What's Behind the $20B Withdrawals from Core Property Funds?
A group of institutional investors' property funds saw $20 billion in withdrawal requests at the end of last year, the largest amount since the Great Recession.
Good morning. Institutional investors lined up in Q4 for an estimated $20B in withdrawals, the largest amount since the Great Recession. Ace Group International, the operator of a buzzy brand of 11 open Ace lifestyle hotels, will be acquired by Sortis Holdings for $85M in cash.
Meanwhile, investor interest in medical office properties slowed in H2 2022 but is expected to rebound as inflation eases and the Fed slows interest rate increases.
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DON'T TREAD ON ME
Core Real Estate Funds Face $20B of Withdrawals as Institutions Cut Exposure to Property
High-profile property funds saw over $20B in withdrawal requests last year as investors attempted to avoid declining property values. According to IDR, it was the biggest capital queue we’ve seen since the 2008 recession.
An epic pileup for the ages: Institutional investors want to get out while the going is still good by cutting their exposure to property funds managed by JPMorgan Chase (JPM), Morgan Stanley (MS), and Prudential Financial Inc (PRU). Blackstone (BX) also saw an exodus of Blackstone Real Estate Income Trust (BREIT) investors and had to limit withdrawal requests in December.
Finding footing on the tightrope: As the overall market took a hit in 2022, stocks and bonds suffered the most while real estate managed to stay the course (kinda). This resulted in property becoming a bigger portion of portfolios than intended—until now. The recent mass exodus from property funds has forced big-name managers to sell off liquid assets like industrial and multifamily properties.
➥ THE TAKEAWAY
It’s called negotiation: While the volume of withdrawal requests is staggering, it’s not the whole story. Investors are reducing their exposure, sure, but they’re not abandoning their stakes entirely. The exit line is likely exaggerated since most investors only expect to receive a portion of their request. In other words, they may be asking for more just to be safe. Not to mention that right after 2008, a 15% exit queue in 2009 turned into a 14% entrance queue by 2010.
ACE IN THE HOLE
Ace Group International Reaches Deal to Sell Hotel Brand For $85M
Portland, OR-based hospitality group Sortis Holdings (SOHI) has agreed to pay $85M in an all-cash transaction for the Ace brand and its management company. Presently, Ace has 11 operating hotels across the world, with locations in LA, NY, and Kyoto, Japan.
New sheriff in town: Sortis is known for investing in a wide range of hospitality brands, including sushi chains, coffee shops, and barbers. Upon completing this acquisition, they plan to double the hotels in their portfolio to 30, with the majority being from Ace. In years past, the Ace brand focused more on management contracts rather than assets, so the acquisition includes one lease for its Seattle location.
Boutique boogaloo: Boutique hotel brands have been growing in popularity as their eclectic, independent nature (and lower price point) continue attracting customers. While their appeal has grown, so has their trend to become institutionalized through M&A deals. On the other side of the playing field, established hotel companies are also known to start their own boutique lines, such as Starwood Hotels’ W Hotels, which spun out in 1998.
➥ THE TAKEAWAY
A market in flux: The urban hotel market has been the slowest to bounce back from the pandemic, as travelers these days prefer resort getaways. Business and international tourism have been slow to catch up, and three Ace hotels closed in Pittsburgh, Chicago, and London. But boutique chains are in a better unique position now to capitalize on industry turnover since it creates opportunities for new and aspiring brands to make their mark.
TAKE YOUR MEDS
Investors Hit Pause on Medical Office Investments (For Now)
Investors showed slowing interest in medical office properties in the latter half of 2022. But analysts anticipate a rebound as inflation goes down and the Fed eases up on interest rate increases. For now, however, sector sales are trending down, according to Cushman & Wakefield.
Unable to meet in the middle: Right now, selling in the medical office market is much like waiting to see your doctor at the hospital. It’s not fun. Most sellers are apprehensive about listing, worried they won’t get the right price, while buyers refuse to pay the same cap rates they would have in a lower interest rate environment. The average stand-alone transaction value has also fallen because it’s so hard to secure debt.
Who’s on the market? There are two major groups of medical office sellers right now: maturity investors and business plan investors. The former consists of those who face fund life maturity or debt maturity with not-so-great refinancing options. The latter has bought property before 2020 and can achieve their long-term business goals just by holding onto what they have.
➥ THE TAKEAWAY
Expected windfall: Despite the deadlock between buyers and sellers, analysts anticipate relief is on the way. The demand for healthcare facilities is rising, which could mean new opportunities for savvy investors. Demand rose last year as more patients began seeking care they found elsewhere during the pandemic. While deal volume will likely stay low in H1 2023, all eyes will be on the Fed for what happens next.
📰 Editors' Picks
NIMBY: A newly proposed Texas bill would ban investors from China, Iran, North Korea, and Russia from purchasing land in the state.
Moody's: $17B in office property-backed mortgage bonds are coming due this year as companies reduce office space to cut costs in an uncertain market.
Skyscraping by: New York City’s luxury apartment market is predicted to feel the squeeze in 2023 due to high interest rates and poor Wallstreet bonuses.
Ivory tower: While economic uncertainty has affected many investors, the DC multifamily market remains strong. Fortune 500 companies and the government could be the cause.
It's alive! While the Bay Area market has been hurting recently, pivoting towards a life-sciences economy could inject some much-needed investment and development.
Factories in a funk: Manufacturing across New York State fell in January as order numbers went down and employment growth froze.
Hats off: Net lease caps have continued to increase, led by the single-tenant lease sector, which is up to 5.95% (an increase of 9 bps).
Where'd the good times go? Property investment in China fell 10% YoY in 2022, making it the first decline since they started keeping records in 1999.
Shrinking footprint: Microsoft has revealed plans to lay off 10,000 employees and spend $1.2B consolidating offices.
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🤝 Deals & Dealmakers
Diamond in the rough: New York developer Brookliv has plans to develop a luxury highrise on three properties a block away from Philidelphia’s Rittenhouse Square.
Keeping it in the family: Colliers (CIGI) will remain the exclusive leasing agent for Prologis’ (PLD) 24-building, 2.8 MSF portfolio in Raleigh, NC.
Seal of approval: The city of San Jose has approved Bay West’s planned development of a 2 MSF office campus, which includes a cluster of 8 buildings and two parking structures.
They're in the money: Square Mile Capital Management and Bank OZK have provided Lane Partners with $373M in financing for a life sciences project in the Bay Area.
The good kind of mix-up: A joint venture between three developers has secured $146.6M in financing to construct the mixed-use project “The District at 15fifteen” in NJ.
SPACtacular: The Chera family goes ahead with plans to bring a real estate startup public via SPAC, after failing to do so a few months ago.
The house wins: RXR Realty and Las Vegas Sands (LVS) are teaming up for a bid to develop the Nassau Coliseum into a casino and hotel, hoping to win one of three NYC-area licenses.
On the market: Cushman & Wakefield (CWK) announced that they advised the sale of an 85.797 KSF Class A Office building for $17.2M.
📈 Chart of the Day
The Dallas-Fort Worth multifamily market—buoyed by elevated levels of liquidity and sustained demand—saw the highest volume of sales nationwide in 2022.
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