📊 Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

Strip Malls: The Hottest CRE Commodity Right Now

Once considered underdogs in the commercial real estate (CRE) landscape, strip malls across the country are now stealing the limelight. They’re boasting high occupancy rates and an influx of tenant interest so intense that businesses are struggling to keep pace with the relocation trend.

Strip Malls: The Hottest CRE Commodity Right Now

Once considered underdogs in the commercial real estate (CRE) landscape, strip malls across the country are now stealing the limelight. They're boasting high occupancy rates and an influx of tenant interest so intense that businesses are struggling to keep pace with the relocation trend.

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Good morning. Strip malls are in high demand as retailers want to stay close to customers spending more time at home. Meanwhile, CBRE, the world's leading commercial real estate brokerage, is grappling with financial challenges as capital markets continue to move sluggishly, leading to a negative cash flow and reduced earnings forecasts.

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PROPERTY REPORT

Strip Malls Enjoy High Occupancy Rates and Strong Tenant Demand

Previously overlooked, strip malls nationwide are now shining in the commercial real estate (CRE) sector, experiencing high occupancy and strong tenant demand—so strong that tenants can hardly keep up with relocation…

Hot sector: While other types of CRE are facing challenges, strip malls are thriving due to retailers wanting to be closer to where customers are spending more time—at home in the suburbs. According to Green Street, the first quarter saw leased occupancy rates at strip mall REITs reach 95.3%, a figure not witnessed in eight years. Physical occupancy remains stable at 92.4%, mirroring levels before the pandemic.

strip center REIT occupancy

Strong leasing activity: The increasing gap between leased and physical occupancy often signals issues, but in this case, it's due to leases being signed faster than retailers can move in, says Paulina Rojas Schmidt from Green Street. Despite potential recession fears, Regency Centers CEO Lisa Palmer highlights strong tenant demand. Even bankrupt retailer Bed Bath & Beyond found lease bidders last month.

Suburban resurgence: An encouraging trend in the market is landlords no longer need to divide large spaces over 10,000 square feet to find tenants, a shift from practices in 2017 and 2018. Releasing spreads, indicating the rent difference between old and new tenants has been on the rise since 2020. Strip center REITs have seen only an 8% drop in foot traffic from 2019 levels as of mid-May, outperforming the 18% decrease at Simon Property Group, according to Placer.ai and Green Street data.

change in strip mall REIT foot traffic compared to 20199

Shift in consumer behavior: The strength of strip malls comes from the shift towards flexible work, leading to more consumer time spent at home, says Kimco Realty's CEO, Conor Flynn. He highlights that this has resulted in increased shopping center visits. Further, significant population shifts occurred in 2021 and 2022, with two million people leaving large cities and about 1.3 million moving to suburbs and exurbs, according to an Economic Innovation Group report.

Net domestic migration in 2021 and 2022 by area type

➥ THE TAKEAWAY

The bigger picture: Although strip malls aren't cheap, their robust financial health suggests it would take significant events—a severe decline in retail spending, a massive return to office work, a sudden overconstruction of strip malls, or a steep increase in interest rates—to unsettle their stability.

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DELAYED RECOVERY

CBRE Trims Profit Projections as Capital Market Delays Drive a 57% Dive in Earnings

cbre headquarters

CBRE Group Inc., the world's largest commercial property brokerage, has reduced its profit outlook as earnings plummeted by 57%, indicating an industry grappling with the protracted revival of capital markets.

Grim financials: CBRE's recent quarterly earnings report revealed a negative cash flow of $86M in Q2 2023, a stark contrast from the $400M positive cash flow in the same period last year. They've revised their earnings forecasts, now expecting a 20–25% YoY decrease in core earnings.

Lingering recovery: The sluggish revival of capital markets, pressured by recent rate hikes impacting sales and financing, has worsened CBRE's financial outlook. The company saw a 44% drop in global property sales revenue compared to last year, with a slightly larger dip (49%) in America's sales revenue.

Acquisition strategy: Despite a 1% decrease in Q2 revenue, CBRE is eyeing growth through strategic M&A activity, aligning with their focus on global workplace solutions. CEO Bob Sulentic assures that the four acquisitions made in Q2, including a valuation firm in the senior housing and healthcare real estate sector, are strategic and not just for expanding their scale.

Potential upturn: CBRE witnessed $18B in U.S. multifamily deals being marketed at Q2's end, indicating potential growth. Their global workforce solutions business also saw a 13% growth in net revenue. Sulentic is optimistic about capital markets unlocking, with recovery possibly beginning next year.

