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Good morning. The recent setbacks at Signature Bank and other regional banks are adding to the industry's existing strain. The potential surge of defaults on office and other loans could compel banks to reduce their value. Meanwhile, it is crucial for CRE enterprises to adopt AI-based best practices and maneuver the ever-changing market

Today's edition is brought to you by Xeal Energy, the next generation of EV charging solutions for multifamily and commercial real estate properties.

U.S. Regional Banks Feeling the Heat of CRE Loan Defaults

As if regional banks haven’t already felt enough pain after the collapse of SVB and Signature Bank, a record amount of commercial mortgages are set to expire in 2023, seriously testing the shaky U.S. financial system.

Small but mighty: According to Trepp, smaller banks hold almost 80% of commercial mortgages or nearly $2.3T in debt. The high interest rate environment is not only hurting valuations but is also cutting into cash flow for owners with floating-rate debt now faced with steep monthly payments. A record number of mortgages set to expire this year—$270B to be exact—are mostly held at banks with less than $250B in assets.

Kick them when they’re down: Economists estimate the value of loans and securities held by banks is about $2.2T lower than book value, with real estate loans accounting for more than 25% of that figure. According to KBW Research, at the median US bank, CRE loans account for 38% of all loans. If uninsured depositors start pulling their money, economists estimate 186 banks are at risk of failure.

It’s not 2008 all over again: Fortunately, banks have far more conservative lending practices nowadays thanks to the 2008 financial crisis. This time, mortgages aren’t underwater, even if values are down. The Fed is also working with banks in trouble by offering more time and flexibility with payments.

➥ THE TAKEAWAY

Borrowers beware: Although the Fed is being more flexible, there are limitations to what they can do. With the growing number of defaults due to high interest rates, work-from-home trends, and tech layoffs, banks will still be required to cut the value of debt on their books. Pimco and Brookfield (BN) are among many big-name landlords already in default. Luckily, the Fed said in Sept that they are revisiting 2008 guidance. Hopefully, it’s not too late.

Case Study: EV Charging for Multifamily Properties

Challenge: This multifamily development installed 14 chargers as the first of a larger portfolio rollout, with the goal of attracting new, high caliber tenants for their self-described “modern, upscale, progressive” community. The only location choice for the chargers was in their sub-level parking garage where there was no cell service or internet connection.

Solution: Xeal provided 14 wall-mounted chargers inclusive of our Apollo technology, eliminating the need for IT infrastructure, encouraging new leases from EV-driving tenants and allowing those tenants to charge at home.

Result: This site witnessed a sharp increase in charger utilization during their lease-up phase, going from an estimated 5 EV drivers at time of charger installation, to 14 EV drivers just 6 months later. New tenants have remarked that the EV charging infrastructure has contributed positively to signing their leases

Xeal provides an all-in-one solution to help you attract high-value residents and increase your multifamily property's net operating income (NOI). Connect with one of their specialists today to explore the potential earnings.

Should CRE Firms Take Notes from The MLB?

Billy Beane, the former GM of the Oakland A’s, is well-known for his innovative approach of bringing statistical analysis to the MLB scouting and evaluation process. His bestselling book, Moneyball, has piqued the interest of real estate leaders, too.

Sophisticated simplicity: Billy Beane’s simple but innovative “Moneyball” approach allowed low-budget Oakland to allocate resources more efficiently than much larger competitors. Now standard practice in the MLB, “Moneyball” has filtered its way through other sports and industries, including CRE.

Unconventional approach: According to Forbes, nearly 90% of organizational data is classified as ‘unstructured.’ Much of CRE operations are manual or rely heavily on scraping market data for decision-making. An opportunity exists for a structured data approach that can impact the economic value of portfolio assets, allowing operators to make critical asset allocation and operating decisions.

Artificial intelligence: AI is all the rage these days—and it can benefit CRE, too. AI tools can help gather large amounts of data, extracting valuable insights while making faster, more confident decisions. Operators who adopt this technology may have a competitive advantage in the future.

➥ THE TAKEAWAY

Zoom out: The conventional way of doing things is changing rapidly. Companies that integrate the "Moneyball" strategy and employ AI technologies will be better equipped to make informed choices and generate greater profits. In the constantly changing landscape of the CRE industry, businesses that fail to enhance their productivity will be at a disadvantage.

• Toxic waste: The FDIC is left with more than $11B in loans against rent-stabilized apartments after NYCB’s partial takeover of Signature Bank.

• Streak ended: Existing-home sales rose 14.5% in February, finally ending a 12-month streak of monthly declines.

• Virginia is not a lover: As Amazon’s HQ2 project continues to stall, VA is finding reasons to withhold its promised benefits, too.

• What’s cooler than being cool? Foot Locker (FL) plans to shut 400 stores by 2026 and revamp their brand image for younger shoppers.

• Crown jewels: The sudden acquisition of Credit Suisse is a significant blow to what had been the Qatar Investment Authority’s ‘crown jewel’ real estate portfolio.

• New man in town: Laxman Narasimhan is officially Starbucks’ (SBUX) new CEO after Howard Schultz stepped down for the third time.

• Career builder: As hotels continue to suffer from staff shortages, advancement opportunities are being offered earlier to retain current staff.

• From all four corners: The apartment rental market is facing significant headwinds—but benefitting from some tailwinds this year, too.

In partnership with Bullpen

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• Refi of the day: NewPoint refinanced the 451-unit The One residential property in Jersey City with a $153.6M loan.

• Southern hospitality: Aimbridge Hospitality acquired Houston-based Terrapin Hospitality’s management portfolio of 71 mid- and upper-scale hotels across the U.S.

• Eyeing industrial: CapRock Partners has purchased a recently completed, Class A industrial property in Phoenix leased to Metrie, Inc.

• Luxury awaits: West Shore has purchased Solis Nexton, a 320-unit luxury community in Summerville, SC, part of a 4,000-acre master-planned community.

• Midtown moves: The Biltmore, a 464-unit luxury apartment building with 47,397 SF of commercial space in NYC’s Midtown West, is being refinanced with a $248M loan.

• Under new management: Cadillac Fairview, which manages the global real estate portfolio of the Ontario Teachers' Pension Plan, is acquiring Dallas-based Lincoln Residential.

• Help for troubled youth: Pennrose JV broke ground on a community catering to those who are transitioning out of Denver’s foster care system or experiencing homelessness.

According to real estate analytics provider CoreLogic, the annual rent increase for US single-family homes in January 2022 was the lowest since spring 2021, with a nationwide rise of 5.7% from a year earlier. All 20 major metro areas tracked by CoreLogic posted single-digit annual rent increases, indicating a cooling in the market.

Orlando, Florida saw the highest year-over-year increase in single-family rents at 8.9%, while New York City-area rents also climbed faster than the national average at 7.4%. Phoenix, a housing-market hotspot earlier in the pandemic, saw rent inflation drop to less than 1%, and Miami dropped out of the top three highest-growth markets.