Property Market Facing $175B Debt Crisis Globally
A global debt crisis looms as lenders pressure landlords to sell their assets in a bear market.
Good morning. A global crisis looms as the decline in housing and commercial real estate prices is likely to cause widespread economic credit turmoil. Private equity firm KKR caps REIT withdrawals joining rivals Blackstone and Starwood in the latest redemption wave.
Meanwhile, Amazon's cloud division has been offered hefty incentives to expand its footprint in Virginia and plans to plow $35B in new data centers by 2040.
Bullpen has new freelancer roles open in the thriving mobile home sector. Check out the Talent Collective below for opportunities.
📖 Read: New York City's commercial real estate market has dropped by nearly $9 billion and is expected to continue declining, affecting the city's budget, which relies heavily on real estate taxes.
💻 Watch: Jennifer Morgan, Global Head of Portfolio, discusses what’s on the minds of Blackstone portfolio company CEOs in an uncertain economic environment.
🎧 Listen: Kyle O’Hehir learned a lot from trading at hedge funds on Wall Street. On this episode of The FORT he discusses why he left to manage his own capital and trade in distressed real estate debt.
TICKING TIME BOMB
Property Market Facing $175B Debt Crisis Globally
There’s now $175B of distressed real estate credit worldwide—four times as much as the next-most distressed industry. To make matters worse, CRE landlords don’t want to sell while demand is low, but lenders are turning up the pressure. The resulting wave of sales and foreclosures could have dire economic consequences.
Too much supply: European CRE distress is at its highest level in a decade, with UK commercial property values sliding 20% in the second half of 2022. Prices plummeted in the Swedish housing market due to a lack of demand. China is also in the sink, with major developers in default because few buyers are interested in the same real estate that made up 29% of China’s 2020 economy. There’s just too much supply.
Distressed assets: European landlords are facing rising default probability (8%) due to heavy debt taken on after the financial crisis, lower demand for office space during the pandemic, and rising borrowing costs, forcing them to mark down values. Example of this is in Sweden, where house prices are falling, Samhallsbyggnadsbolaget i Norden AB has agreed to sell $1 billion worth of property to pay off debt.
Source: Bloomberg, BQuant
No way out: While regulators could stimulate CRE demand by lowering rates, combating inflation is their first priority. And with remote work trends on the up and up, it looks like the CRE market is in for a painful long-term adjustment. Many analysts believe that US real estate values could fall another 5–10% before stabilizing and that credit losses are likely to grow this year.
➥ THE TAKEAWAY
Brace yourselves: Borrowers will likely suffer the most since they’re the ones who need to refi or pay back their loans—and they just don’t have that kind of financial cushion right now. To avoid foreclosure, many will have to lower asking prices to shrink the bid-ask spread. When this happens, a lot of paper value is going to go up in smoke, which will probably look a lot like a recession.
KREST Becomes Latest Non-traded REIT to Cap Withdrawals
Investment firm KKR has followed in Blackstone's (BX) and Starwood’s (STWD) footsteps by limiting investor redemptions from their non-traded REIT, KKR Real Estate Select Trust (KREST).
Not so fast, valued investors! In a regulatory filing last week, KKR revealed that investors tried to withdraw more than 8% of the fund’s total $1.6B in assets in Q4 2022. KREST, which has a 5% quarterly withdrawal limit, honored just 62% of redemption requests rather than selling assets in order to honor all of them.
Sounds familiar, doesn’t it? Redemption limits are the rule, not the exception. BREIT and SREIT both began limiting redemptions in the fall and continued to do so into December. BRIET and SREIT honored just 20% and 4% of investor redemption requests made last month, respectively. While private REITs outperformed public ones over the past few years, the recent wave of redemption limits casts doubt on their future.
➥ THE TAKEAWAY
Don’t bite the hand that feeds: KREST performed well in 2022, generating an annual net total return of more than 8%. Private REITs tend to cite their returns as proof that they’re good investments. But when those returns depend on forcibly holding onto investor capital, the picture isn’t as rosy. The longevity of private REITs relies on investor confidence—and the more they limit redemptions, the lower confidence will be.
