🏠 Is Preferred Equity Multifamily’s Savior?

Capital scarcity in multifamily is leading developers and operators to explore alternative funding, with preferred equity gaining popularity due to its higher-than-average returns.

🏠 Is Preferred Equity Multifamily's Savior?

Capital scarcity in multifamily is leading developers and operators to explore alternative funding, with preferred equity gaining popularity due to its higher-than-average returns.

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Today's brief: Developers pivot to preferred equity amid multifamily capital crunch; Blackstone bets big on student rentals; and Chicago tops U.S. in H1 2023 retail revival.

Today’s issue is brought to you by FNRP, offering access to institutional-quality deals in grocery-anchored, multifamily, and industrial assets.

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Market Snapshot

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*Data as of 9/29/2023 market close.


Preferred Equity Steps in to Save Stalled Deals and Boost Returns in Multifamily

the capital stack

Preferred equity, a financing tool in the multifamily sector that had once been sidelined, is witnessing a resurgence due to the scarcity of capital in the sector, prompting developers to explore alternate and niche funding sources.

Shifts in financing: Conventional lenders are becoming increasingly cautious, limiting their funds due to factors like surging interest rates, regulatory pressures, and heightened risk perception. This has led to substantial financing gaps. Companies like Canyon Partners Real Estate and other operators have recognized the benefits of preferred equity investments, attributing its allure to its debt-like qualities, such as fixed terms and priority repayments, while occasionally allowing for profit participation.

New players in town: The preferred equity market has evolved significantly in the past year. New entrants, including REITs, family offices, and foreign investors, are now participating. Chinmay Bhatt of Berkadia highlighted the market's fragmentation and changing interest rate environment as challenges, pointing out the need to consult a broader range of groups to get optimal solutions. Despite these challenges, certain deals remain appealing, especially those that can offer higher current pay rates to the preferred equity.

Loans secured by multifamily

Source: Federal Deposit Insurance Corp.

Comparison to other funding methods: While preferred equity is gaining traction, it still faces stiff competition from other funding options, especially mezzanine debt. Both fill similar roles in the capital stack, sitting between mortgage debt and common equity. However, preferred equity has an advantage as many mortgage lenders disallow subordinate debts like mezzanine but permit preferred equity. This growth in interest around preferred equity also means investors in this space can be more selective about credit choices, maximizing their investment potential.


Multifamily’s lifeboat? Multifamily's traditionally robust performance is facing challenges, pushing sponsors to reconsider preferred equity despite past reservations. In the face of rising interest rates and potential rent reductions in certain markets, experts anticipate an even more prominent role for preferred equity, especially with over $250 billion in multifamily maturities expected in 2024. As the need for refinancing grows, preferred equity is proving essential in bridging the financial gap many owners face.


Get Access to Monthly Grocery-Anchored CRE Investments

grocery-anchored cre hottest trends

This year, the CRE industry is witnessing a trend focusing on retail properties anchored by grocery stores. Even esteemed sources such as the Wall Street Journal and Business Journal have acknowledged this trend's significance.

Why Join the Grocery-Anchored Movement?

  • Resilience in Turbulent Times: These properties have showcased unwavering resilience during economic uncertainties, making them the go-to choice for stability-seeking investors.

  • Thriving on Essential Demand: Rooted in necessity, grocery-anchored centers ensure an evergreen demand for essential goods, supporting steady foot traffic and tenant occupancy.

  • Long-Term Profitability: Investment longevity defines these properties, offering dependable and foreseeable income streams that provide investors with lasting financial stability.

  • Relevance in Modern Shopping Era: In the face of online shopping, grocery-anchored properties align seamlessly with contemporary consumer preferences, ensuring continued relevance.

A frontrunner in this trend is First National Realty Partners (FNRP), a prominent private equity firm specializing in necessity-based commercial real estate. They led the acquisition of grocery-anchored properties in 2022 and currently manage assets worth $2+ billion.

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*Past performance is not indicative of future results.


Blackstone's McCarthy Says Student Housing is One of the Most Resilient Real Estate Sectors

Commercial real estate varies greatly by sector, says Blackstone's Kathleen McCarthy

Blackstone is wagering big bets on the student housing rental market, riding the wave of surging global demand and strong cash flows.

Filling the gaps: Speaking at CNBC’s Delivering Alpha conference, Kathleen McCarthy, Blackstone's global co-head of real estate, underscored the substantial cash flow opportunities in the student housing sector for Blackstone and its investors due to universities' escalating accommodation needs. McCarthy cited the acquisition of American Campus Communities as a strategy by Blackstone to alleviate housing shortages in collaboration with universities, emphasizing the resilience of the rental housing market.

