

🎧 Listen to what Brian Good, CEO of iBorrow and founder of TenantDirect, learned from his years in equity real estate, serving on panels, and why he transitioned into debt.

BIG-BOX IS BACK

Tenants Line Up For Bed, Bath & Beyond’s Vacant Retail Spaces

Bed, Bath, & Beyond (BBBY) inches closer to bankruptcy following the announcement of a new round of store closures, which could flood the CRE market with vacant properties. But the landlords who own these spaces aren’t as worried as you might expect, because big-box retail is healthier than it’s been in over a decade.

Bankruptcy & Beyond: Last year, announced the closure of 150 stores nationwide. The new closure wave added another 90 retail stores, bringing the total number of closures to 240. Party City (PRTY) has also signaled impending bankruptcy, adding to the potential stock of vacant CRE.

Its free real estate: In-person shopping returned with a vengeance in 2022 and demand for prime space in major shopping centers is on the rise (especially in the Sun Belt). So properties like BBBY’s are getting snapped up quickly. One of the retailer’s landlords said they received commitments from tenants including Trader Joe’s and Dick’s Sporting Goods to fill all 12 of their locations when BBBY vacates them.

➥ THE TAKEAWAY

Boom or bust? Many analysts are confident that shopping centers will stay strong for years to come, despite the prospect of a recession and decreased consumer spending. CRE landlords will only thrive if they can fill all their vacant spaces, which likely means subdividing big-box spaces into individual stores for smaller tenants. Expect to see lots of short-term renovations with landlords eating the up-front costs.

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BRACE FOR IMPACT

Scarcity of Investment-Grade Property Sales Cuts Into Prices

The CRE market shrank across all asset types except land this past December, reinforcing fears that the global market is on track for a recession. Inflation and high interest rates dampened demand enough to drive asset costs down despite inflationary pressures.

Sliding down some: According to an analysis by CoStar, every CRE sector index posted quarterly declines except the US Land Index. Overall, institutional transaction volumes fell 12.5% from November and annually from December 2021. Repeat-sales transaction activity slumped, too, hitting its lowest figure since March 2021.

Survival of the biggest: On average, there were fewer but larger sales. Major declines in the purchase of smaller residential properties and the signing of apartment leases were offset by the purchase of large assets by institutional investors. Basically, big corporations are making investments in big facilities, but nobody’s buying a house or renting an apartment because they can’t afford to.

➥ THE TAKEAWAY

Rough road ahead: Usually, the fourth quarter enjoys a rise in apartment sales, thanks to the rush of deals that typically occur at the end of the year. But analysts predict Q4 2022 will see a drop in apartment sales from Q3—the first such decline the market will see in a decade. High hopes were riding on the Sun Belt, but even red-hot markets are oversupplied. All signs point to a hard landing for CRE.

• Go big or go home: Today’s REIT environment suggests that the safest strategy may be a balance of income-producing properties and growth-oriented investments.

• Out of office: US office sales fell 28% last year—and the downtrend shows no sign of letting up in 2023, either.

• Warehouse where? The growing demand for industrial property and warehouse space is likely to exceed supply all through 2023.

• East coast beast coast: Supply chain shakeups and a West coast longshoremen labor dispute have positioned NY and NJ to become the dominant US shipping centers.

• Here it comes: Goldman Sachs (GS) predicts that San Jose, Austin, Phoenix, and San Diego will see declines in housing prices as large as those in the 2008 crash.

• Hot for housing: NYC Mayor Eric Adams wants to rezone much of Midtown to convert unused offices into more apartment buildings.

• Just believe: Markerr bucks the trend of doom and gloom in the multifamily market with by predicting that rent growth in the sector will top 4% this year.

• The big Move: CoStar’s (CSGP) potential acquisition of Murdoch’s Move, Inc. could position the real estate giant to compete with the likes of Zillow (ZW).

• Looking up: The CREFC reports its first upswing in market sentiment after five months of quarterly declines.

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🤝 Deals & Dealmakers

• Across the pond: UK-based coworking giant IWG is opening four new spaces in Illinois and has lots more planned stateside.

• Built in Bethesda: REIT Saul Centers received approval to build a 350-unit mixed-use development in downtown Bethesda, MD.

• Parkway goes private: A JV between Stiles Corp. and Cantrell & Morgan sold a 52 KSF retail center in St. Augustine, FL to a private investor for $24.1M.

• Invesco in the red: Invesco Advisors (IVZ) just sold a decade-old office building in Arlington, VA to Oaktree Capital for 66% of what they paid for it.

• 1,355-car garage: The Related Group received approval from the Miami Parking Authority to develop a mixed-use complex on a city parking lot as long as they can park 1,355 vehicles there.

• Selling space: Amazon (AMZN) offloaded its four-building office complex in the Bay Area, the Metro Corporate Center, to Dermody Properties as part of its office space cutbacks.

📈 Chart of the Day

As of January 2023, the least affordable housing market for renters is Brooklyn, NY (126% of average wages in the area), while the most affordable is Birmingham, AL (just 20% of area wages).

😎 Offering-MEME-Orandum

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