Good morning. Ready Capital and Broadmark will merge to become the fourth-largest commercial mortgage REIT. Multifamily investors have reduced IRR expectations, but finding quality deals remains a challenge. Meanwhile, 2022 was choppy going for U.S. economy, yet the retail sector proved itself seaworthy.

DEAL OF THE DAY

Ready Capital & Broadmark Merge to Form $2.8B Mega-REIT

Ready Capital Corp. and Broadmark Realty Capital Inc. have entered into a definitive merger agreement to become the fourth-largest commercial mortgage REIT before Q2 wraps.

Splitting shares: Each share of Broadmark will convert into approximately 0.47233 shares of Ready Capital. The companies have stated that the transaction offers a price of $5.90 for each Broadmark share, which represents a 41% premium over the company's stock value at the end of last year.

From the horse's mouth: "We are thrilled to join the Ready Capital team to usher in a new chapter of growth for both organizations by forming the fourth-largest commercial mortgage REIT," Broadmark Chairman and interim CEO Jeffrey Pyatt said in the statement. 

Mega-merger: As per the terms of the deal, the companies have disclosed that Ready Capital stockholders will hold around 64% of the combined entity's shares, while Broadmark's stockholders will hold 36%. The companies have estimated the market capitalization of the combined entity to be $2.2B.

➥ THE TAKEAWAY 

Why it matters: Spokespeople for both companies stated that they have "highly synergistic business models with natural alignment across geographies, products, sponsors, and credit philosophies." The merged company is expected to capture economics throughout the entire property lifecycle and maintain sponsor relationships beyond construction and bridge stages, which could potentially allow for the provision of longer-term mortgages even after making construction and bridge loans as a project progresses.

AROUND THE WEB

📖 Read about how Amazon (AMZN) employees will soon be able to tap into their company shares as homebuying collateral via mortgage lender Better.com.

💻 Watch this video from Altos Research with Mike Simonsen about what happened with home prices last year as well as what might happen with prices in 2023 (with lots of charts).

🎧 Listen to Chris Powers interview the founder of Riaz Capital, Riaz Taplin, on how he built a billion-dollar microliving empire in the Bay Area on this episode of the Fort.

RISING RATES

Multifamily Yields Leave Private Investors Frustrated

Wealth managers who aim to invest in multifamily real estate face difficulty finding suitable opportunities due to the gap between buyers and sellers' expectations as the market adjusts to higher interest rates.

Limited opportunities: The current market conditions have led wealth managers to be more cautious and invest less in real estate. Deals with very little cash flow in the first two years are common, and high IRRs are not feasible. As a result, wealth managers are more likely to purchase stabilized core apartment properties with lower returns in exchange for low risk and a place to invest their money.

Low sales of apartment properties: Investors only spent $6.2B on apartment properties in January 2023, which is less than half of the monthly volume of deals that closed in late 2022. Most of the deals in the sales pipeline are struggling with massive bid-ask spreads, making it challenging to establish market-clearing prices. Cap rates averaged 4.7 percent in January for sales of apartment properties, which is a few basis points higher than the previous year.

➥ THE TAKEAWAY 

Impact of interest rates: Private real estate investors have reduced their desired IRRs, but the current market conditions are making it difficult to find suitable deals. The increase in debt costs has contributed to a decline in apartment transaction volumes, and it has become challenging to establish market-clearing prices, as some sellers are reluctant to let go of their old prices.

RESILIENT RETAIL

2023 Outlook: Retail Proves Resilient Despite Strong Headwinds

Despite a volatile 2022 for the U.S. economy, the retail sector has managed to remain resilient. Cox, Castle & Nicholson LLP's recent report delves into the factors that have enabled the retail industry to weather the storm, thrive, and sheds light on the outlook for 2023.

When the going gets tough…Faced with ongoing uncertainty and the promise of more rate hikes to come, many CRE investors are likely to pursue the safety of top-quality retail assets better positioned to withstand expected macro headwinds due to favorable demand fundamentals or strong demographic support.

The tough get going…Net lease retail—particularly fast-food properties with drive-throughs—is expected to remain in high demand, assuming properties have long-term leases in place with excellent tenants. However, the broader challenge is where to find available supply, since CRE investors are all chasing this product type (or will be soon).

While others wait in the wings: Although high rates will continue to impact retail developments, lenders aren’t looking to take drastic measures such as foreclosure just yet. Most lenders will likely work with their borrowers on loan modifications and extensions instead. With new developments, lenders might take more drastic measures if they believe projects have been significantly mismanaged.

➥ THE TAKEAWAY 

Patience is still a virtue: Opportunities may exist for investors with the foresight to consider ‘wait-and-see’ strategies for promising retail projects. The fundamentals for most retail developments remain strong, and significant capital still exists in the marketplace. Many expect retail sales and lending could pick up substantially in H2 2023 as the interest rate outlook narrows and inflation comes back down.

✍️ Editors' Picks

• After getting their hopes up: Brookfield's (BAM) office portfolio value fell by $825M in 2022, despite a slight increase in income. The company has $113B in assets, including $66B in CRE.

• The good and the bad: Signed contracts on existing homes jumped 8.1% last month compared with December, but sales were 24% lower than in January, according to NAR.

• Can’t win ‘em all: In 2021, Pimco acquired Columbia Property Trust for $3.9B, citing the value of high-quality office buildings. However, Columbia has now defaulted on over $1.7B of debt.

• ‘It takes a decade’: AXA Investment Managers Global Head Isabelle Scemama explains how the $124B firm repositioned its portfolio to focus on growth sectors with resilient income.

• What a payday: Blackstone Group CEO Stephen Schwarzman received over $1.27B in compensation and dividends in 2021. His total compensation was $253.1M, up 58% from 2020.

• The clock is ticking: Developer Harry Macklowe is running out of time to pay off a $750m loan for his 432 Park Avenue tower after failed refi attempts and no takers at $1.7B.

• Shifting sands: Multifamily investors favored Sunbelt cities for several years, but CoStar expects apartment rent growth in the Sunbelt to be lower compared to older gateway cities this year.

• Sorry, Mickey: Florida Governor Ron DeSantis signed a bill that ends Disney's (DIS) control of the Reedy Creek district. The law dissolves the current board and requires residents to pay taxes, ending Disney's self-governing status.

• Depopulation: Downtown San Fran lost 150K office workers to remote work and online shopping, according to a report from the city's Budget and Legislative Analyst's Office.

💼 Talent Collective

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🤝 Deals & Dealmakers

• Finally for sale: NYC’s 560 Fifth Avenue has hit the market for $45M. The five-story building, owned by the Riese Organization for 50+ years, houses ground floor retail and three office floors.

• Sneak peek: ITEX revealed The Aronson, a mixed-use development in Arkansas with 214 rental homes, restaurants, and entertainment developed by Catchlight Entertainment.

• History repeats: The Blanchard Building in Long Island City is being sold by Related Fund Management and BentallGreenOak to convert it into a last-mile industrial development.

• The bigger, the better: Construction began on Ridgeline Property Group's 89.7-acre Midway Commerce Center logistics park in Vacaville, CA, which includes a 1.2 MSF cross-dock facility with hydraulic dock levels.

📈 Chart of the Day

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