Together with

• Real estate sales dropped significantly, impacting shareholder earnings.

• Q3 real estate sales fell 93% year-on-year.

• Distributable real estate earnings down 27% to $557 million.

• Fourth consecutive quarter of key financial declines.

• $2.2 billion sale of Simply Self Storage to Public Storage announced.

• Data center business remains a highlight, boosted by AI.

• Stock dropped 5.5% post-report but is up 10% over 12 months.

Related Dives Into Cold Storage With $1 Billion Wager

Related, known for major developments like Manhattan's Hudson Yards, is branching out of offices and apartments. Their affiliate, RealCold, plans a $1B network for growing online grocery demand, as noted by The Wall Street Journal.

Chilling growth: The firm is allocating $150M for its initial locations in Lockhart, Texas, and Lakeland, Florida. Construction of these 300K+ SF warehouses is slated to start before the year's end. By 2025, RealCold aims to have over 10 facilities spread across six markets. Given supply chain shifts and rising local food demand, major investors like Related are increasingly bullish on cold storage, seeing it as resilient to economic fluctuations unlike some other CRE sectors.

Smaller is better: While Related is not the first CRE investor in cold storage, the high upfront capital often makes the sector specialized. Building cold storage warehouses is notably costlier than standard warehouses, sometimes by a multiple of 4x. Other investors include Bain Capital and Barber Partners, who teamed up for a $500M cold storage project, and Envision, which received a $500M investment to develop $1.5B in cold storage assets.

➥ THE TAKEAWAY 

Cool confidence: The cold storage industry's growth is linked to e-commerce expansion, with online grocery shopping projected to rise significantly by 2025. This surge is expected to boost the demand for cold storage. However, the sector faces challenges from inflation, labor issues, and general economic instability. Nevertheless, the potential return on investment remains attractive due to the limited new constructions compared to the existing inventory, as highlighted by a BentallGreenOak study.

NY Housing Hangover: Worst Year Since 2012 Sparks Shift

NYC is facing its worst year of housing production since 2012, with a projected 62% decrease in new units, driven by reduced tax breaks and higher interest rates, according to the New York Building Congress.

Shift toward infrastructure: With residential construction facing challenges, the focus is shifting to infrastructure projects and government spending to bolster the industry. Infrastructure investments are on the rise, albeit with some challenges due to inflation in materials and labor costs. Various borough presidents, including Manhattan's Mark Levine and the Bronx's Vanessa Gibson, emphasized the need for affordable housing and reevaluating neighborhood development practices.

Construction boom: Construction spending is set to increase by an inflation-adjusted $13B this year, reaching a total of $83B, with a slowdown in price inflation for materials and labor compared to last year. Spending on CRE is projected to grow 32% above pre-pandemic levels by 2025. Still, the outlook for new office construction has diminished, with only about 1MSF of new office space expected in the coming years.

Funding for growth: Construction employment is still 5% below pre-pandemic levels, and a full recovery to those levels is not expected until 2025. Government infrastructure spending is projected to dominate the construction market in the coming years. Still, NY has only received $11.7B of the $1.2T Bipartisan Infrastructure Law funds, leading to calls for a centralized monitoring system to enhance transparency and streamline project delivery processes.

➥ THE TAKEAWAY

NY outlook: While CRE spending is expected to surpass pre-pandemic levels by 2025, the outlook for new office construction has decreased, with a substantial reduction in new office space, despite ongoing major commercial projects. NYC's housing production challenges are driving a focus on infrastructure and government investment as key drivers of economic growth in real estate. CRE is poised to rebound, albeit with changing dynamics and a reduced emphasis on new office construction.

D-FW Outpaces Los Angeles as the Nation's Top Spot for Commercial Property Investment

Dallas-Fort Worth (DFW) has continued to dominate the CRE market, leading the nation with over $13B in investments in the first nine months of 2023, surpassing LA and other major cities.

Back on top: Despite a 64% YoY decrease in transaction volume, DFW reclaimed its position as the top US market in real estate transactions YTD, surpassing LA, which had $12.8B in transactions. DFW's rise was attributed to a significant number of apartment sales, which accounted for over 50% of the total investments, amounting to $6.84B, along with industrial and retail transactions totaling $2.9B and $1.3B, respectively.

