Simon Says Malls Don’t Suck

One of the largest mall REITs in the country reported higher rents and occupancy rates for the quarter. CRE lenders are keeping cash on the sidelines, watching and waiting as the Fed’s rate hikes continue. Meanwhile, KKR launches a new, European real estate credit business arm, targeting $1–2B in originations next year.

Simon Says Malls Don’t Suck

One of the largest mall REITs in the country reported higher rents and occupancy rates for the quarter. CRE lenders are keeping cash on the sidelines, watching and waiting as the Fed’s rate hikes continue. Meanwhile, KKR launches a new, European real estate credit business arm, targeting $1–2B in originations next year.

Good morning. In today’s email: One of the largest mall REITs in the country reported higher rents and occupancy rates for the quarter. CRE lenders are keeping cash on the sidelines, watching and waiting as the Fed’s rate hikes continue. Meanwhile, KKR launches a new, European real estate credit business arm, targeting $1–2B in originations next year.

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🎧 Podcast of the Day: In this episode, MWPVL founder and President Marc Wulfraat, a logistics consultant who tracks Amazon's industrial footprint, discusses the impact the company's moves have had on the broader industrial market and what the landscape looks like amid wider economic uncertainty. (Bisnow Reports)

SHOPPING SURGE

Rebounding Mall REIT Wants to End The "Negative Mall Narrative"

Simon Property Group (SPG), the largest mall owner in the U.S., revealed that rents and occupancy rates are rising again. According to CEO David Simon, brick-and-mortar retail is back.

By the numbers: SPG’s Q3 earnings report revealed $1.11B in earnings, a 1.4% increase from the previous quarter. While net income was $539M, down from $679.9M a year ago, Simon believes the lull in e-commerce points to a return to form for retail. “We have yet to see any pullback in opening new stores or [lease] renewals…It’s been a difficult year for e-commerce, and bricks is where the action is.”

Returning demand: SPG occupancy across its malls and outlets stood at 95%, compared to 92.8% last year. Base minimum retail rents were $54.80 per SF compared to $53.91 in Q3 2021, while some malls and outlets saw Q3 rents of $749 per SF, up 14% YoY. Notably, SPG has paid out $39B in dividends since the pandemic began.

THE TAKEAWAY

A tale of two shoppers: Although the macro economy doesn’t look too good right now, Simon believes inflation will mostly impact the “lower income consumer [who] is tightening their belt.” Name brands that Simon has a stake in, including Nautica, Brooks Brothers, Lucky Jeans, and Aeropostale (ARO), have remained resilient throughout the pandemic and are expected to continue performing well.

DEBT MARKETS

Spooked by Fed Hikes, CRE Lenders Slow Down in H2

CRE lenders enjoyed one of their best years on record in 2021, but the party looks like it’s finally coming to an end. The second half of 2022 has been a very different story so far due to the Fed’s continued rate hikes.

What will Powell do next? After the Fed’s hawkish 75 basis point hike on June 15th, the first three-quarters hike since 1994, CRE lenders were spooked. More “jumbo” rate hikes followed. Interest rates have gone from nearly zero at the start of the year to 3.25%. CRE lenders aren’t thrilled about the situation and have become far pickier as a result.

Borrowing is getting pricey: In August, the number of CRE transactions fell 50% nationally, according to Colliers research. The “loads of capital” still on the sidelines is being deployed primarily for industrial and multifamily opportunities in core markets like SoCal, the Sun Belt, and Northern NJ. Meanwhile, credit spreads are as much as 230–245 basis points above the Treasury rate for anchored retail properties and Class A offices, far higher than last year.

THE TAKEAWAY

Still not as bad as 2008: Although lenders are concerned, most of them seem convinced that the cooling CRE market will be just fine in the long run. With billions in dry powder they still haven’t spent, lenders aren’t willing to take on more risk than they can afford. Instead, they’re staying cautiously optimistic (a recurring theme). Industry observers believe hard money lenders will do well in this environment, and 2023 will see its fair share of defaults in pandemic-impacted asset classes.

ACROSS THE POND

KKR Launches European Real Estate Debt Business Arm

NY-based KKR & Co (KKR) has opened a real estate credit business in Europe, and aims to originate $1–$2B in loans next year. The firm plans to invest “across the real estate capital stack.”

Who’s in charge? KKR’s European arm will be spearheaded by Ali Imraan, former director of debt investments at LaSalle Investment Management. Other executives are joining the London team from Goldman Sachs, Morgan Stanley Investment Management, and Deutsche Bank.

What’s the plan? According to Matt Salem, head of KKR real estate credit, “It’s a super interesting time to be building a real estate credit business…We have the different forms of capital in terms of permanent capital and drawdown capital, so the flexibility is great.” KKR’s new business arm will focus on average loan sizes of $100–150M, where “liquidity really dries up,” as their market differentiator.

THE TAKEAWAY

Land and expand: Just seven years ago, KKR’s real estate debt platform was formed from scratch. Since then, they’ve listed a public mortgage REIT (KREF) and raised capital for two private real estate fund series. Much of their focus has been on transitional lending and lower-risk, lower-return opportunities through Global Atlantic. KKR believes its capital pools are well-positioned for European expansion.

📰 Editors' Picks

  • “Storytelling and curation”: Kohl’s (KSS) unveiled its first 35K SF self-checkout concept store, which also features “hyper-localized” experiences, in Tacoma, WA.

  • Private playground: In the past decade, private real estate investments returned nearly 11% annually with a much lower risk profile than the S&P 500 and even publicly traded REITs. 

  • Polarizing postmortem: Jack Welch, the former CEO of General Electric (GE), was a man many people either loved or hated. Was he the greatest CEO of his time or one of the worst?

  • The emperor’s new clothes: For over a decade, cheap debt fueled the meteoric rise of U.S. office values. But aging office towers in major cities nationwide are starting to feel exposed.

  • Buy the bottom? Given the Fed’s recent remarks, which were broadly interpreted as Powell considering a potential pivot after looking at the data, real estate funds could rebound soon.

🤝 Deals & Dealmakers

  • New joint venture: Bridge Investment Group and KB Asset Management (KBAM) have established a partnership that will strengthen overseas real estate investment and management.

  • Making the list: CoStar just published its latest Power Broker Quarterly Deals list, which indicates that across major deals brokers are bracing for a slowing economy.

  • Almost a new record: A student housing portfolio in Tucson, AZ just made headlines for its $203M sale price, among the five largest single-asset purchases in student housing history. 

  • If it ain’t broke, keep investing: Real estate investor Stonepeak just added another $570M to its $3B stake in data center provider CoreSite (COR), upping Stonepeak’s ownership to 36%.

  • Born-again building: GFP Real Estate, Metroloft, and Rockwood Capital are joining forces to convert the iconic office tower at 25 Water Street into 1,200 rental units.

  • Loan of the day: Blackstone (BX) just lent $700M to Onni Group’s luxury 1,097-unit development in Seattle’s popular South Lake Union neighborhood.

📈 CHART OF THE DAY
💼 JOB BOARD

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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.

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