Blackstone’s conviction: Last year, the investment giant flexed its real estate muscles by pooling $30 billion for its Blackstone Real Estate Partners X fund. McCarthy emphasized this as a reflection of the company's strategic use of insights to ensure steady returns for investors and maintain confidence in a market experiencing notable dislocation.

Global investments: Blackstone’s venture into student housing knows no borders. With eyes on the expanding demand for English-language degrees in Australia, Canada, and the U.K., Blackstone has anchored itself strategically in these regions. These countries, with their favorable visa regulations compared to the U.S., are in dire need of student housing to support their expanding educational institutions.


Big picture: In the grand scheme of things, while student housing is undoubtedly the favorite asset class for Blackstone, McCarthy also called out data centers and logistics as an area of interest. These investments mirror the global rise of artificial intelligence and the booming online shopping trend, emphasizing Blackstone's multifaceted strategy in navigating and capitalizing on emerging opportunities in the global real estate landscape.


Retail Resurgence in the Windy City: Chicago Tops U.S. Markets in H1 2023

Top Ten U.S. Markets in YTD Retail Net Absorption

Top Ten U.S. Markets in YTD Retail Net Absorption. Source: CBRE Econometric Advisors, Q2 2023.

In H1 2023, Chicago led U.S. markets in retail revival, marked by significant retail space absorption, fueled by a surge in restaurant traffic and supported by an affluent population. This resurgence is highlighted by the city's lowest retail availability since 2005, at 6.8% in Q2 2023.

Fueling the retail renaissance: Chicago’s attractiveness to retailers has been significantly boosted by a strong recovery in the restaurant scene, with a 7.6% increase in restaurant dining over the first seven months of 2023. The city’s gastronomic appeal is further solidified by its ranking in numerous food and travel publications and a host of accolades received by local restaurants. Additionally, the success of the hit television series “The Bear” may have played a role in bolstering the city’s restaurant rebound.

Retail appeal: The Chicago metro area, maintaining its status as an affluent community, ranked fourth in the U.S. in investment income last year. The city’s affluence, coupled with rents that are 50-67% lower than those in coastal cities like Manhattan, Miami, and Los Angeles, makes it a lucrative location for luxury retailers. Established brands like Neiman Marcus already have a presence there, and recent additions include Richard Mille, Balenciaga, and others, especially in areas like Michigan Avenue and the emerging Fulton Market in the West Loop.

Top U.S. Markets for Investment Income, 2022

Top U.S. Markets for Investment Income, 2022. Source: Oxford Economics, Q3 2023.


Looking ahead: Chicago’s retail sector appears to be on a sustainable path of growth, poised to maintain its momentum post the challenges posed by the pandemic. With a decline in retail availability and an influx of retailers capitalizing on the in-city migration trends and expanding into prime spaces, the city stands out as a dynamic hub for business and wealth, foreseeably sustaining positive asking rent growth in the coming years.


  • Asset concealment: An Atlanta-based developer, once prolific in retail, faces accusations of concealing assets to evade paying over $7M on loans for three private planes.

  • Multifamily boom: Throughout metro Omaha, the landscape is being transformed by the construction of new apartment buildings, some of substantial size, in downtown, midtown, and suburban areas.

  • El Presidente: Dave Portnoy, the contentious founder of Barstool Sports, recently acquired a luxurious Nantucket compound for a record $42 million, as reported by the Wall Street Journal.

  • Industrial dominance: One of California's smallest cities located four miles southeast of downtown Los Angeles, industrial buildings notably outnumber the few full-time residents almost four to one.

  • Refinance failure: Owners RFR and Kushner Companies defaulted on a $180 million loan this month after their refinancing efforts for a Dumbo office campus were unsuccessful.

  • Elevated closure: Chicago's Signature Room, known as one of the country's highest-elevation skyscraper restaurants and a high-profile dining spot in the city, has shut down after three decades of operation.

  • Legal jeopardy: The uncertain future of the Trump Organization also places the ownership of several of New York’s notable properties at risk, potentially leading to their departure from the portfolio.

  • Site takeover: Boucher Brothers and Major Food Group have received narrow approval from Miami Beach elected officials for a proposal to assume control of the Nikki Beach Club site, despite opposition from some residents.


investor bets on US treasuries

The averting of a U.S. government shutdown has brought the focus of the treasury market back to the prospect of higher long-term interest rates, causing a rise in yields, with 10-year debt yields reaching 4.62%.

The market is leaning bearish, anticipating an advancement in rate hikes potentially to November. This reflects mixed market sentiments, with leveraged funds holding short positions on longer-dated Treasuries and asset managers maintaining bullish bets. The avoided shutdown is leading to a recalibration of rate hike expectations in the market.

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