Private Lenders Worsen Liquidity Gridlock in CRE

Plus: Thesis Driven explores how short-term rentals in multifamily buildings can enhance NOI.

Private Lenders Worsen Liquidity Gridlock in CRE

Plus: Thesis Driven explores how short-term rentals in multifamily buildings can enhance NOI.

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Today’s Issue:

  • 🏢 US CRE liquidity crisis worsens with rising rates.

  • 🏠 Thesis Driven explores boosting NOI with short-term rentals.

  • ☕ Starbucks to open 17k new stores and cut $3B in costs by 2030.

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Private Lenders Worsen Liquidity Gridlock in CRE Amidst Rising Rates

The US commercial real estate sector is in a liquidity crisis due to rising interest rates and cautious private lenders, intensifying the gridlock amid trillions in maturing debt.

Between a rock and a bank: Private lenders are gaining prominence as banks seek to rework maturing commercial real estate debt terms. This has allowed private lenders to offer rescue financing, including mezzanine debt, preferred equity, or common equity. Initially, the focus was on the office sector, but it has now extended to multi-family, industrial, and hotel properties. However, even private lenders are finding these rescue operations financially challenging as rental income struggles to keep up with rising debt servicing costs.

Rising borrowing costs: Borrowing costs for the CRE market have risen more than income due to the steepest jump in interest rates in decades. This has prompted tighter lending standards after regional bank failures and falling office occupancies post-COVID. Property valuations have also dropped, resulting in smaller senior refinancing loans with rates at least 500 bps higher. Additionally, two-year interest rate caps are maturing, and new caps are much more expensive.

Uneven recovery: Certain assets may never recover, especially in cities grappling with rising crime rates and declining demographics. Additionally, some properties require substantial investments to turn them around, which can eat into potential returns, making them unattractive for lenders.


Looming crisis? The caution among private lenders is expected to worsen liquidity shortages for property owners, leaving them with no real exit options. With significant CRE debt maturing in the next two years and limited lender availability, the market is gridlocked, and recovery remains uncertain, potentially leading to portfolio reductions and challenges for private lenders. However, while delinquency rates are rising, experts say the risk of a systemic crisis is low.


WeWork founder Adam Neumann breaks his silence…

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Fundamental Cap Rate Analysis: The Flex Stay Example

This week’s Thesis Driven explores the short-term rental market from an operator’s perspective. Incorporating furnished flex rentals into a multifamily building can increase NOI due to higher demand for flexible housing options. 

By offering both short and long-term rentals, owners and developers can diversify their income and protect against increased apartment supply.

But despite flex rentals offering higher NOI, multifamily owners hesitate to incorporate them into new projects. The problem? Many investors put a risk premium on short-term rental revenue, meaning flex-heavy multifamily buildings trade at a higher cap rate than assets with only 12-month leases. But is that the right approach?

This week’s letter dives deep into how investors and developers should approach flex apartment cap rates. 

Cap rates are vital in real estate valuations, representing the ratio of Net Operating Income (NOI) to property price and indicating expected annual returns.  Exit cap rates are crucial for real estate investors, as they influence the expected sale price at the end of the investment period. These rates are so sensitive that an accurate prediction can make up for other errors in the investment analysis.

Historically, multifamily properties had lower cap rates compared to hotels due to their necessity, stability, and lower risk. However, the approach to valuing novel asset classes, like flex-term rentals, has been less about fundamentals and more reliant on market comparisons, which may overlook the unique benefits and risks of these assets.

Looking at sectors like self-storage, single-family rentals (SFR), and data centers, we see evidence of cap rate compression over time, indicating increased value. For instance, self-storage cap rates compressed by approximately 250 basis points (bps) over two decades, data centers by around 300bps over 13 years, and SFR by 130bps over five years. 

Betting on a sector before it is obvious means an investor can benefit from cap rate compression, making each dollar of NOI their properties generate more valuable. The limited availability of flex rental comparables makes it challenging to establish a solid precedent for exit cap rate valuation. Yet, as the sector matures, it will become clearer how these assets perform in the market, presenting opportunities for investors who focus on fundamentals to gain an edge.


Zoom out: Understanding and applying fundamental analysis to the valuation of emerging real estate asset classes like furnished flex rentals can significantly impact investment returns. As the real estate market evolves, it's crucial to not solely rely on comparables but to engage with the fundamentals for a more accurate and potentially profitable valuation strategy.

You can read more about the valuation of flex apartments on Thesis Driven.


  • Strategic lending: Investors and lenders in hospitality are being strategic and selective due to risks associated with interest rates and inflation, according to Wells Fargo.

  • Breaking free: WeWork (WE) plans to emerge from Chapter 11 bankruptcy with significantly reduced debt obligations.

  • Mall makeovers: Orange County shopping malls are being transformed with $8B of redevelopment, leading to the demolition of 4MSF retail space and the construction of 13K homes over the next decade.

  • Building boom: Multifamily construction starts remained strong in 1H23, resulting in an increase in under-construction units and a projected increase in completions for 2024 and 2025.

  • Opportunity knocks: High interest rates may lead to investors selling properties, creating opportunities with attractive prices, but not as steep as in the 1990s.

  • The pomp: Rockpoint acquires a 87.8-acre industrial site in Pompano Beach for $180M, partnering with Cordish and Caesars Entertainment for development.

  • Riverfront Renaissance: Developers have plans for 12 projects along the Miami River, potentially adding 10.5K condo and apartment units.


Starbucks Aims to Open 17K Stores by 2030, Cuts $3B in Costs

Starbucks (SBUX) revealed its plans for accelerated global growth, aiming to open 17K new stores by 2030 while implementing cost-cutting measures.

Triple shot of caffeine: The coffee chain currently operates around 30K locations worldwide and intends to increase that number to 55K by the end of the decade, averaging eight new stores daily. This expansion is part of Starbucks' "Triple Shot Reinvention Strategy," focusing on enhancing store operations, bolstering digital capabilities, and establishing a global presence.

Impressive growth trajectory: Starbucks reported an 8% increase in global comparable store sales for Q4, driven by a 4% rise in average customer tickets and a 3% increase in comparable transactions. The company added 816 net new stores during the quarter, bringing the total store count to 38,038, with 52% company-operated and 48% licensed. Furthermore, international store growth outpaced that of the US, with nearly 600 new stores added in Q4.

Cost-cutting & efficiency: As part of its reinvention effort, Starbucks plans to implement a $3B efficiency program. This program primarily focuses on cost reductions, with $2B allocated for cost-of-goods sold outside the store. The aim is to reinvest in the business, achieve progressive margin expansion, and generate returns for shareholders through earnings growth.

Future growth outlook: Starbucks sets its sights on a global store count of nearly 41K by the end of fiscal year 2024, with over 16.3K stores in the US. Additionally, the company aims for 4% net new store growth in fiscal 2024, aspiring to reach 20K stores in the long term. Over the past five years, Starbucks has opened 9K stores, with 7K outside of the US, highlighting its success in international expansion.


Unlimited potential: Starbucks' ambitious plans for global expansion, aiming to open 17K new stores by 2030, reflects the company's confidence in its growth potential. Q4 saw an 8% increase in global comparable store sales, demonstrating the effectiveness of their reinvention strategy. By focusing on operational improvements, digital advancements, and purpose-defined store formats, Starbucks aims to meet the evolving needs of its customers.


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