Good morning. In today's email: New York-based Fifth Wall Ventures just raised the largest-ever venture fund focused purely on proptech companies. The plummeting value of office buildings is likely to cause a headache for city budgets that rely heavily on property taxes. Meanwhile, the National Multifamily Housing Council (NMHC) expects rent control legislation to tighten in 2023. 

READ, WATCH, LISTEN

• 📖 Read: Learn how investing in preferred equity can offer upside as well as built-in downside protections that lower risk.

• 💻 Watch: From renting out air mattresses in his apartment to disrupting the hotel industry, hear Brian Chesky’s story of launching Airbnb (ABNB).

• 🎧 Listen: Harrison Street CEO joins Deconstruct to make the case that alternative assets (student housing, self-storage, etc.) are the key to returns in this downturn.

POLISH YOUR PITCH DECKS

Fifth Wall Closes $866M Proptech Fund In New Record For Growing Industry

Despite the rapid rise in interest rates, investors are still bullish on proptech companies. To wit, NY-based Fifth Wall Ventures Management just raised $866M—the largest-ever raise for a venture fund focused purely on proptech companies.

Put out the fire: Proptech fundraising broke records in 2021, but higher rates and a softer housing market have changed the game. “While last year’s fundraising was at times so competitive that investors had little time for due diligence, this year they are taking more time to sift through startups’ books,” says Allison Sedrish, head of proptech coverage at Barclays (BCS). 

Heavy hitters: Fifth Wall agreed that raising money was more difficult this year, but noted that over half of the $866M fund was raised in 2022. Annaly Capital Management Inc. (NLY), Arbor Realty Trust Inc. (ABR), CBRE Group Inc. (CBRE), Equity Residential (EQR), and other major real estate companies invested in the fund, bullish on real estate tech.

➥ THE TAKEAWAY 

On the horizon: Despite volatility, Fifth Wall thinks that a changing economy creates opportunities for some startups. “Fewer home sales, for example, could lead to more demand for online marketplaces offering home renovations,” said Sarah Liu, partner at Fifth Wall. It’s these types of trends that the company will look to capitalize on in its latest fund.

THE FALLING KNIFE

Declining Office Values Could Become a Big Problem For City Budgets

As office vacancy climbs and tenant demand dwindles, values have fallen dramatically from pre-pandemic levels. Municipalities may soon start feeling the pain from office landlords appealing property-tax assessments. 

The perfect storm: Most businesses are adopting remote (or at least hybrid) work arrangements, which require less space. At the same time, higher borrowing costs mean investors aren’t willing to pay as much for properties. According to real estate analytics firm Green Street, average quality office buildings have lost nearly 25% of their value since the start of the pandemic. 

At a snail’s pace: Municipalities are slow to reflect diminishing office values for a variety of reasons. Values are sometimes based on recent sales, which is hard to do when there aren’t many recent sales. Other times, assessors rely on a building’s income to determine its value, but that can lead to errors because many long-term leases were signed before the pandemic. 

Spillover effects: According to Merritt Research Services, some cities like Boston, Detroit, and Denver have at least 8% of their tax base concentrated in the 10 largest commercial property taxpayers. Amidst mass layoffs, this could eventually lead to weakening credit and even heightened default risk.

➥ THE TAKEAWAY 

Here comes the pain: If landlord appeals are successful, cities, school districts, and other tax authorities may have to cut jobs or find creative ways to raise revenue. In the past, some tax authorities have responded to declining CRE values by increasing taxes on residential properties. It’s too soon to tell if this time will be different.

DIG DEEPER

A Closer Look at Rent Control Regulations Heading into 2023

The National Multifamily Housing Council (NMHC), an organization that outwardly opposes rent control, tracked 23 states considering rent control measures. While the policy “largely failed” in 2022, expect it to make a comeback next year. 

Scoring system: The NMHC survey categorized states into 3 tiers. Seven Tier 1 states are looking to lift preemption, five Tier 2 states are advocating for rent control with limited success, and 11 Tier 3 states have adopted rent control in some capacity. 