Market slump: CRE purchases have significantly decreased this year due to high interest rates and a tight lending market, with all the markets on the list experiencing double-digit declines in deal volume and all but five of them sliding more than 50% annually compared to the first three quarters of 2022, according to MSCI. Other Texas metros also topped the list of markets with significant CRE activity, including Houston (6th), Austin (10th), and San Antonio (18th).

Office in distress: In Q3, national investment in office buildings saw a substantial 65% decline compared to last year, marking the most significant decrease in CRE investment, according to MSCI. MSCI estimates that the US saw $276.3B in investment property transactions through Q3, with $89.6B coming from apartment purchases. About $79.7B of US CRE was considered distressed, with office buildings accounting for approximately $32.5B of that troubled real estate. However, the current distress level remains less than half of what was seen during the peak of the GFC.

➥ THE TAKEAWAY

Rise from the ashes: In DFW, approximately $1.4B worth of commercial properties are currently distressed, with the potential for another $8.8B in troubled property deals. Manhattan leads the list of markets with distressed CRE at $14.4B, followed by Chicago at $7.3B. Despite challenging national trends, DFW's resilience in the face of declining investment activity highlights its dominance in CRE, driven by substantial apartment sales and maintaining its top position for the third consecutive year. At the same time, the distressed CRE market remains a concern across the US.

• Sell it like Serhant: Bob Knakal's Park Avenue apartment, listed at $13.45M, is under contract with a Hong Kong businessman. Ryan Serhant and Kayla Lee of Serhant managed the listing.

• Build-for-rent: TruAmerica Multifamily embarks on its first build-for-rent (BFR) community project with an $86M development in SC.

• Closing shop: Major banks, including Bank of America (BAC), Wells Fargo (WF), and JPMorgan (JPM), are shutting down branches as they face financial challenges from higher interest rates and distressed commercial mortgages.

• Watchlisted: Brookfield's (BN) $260M loan for the Pembroke Lakes Mall in Pembroke Pines faces a downgrade and watchlist status as declining operating performance raises doubts about paying off or refinancing the debt maturing in 2025.

• Dream shattered: Harry Macklowe's five-year quest to acquire a seven-story office building in Midtown for his TowerFifth project comes to an end as the property is sold to Ramirez Asset Management for $19.5M.

• Record setting: Prologis (PLD) acquires the Airpark Logistics Center in Goodyear, AZ, for a record-breaking $184M, marking the largest-ever multi-building industrial business park acquisition in Arizona history.

• Deeper pockets: During the pandemic, the net worth of the typical US family grew by 37%, the largest increase on record, driven by higher home and stock prices and government stimulus.

• Breaking ground: The NRP Group and H.I.G. Realty Partners have commenced construction on Diamond Flats, a $69M project of 331 units in Carrollton, TX.

• Moving to Miami: Brazilian billionaire Daniel Dantas and his firm, Opportunity, are expanding into the hot Miami real estate market, planning to invest over $1B in apartment towers and condos.

• Mansion mania: The luxury real estate market in Aspen, CO, has experienced significant growth, with a surge in home sales above $30M, driven by tight inventory and building restrictions.

• Hotel disposal: Pimco, facing challenges in the hospitality industry, has decided to give up on 20 underperforming hotels amid a tough financing environment and rising operating and borrowing costs.

• Sunshine State success: The Florida office markets, especially in Miami and Orlando, are thriving due to strong job markets, lower unemployment rates, and high demand for top-quality office spaces.

• Possible perjury: Attorneys for former President Donald Trump accuse Newmark appraisal expert Doug Larson of perjury after he denied working on valuations for The Trump Organization.

• Road to recovery: A JLL report suggests that the US office market is on the path to stability, with indicators including growing tenant demand, declining sublease space, and shrinking high-end office availability.

• Tax time: The decline in office property values has raised concerns about the impact on property tax revenue, prompting office owners to consider various strategies to reduce costs and reassess their property's value.

• Fundraising victory: Real estate software company HqO has secured a $50M Series D funding round, led by Koch Real Estate Investments, to support its growth and acquisition strategy through its Real Estate Experience (REX) platform.

Colliers is optimistic about the untapped capital on the sidelines, suggesting it might stabilize prices. However, for the industry to appreciate this potential stability, there's a need for more market debt. Investors previously bought assets with a return rate of over 8%, but with current borrowing rates at 7-8%, they'd expect even higher returns, possibly leading to asset price declines of 20-40%.

Colliers notes that with $270.6 billion available for commercial real estate investment, it might uphold a price base in challenging times.

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