CHASING THE CLOUD
Amazon to Plow $35B Into Virginia Cloud Infrastructure by 2024
Amazon (AMZN) announced that it will pour a fresh $35B into cloud infrastructure projects in Virginia through 2040, creating an estimated 1,000 jobs in the state. The investment underscores its effort to stay ahead of rivals Microsoft (MSFT) and Alphabet (GOOG).
Something about Virginia: Thanks to its cheap power and government tax incentives, Virginia has long been a data center hub. AMZN has invested $35B in cloud computing infrastructure in the state since 2011. And even after decades of demand, it seems the already white-hot cloud computing market is still just warming up.
The incentive: Amazon has been offered incentives to expand its footprint in Virginia and will qualify for a 15-year extension on tax exemptions for equipment and software installed at the new locations, the state said. The cloud unit also may have received as much as $140 million in performance grants, subject to approval by the state’s government, tied to infrastructure investments and workforce improvements.
➥ THE TAKEAWAY
Cloud is king: Amazon recently announced it would lay off 18,000 workers globally, as part of a downsizing trend among big tech companies in anticipation of a potential recession. However, despite the job cuts, Amazon's cloud unit (AWS) has stated that it will continue to invest and grow in Virginia, as per the assurance given by the unit's senior executive in November. Additionally, other major tech companies are also increasing investments in cloud computing, indicating that the demand for cloud services will remain strong in the long term.
📰 Editors' Picks
Lending less: Big US banks are pulling back on CRE lending nationwide, especially for office spaces and apartment complexes.
Oh my, Miami: Miami residents have accused landlords of rigging rents through a massive, coordinated price-fixing scheme.
Blue-collar “bleisure”: Hotels are hurting from a drop-off in corporate travel, but blue-collar business is swooping in to save the day.
Pros play pickleball: As pickleball’s popularity grows, realtors are using the sport to network and make deals. Because of course they are.
Experiential experiment: Malls are trying to stay relevant by adding out-there experiences like indoor skiing and ax throwing, but the gamble’s unlikely to pay off.
Buyer beware: LA’s new county transfer tax is going to make luxury CRE deals pricier for sellers unless they succeed in their efforts to foist some of their costs onto other parties.
Going global: New Orleans is revamping its port system as part of a bigger bet to become a major trade hub for the new worldwide supply chain.
💼 Talent Collective
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🤝 Deals & Dealmakers
A bigger deal: Foreign investors are interested in fewer US projects, but the ones they’re still eyeing are bigger than ever before.
Affordable living: Greysteel just arranged the $24M sale of 113-unit affordable housing complex in Frederick, MD.
This land is my land: Prologis (PLD) plans on building a 625 KSF logistics complex in Austin, TX, on a parcel that it acquired from National Instruments (NATI).
Bidding up a storm: Vornado Realty Trust (VNO) is the latest firm to consider entering a bid for one of NYC’s three coveted casino licenses.
Shaw’s time to shine: Ybor City developer Darryl Shaw just released plans to build 6 MSF of mixed-use space in a 20-building complex at the end of the Ybor Channel.
Campus construction: Texas A&M has just committed to building a three-building research campus in downtown Fort Worth.
Kick it with cannabis: Elevation Hotels and Resorts will soon convert the Artisan Hotel Boutique into The Lexi, Las Vegas’s first cannabis-friendly hotel.
The fall of Troy: Two of the John P. Taylor apartment buildings in downtown Troy are being demolished to make way for a new multifamily complex.
Sorry, boss—I got first dibs: Two Cushman & Wakefield (CWK) brokers just snatched up a $22M, 11-acre parcel in Fort Lauderdale for themselves.
📈 Chart of the Day
We all have our favorite weekdays, including days on which we’re more productive than others. As it turns out, most office workers in hybrid work arrangements prefer to go into work on Tuesdays and Wednesdays.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.