Nontraded REITs Capitalize On Depressed Property Valuations

Amid an economic downturn and high interest rates, four major investment firms are leading a new wave of nontraded REITs.

Nontraded REITs Capitalize On Depressed Property Valuations

Amid an economic downturn and high interest rates, four major investment firms are leading a new wave of nontraded REITs.

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Good morning. A fresh wave of nontraded REITs has arrived to take advantage of a decline in property values. Meanwhile, the cost of concessions in office lease transactions is rising in major metros, impacting profitability and giving tenants more negotiating power.

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Market Snapshot

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*Data as of 8/3/2023 market close.


New Wave of REITs Emerges as Investors Capitalize on Low Property Values

Amid an economic downturn and high interest rates, four major investment firms are leading a new wave of nontraded REITs, leveraging the challenging market conditions and low property prices.

Surge in filings: A new league of REITs, led by firms like EQT Exeter, Invesco, Sculptor, ExchangeRight, and BentallGreenOak, has emerged. They've recently filed in the last two months to create nontraded REITs, favoring long-term strategies over short-term gambles. Their eye is on an expected property value dip, opening the door for acquiring premium assets at a bargain.

Why now? The surge in nontraded REITs comes at a time when shareholders are pulling out of nontraded REITs like Blackstone Real Estate Income Trust and Starwood Real Estate Income Trust due to concerns over inflation and recession. The new entrants, however, are betting on the downturn and leveraging their fresh, unaffected portfolios to take advantage of the market situation.

The divergence: Over the last five years, nontraded REITs, focusing on multifamily and industrial assets, have yielded returns of 59%, outperforming publicly traded REITs' 20%. The shift towards privately transacted nontraded REITs, especially from 2021, implies that most opportunities now cater to individual investors, as institutions hold back.

Investment strategies: The key to the success of these new REITs lies in their investment strategies. While some, like ExchangeRight, are focusing on essential retail properties leased to grocery stores and healthcare providers, others, like EQT Exeter, are looking at business-tenanted properties such as industrial or life science facilities and consumer-used assets like multifamily or self-storage properties.


Why it matters: With the anticipation of further property value declines, the establishment of new REITs has shown a strategic shift by investment firms. They aim to leverage the current market conditions to build new investment portfolios, free from the recent value degradation seen in the sector. This trend reflects a broader market strategy: Investors now see opportunities in challenges, demonstrating resilience and adaptability in the face of economic changes.


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📖 Read: Here are the five key lessons investors learned from the pandemic-triggered downturn (one that has been quite different from previous cycles) in this article from The Economist.

🎧 Listen: In this episode of Back Story, Commercial Observer editors Max Gross, Cathy Cunningham, and Chava Gourarie discuss how the special Water Issue came together, including the story of the Florida man who’s been buying up submerged land.

▶️ Watch: Tim Bodner, Global Real Estate Deals Leader at PwC, joins broker Michael Bull to discuss PwC’s mid-year CRE outlook, including major sectors, niche sectors, lenders, and equity.


The Cost of Concessions: Landlords Feel The Pinch

The cost of concessions in office lease transactions is rising in major metros, impacting landlord profitability and giving tenants more negotiating power.

Hefty concessions: Concessions, including free rent periods and tenant improvement allowances, have shot up in Manhattan's office market, especially for prime and newly constructed buildings. While deals with triple-digit starting rents are often coupled with hefty concessions, the share of total lease value going to concessions has risen faster for Class A deals with starting rents below $100 PSF.

Share of Manhattan Office Transactions with $100+ Starting Rents, New Deals Only

Look at the ratios: According to CompStack, it's crucial to examine concessions ratios, which are effectively discounts on the income value of a lease, especially considering wavering lease terms and transaction sizes post-2020. Higher concessions ratios lower landlord income, raising questions about the value of tenants with lower rents and fewer concessions.

Average Concessions Ratio to Total Deal Value, Major Markets

NYC takes the lead: Concession ratios are rising for Class A deals in Manhattan. The average concessions ratio for Class A office buildings with starting rents of more than $100 PSF has risen 200 bps since 2018 to 10.8%. For Class A office properties with rents below that threshold, concessions ratios have shot up 430 bps. While Manhattan outpaces major office markets like Chicago, Bay Area, and San Francisco, NYC's overall concession ratio has grown faster since 2018.

Average Concessions Ratio to Total Deal Value, Manhattan Office


The tenant is on top: CompStack's biggest takeaway is that growing concession ratios show the negotiating power tenants still have. Landlords may need to rethink their strategies to maintain profitability while meeting tenant demands.


  • Delayed: The vote on the proposed 106-unit Ocean Crest affordable housing in Bayswater, Queens, has been deferred by the NYC Council zoning subcommittee, following calls for more homeownership opportunities.

  • LA reimagined: Potential buyers are considering new designs for Oceanwide Plaza, an unfinished skyscraper in downtown LA, as goalposts have shifted since construction began in 2015.

  • How convenient: Mixed-use properties are growing increasingly popular due to the demand for convenience and their diverse market appeal.

  • Earnings drop: Global commercial real estate broker JLL reported a steep 99% earnings plunge due to higher industry-wide interest costs affecting sales, leasing, and financing.

  • Fresh financing: Crescent Real Estate secured refinancing for The Ritz-Carlton Dallas and Hotel Crescent Court with a $245.8M mortgage and $54.3M in mezzanine financing.

  • Bullish on DC: Despite a perceived downturn in DC’s office market, Boston Properties remains bullish while reporting 91% occupancy for its property at 2100 Pennsylvania Avenue.

  • In-person wins: Despite the widespread availability of Amazon Clinic's (AMZN) telehealth services, experts don’t think it will replace in-person care or impact the medical office sector.

  • Steel-to-Science: Developers IQHQ and Spur Capital Partners are moving forward with plans to transform the former Pacific Steel Casting plant in Berkeley, CA, into a 900 KSF life science campus called Gilman Gateway after acquiring 16 land parcels for $48M.

  • Industrial moratorium: The Fort Worth City Council is considering a temporary moratorium on new industrial projects in Echo Heights based on resident requests to address risks associated with the proximity of industrial facilities to homes.

  • Airbnb Battle: Airbnb's (ABNB) latest lawsuit over a new registration rule in NYC has left landlords and hosts feeling unwelcome and adds to the city's hospitality difficulties.

  • Prime potential: A group of surface parking lots near Arena in Downtown LA has hit the market with an asking price of $27M, opening the door to major CRE projects or affordable housing in a prime location.

  • Foreign buying slump: The number of foreign buyers purchasing homes in the US has declined for the sixth consecutive year, hitting a record low, although some signs of renewed interest are emerging as worldwide Covid restrictions ease.

  • Green energy goldmines: European countries are turning former coal pits, stone quarries, and hydropower lagoons into goldmines for solar energy by installing floating solar panels (FPVs), which have seen a remarkable 2,000% growth in the last decade.

  • Swell of foreclosures: New York Community Bank's subsidiary, a major lender to rent-stabilized landlords in NY, has initiated foreclosure proceedings on 8 properties owned by two landlords who struggled to pay loans to Flagstar Bank.


US Metro Markets With The Most Vacant Offices

Vacancy rates in US offices have soared, with San Francisco suffering the steepest increase of 19.8% since 4Q19 followed by NYC and Austin, as remote work trends persist and new office construction contributes to the oversupply.

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