Shvo’s $1B Office Gamble

Developer Michael Shvo hopes to revitalize San Franscisco’s dying downtown office market with a $1B transformation of the iconic Transamerica Pyramid.

Shvo's $1B Office Gamble

Developer Michael Shvo hopes to revitalize San Franscisco’s dying downtown office market with a $1B transformation of the iconic Transamerica Pyramid.

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Sam Zell, Billionaire & Real Estate Mogul, Dies at 81

The real estate world lost one of its greats this week as Sam Zell, the outspoken real estate billionaire and founder of Equity Residential (EQR), passed away at age 81.

The earlier, the better: Born in Chicago to Polish refugees, Zell showed signs of entrepreneurship by the tender age of 12 when he started selling Playboy magazines in the suburbs. He attended the University of Michigan, where he began his real estate career managing student housing with a fraternity brother. The pair were hooked and kept snatching up more properties.

Winning more often than not: Zell accumulated a vast portfolio during his career, including 573 office buildings in Equity Office Properties Trust, which he sold to Blackstone (BX) in 2007 for $39B, the largest private equity deal at the time. After his failed $8.2B purchase of the Tribune Company in 2007, Zell knew he couldn't get it right 100% of the time. In 2016, he sold a 23K-unit suburban rental portfolio to Starwood Capital (STWD) for $5.4B. Zell stepped back from day-to-day duties in 2017 but never intended to fully retire.


Legends never die: Sam spent decades creating billions in value for his investors in Equity Residential, amassing an empire of apartment buildings, offices, and mobile homes—earning him the infamous moniker "The Grave Dancer" for his ability to swoop up and rehabilitate distressed assets after their owners folded. Zell was a legend, and he will be greatly missed.

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CRE Prices Finally End Their 12-Year Rally

US CRE prices fell in 1Q23 for the first time in 12 years, led by the decline in office and apartment values, with further drops expected.

The culprits: While the overall price drop was less than 1%, the biggest drop came from Multifamily (-9%), followed by Office (-3%), Warehouse (-2%), and Retail (-1%). The hospitality and industrial sectors were also silver linings. Chief Economist of Moody's Analytics, Mark Zandi, expects further CRE price declines, forecasting a 10% peak-to-trough plunge by the middle of the decade—assuming the US avoids a recession. Declines could be worse if the nation sinks into recession.

Watch out: Experts have warned of turmoil in the CRE market for months because of high borrowing costs and stress on the office market. Last week, the Fed announced they’re keeping a close eye on financial firms with significant exposure to CRE. Their Financial Stability Report noted banks account for more than 60% of the $3.6T in outstanding CRE loans in 4Q22, with smaller institutions the most exposed. "The magnitude of a correction in property values could be sizable and therefore could lead to credit losses."

Doom loop: With transaction volumes down and lending standards tighter than ever, the risk of a "doom loop" continues to linger, leading to a bigger drop in CRE prices and, consequently, more credit cuts. According to Zandi, more price declines could trigger more delinquencies and defaults, but he doesn’t think there will be too many forced sales.


Give me the good news: Since prices have seen record highs over the past few years, borrowers have more equity, reducing the danger of defaults and limiting losses for lenders. For example, LTV for office loans ranged from 50–60% by year-end. So we shouldn't be looking at a GFC-esque catastrophe. With that said, Zandi believes that "We're on a razor's edge” as more price declines are almost certainly on their way.

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AT&T Plans to Downsize Its Real Estate Portfolio

AT&T (ATT) CEO John Stankey has plans to cut back the company's real estate portfolio while also ordering employees back to the office.

Drink the Koolaid: Stankey wants his managers to be "all-in" with AT&T's corporate culture. That means that managers in Dallas and Atlanta must either come back to the office 3 days a week or pack their bags, a decision that will affect more than 60,000 managers. Up to 85% of AT&T’s managers are local, but the other 15% have some self-reflection to do.

Core consolidation: Although details about which offices will be cut have yet to be disclosed, AT&T plans to consolidate in 9 key office hubs, including its Dallas headquarters; Atlanta; LA; Middletown and Bedminster, NJ; San Ramon, CA; Seattle; and Washington, DC. AT&T leases 12K locations worldwide, with 61% of its real estate being office space.


Come back or else: AT&T isn't the first company, and certainly won't be the last one, to cut down on its office portfolio as sublease availability reaches all-time highs in the US. AT&T is one of many companies pushing to get workers back into buildings in an effort to increase collaboration and productivity. The company spent $100M upgrading its Dallas headquarters, opening revamped offices during the pandemic, and now they’re demanding employees use it.

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📰 Daily Picks
  • Funding Florida: Developer Dan Kodsi’s firm Participant Capital is launching a $250M equity fund focused on the Sunshine State.

  • Manhattan on the rise: Manhattan’s median rent set new records this April at $4,241 per month, topping last summer’s high.

  • Grocery gains: Grocery-anchored operator Regency Centers (REG) will acquire Urstadt Biddle in an all-stock transaction valued at $1.4B, valuing the company around $16B.

  • Thou shalt not steal: NYC prosecutors and Mayor Eric Adams have a comprehensive plan to crack down on retail theft that’s running rampant in the city that never sleeps.

  • Please come back: NY asset manager Blackrock (BLK) is asking all employees to return to the office 4 days a week starting in September.

  • Rebuilding Detroit: Minneapolis developer The Opus Group started constructing a 2-building spec industrial development in Metro Detroit.

  • Invest to win: As WeWork’s (WE) stock continues to tumble, faithful short sellers earned a handsome $440M over the past year.

  • Dropping like flies: Brookfield (BAM) has defaulted or missed payments on over $1B in CMBS loans backed by its largest DTLA trophy office buildings.

  • Climbing cap rates: Car washes, gas stations, convenience stores, and other single-tenant net lease properties had the highest cap rate hikes in 1Q23.

  • The great sell-off: Many regional banks may start offloading their CRE loans and reducing their exposure to the troubled sector.

  • Bigger is better: Cassco Land Company is planning a $400M expansion of its Clearfork development in Fort Worth, hoping for a $22M tax break from the city.

📈 Chart of the Day

Florida is finally feeling the effects of the CRE slowdown, as sales volume is down 64% for all investment types in the Sunshine State. Multifamily sales volume fell nearly 80%, while Industrial fell over 50%.

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