Paving the way: Voters in CA and ME approved rent control this year, with further expansion possible in 2023. Kingston, NY became the first city in upstate NY to adopt rent control, but a judge blocked the city from implementing it. Meanwhile, the NMHC marked MA as “the top threat to enacting” rent control. Boston Mayor Michelle Wu is pushing lawmakers to revoke statewide rent control preemption, and Governor-elect Maura Healey would also support revoking the preemption.

➥ THE TAKEAWAY 

The powder keg: NMHC expects a continued push toward adopting rent control at the federal level. Tenant advocates are urging President Biden to issue an executive order to implement rent caps on mortgages backed by Fannie Mae (FNMA) and Freddie Mac (FMCC). NMHC sees rent control as a “reputational threat to the apartment industry” regardless of adoption.

MONEY IN THE BANK

Brookfield Closes Flagship Real Estate Fund, Raises $17B

Brookfield Asset Management, the global powerhouse with a whopping $750 billion in assets (including a cool $246 billion in real estate) has successfully closed its flagship real estate fund, hitting its target of a staggering $17bn.

Move over TPG: Brookfield Strategic Real Estate Partners IV is the largest real estate fund to close this year, beating out TPG's previous round, closing at $6.8bn. Brookfield launched the fund back in April 2021 and is on track to have its largest fundraising year ever, with inflows of a whopping $33 billion since the end of last quarter.

From the horse's mouth: “We will have one of the largest discretionary pools of alternative assets globally,” said chief executive officer Bruce Flatt in his quarterly letter to shareholders, referring to $125 billion of deployable capital. “The corporation will not face any restrictions on how we use this capital, and our sole focus will be on allocating capital among our operating businesses and new business initiatives while targeting a 15% plus total return for our shareholders over the long term.”

➥ THE TAKEAWAY 

Why it matters: The record fundraising for the Toronto-based firm highlights the appeal of real estate and other hard assets during a volatile market environment. “Private real assets have proven to be a safe haven, further enhancing their appeal to investors,” said Flatt.

📰 Editors' Picks

• Back to the ‘80s: Residential brokers say that the renewed perception of danger in NYC has made some clients very nervous.

• Keep it private: For the first time in 21 years, there were no REIT IPOs this year as many companies sought private capital instead. 

• Scratch my back: Billionaire Chinese developer, Zhang Li, was arrested for allegedly providing kickbacks in exchange for permits for a new development. 

• Bridge the gap: A MyEListing study of BLS data found the worst & best metros for women working in commercial real estate. 

• Office woes: One of the tallest offices in St. Louis, One AT&T Center, could be converted into mixed-use after a massive loan loss.

• Just in time: CPI slowed to its lowest level in almost a year at 7.1%, bolstering the Fed’s plan to slow down the pace of rate hikes.

• Tenant's market: Quarem, a proptech company, predicts that leases will continue to become more favorable to tenants in 2023, focusing on shorter terms and termination flexibility.

🤝 Deals & Dealmakers

• NYC’s Big Ten: Commercial Observer highlights the “mixed bag” of New York’s 10 biggest office leases of 2022.

• Go big or go home: The Meridian Group secures $81M to begin development of a 2.7 MSF industrial park in Winchester, VA.

• Cha-ching!: Sage Realty and Travelers Cos. (TRV) have sealed a $155M loan from Signature Bank to refinance 777 Third Ave in Manhattan.

• Going shopping: Bridge Group and Steerpoint Capital acquired Antelope Valley Mall (441 KSF) in Palmdale, CA, for $60M.

• Almost there: Metro Loft Management and Fortress Investment Group are inching towards an agreement to buy a stake of 85 Broad Street in NYC from Ivanhoe Cambridge.

• State of the art: The Dallas Cowboys are planning to spend $295M on renovations to their 13-year old stadium.

 📈 Chart(s) of the Day

While the chart might suggest that not much has changed since the beginning of the pandemic, office leases are generally longer-term in nature. As such, “true” office vacancy rates may be worse than the data tells us they are.

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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.