➥ THE TAKEAWAY

Signs of a coming recovery? According to CEO Bob Sulentic, three signs would suggest capital market recovery: rate stabilization, increased debt availability, and aligned buyer and seller expectations. Sulentic noted some positive trends, including improved investor sentiment and potential pricing resets. These delayed recoveries underscore the persistent challenges confronting CBRE and the broader brokerage industry.

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🌐 ARROUND THE WEB

📖 Read: Matthews Real Estate Investment Services applies its founder’s competitive football mindset to real estate, requiring a 30-step checklist for pitches. And it works. Matthews' firm saw 56% more sales YoY and completed 4,518 transactions worth over $14.25 B in 2022.

📊 Data: S&P Global’s June 2023 Commercial Real Estate Chart Book: Weathering the Storm is chock full of graphs, tables, and more data points than you probably want or need. Check it out.

🎧 Listen: In this 49-minute episode of The Memo, Howard Marks discusses the importance of "Taking The Temperature" in investing and decision-making processes in the current market environment.

✍️ DAILY PICKS

  • Highs and lows: New York City's commercial and multifamily construction starts witnessed a 31% year-on-year decline in the first half of 2023, with the total value falling to $10.8B, signifying a slowing market.

  • Year of Efficiency: META, previously known as Facebook, aims to reallocate resources, planning to spend $4B on reducing its real estate footprint while investing more in artificial intelligence and augmented reality technologies.

  • Checking in: With struggles in the commercial office sector continuing, there are potential strategies and practices to be borrowed from the customer-focused hospitality industry, which could breathe new life into office spaces.

  • Multifamily turmoil: Despite strong rent growth, the US multifamily sales volume suffered a dramatic 70.6% drop in the second quarter of 2023 from its previous highs, as reported by Avison Young.

  • Rap game strong: Flo Rida, a globally recognized rapper who has been expanding his business ventures, recently purchased the Cloverleaf Shopping Plaza in Miami Gardens for a hefty $10M.

  • Retail acquisition: Bridgewell Property Management acquired two retail centers in Houston, together offering 93.7 thousand square feet of space and boasting an occupancy rate of 80%, signaling confidence in the region's retail market.

  • Affordable housing win: The proposed residential project at 5 World Trade Center in New York City, which reserves one-third of its units for affordable housing, received approval, marking a significant win for housing accessibility in the city.

  • Enough cost-cutting: Tech giant Alphabet drastically reduced its real estate-related impairment costs by 90% to $69M, possibly indicating a strategic shift from cost-cutting measures towards a phase of expansion and growth.

  • Delinquent danger: The level of delinquent Commercial Mortgage-Backed Securities (CMBS) loans rose by $12B to 3.93% in July, and troubled securitized loans hit 6.44%, with the office and retail sectors feeling the brunt of the financial stress.

  • Domino effect: WeWork's decision to stop paying rent at 315 West 36th Street led to a cascading effect, causing the landlord to default on its debt payments and intensifying the co-working giant's ongoing struggles.

  • Insurer exodus: Farmers Insurance's strategy to stop issuing new policies and not renew existing ones in Florida affected approximately 100,000 policies, reflecting challenges in the state's insurance market.

  • Merger madness: Banking giant JPMorgan Chase struck a deal to buy residential loans worth $1.8B from Banc of California at a discounted rate, highlighting a strategic move in the residential loan market.

  • Ah, the suburbs: The trend of people moving from larger cities to smaller, more affordable markets is creating investment opportunities across the nation, showing a shift in residential preference trends.

  • Luxury living: Real estate developer Related Cos. acquired a substantial land parcel in Jersey City for $58M, where it plans to build an 800 thousand square foot luxury multifamily building, marking its first venture in New Jersey.

  • Loan of the day: Canyon Ranch, a luxury spa operator, secured a substantial $300M loan from Vici Properties, a REIT that owns several casinos, including Caesars Palace, indicating strong investor confidence.

  • Under pressure: A San Diego-based online bank, previously criticized for its loans to Trump, saw its website go offline for five hours, a disruption that coincided with a dip in the stock price of its parent company.

  • Foreclosure auction: An eight-story mixed-use building in D.C.'s West End was sold at a foreclosure auction by the lender New York Life Insurance Co. for $40M, indicating distressed assets in the market.

📈 CHART OF THE DAY

CBRE H1 2023 Cap Rate Survey

The H1 2023 Cap Rate Survey reveals that CBRE capital markets and valuation analysts think yields will stabilize in H2 2023. It’s a clear reversal from their H2 2022 survey stance and could be due to a persistent belief that the Fed’s tightening cycle will soon come to an end.

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