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Treasury Vacuum Coming for CRE

US Treasury floods banks, reducing CRE owners’ borrowing power and raising loan rates. Proptech funding declines amid uncertainty, but some sectors stay strong. Slowing volume prompts service firms to shift focus and review processes.

Treasury Vacuum Coming for CRE

US Treasury floods banks, reducing CRE owners' borrowing power and raising loan rates. Proptech funding declines amid uncertainty, but some sectors stay strong. Slowing volume prompts service firms to shift focus and review processes.

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Good morning. The US Treasury is reducing borrowing power for CRE owners and raising short-term loan rates. Proptech funding is declining amid economic uncertainty, though some sectors remain strong. Additionally, slowing volume calls for shifting emphases and a review of business processes for service firms.

Today’s issue is brought to you by FNRP. Learn how you can diversify your portfolio with grocery-anchored and necessity-based real estate.

Market Snapshot

S&P 500
GSPC
4,283.84
Pct Chg:
0.2%
FTSE NAREIT
FNER
697.04
Pct Chg:
-0.7%
10Y Treasury
TNX
3.677%
Pct Chg:
-0.4%
SOFR
1-month
5.06%
Pct Chg:
-0.2%

*Data as of 6/6/2023 market close.

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MONEY SUPPLY

Treasury Department Gets Its Giant Liquidity Vacuum Ready

The recent resolution of the debt ceiling problem is great news—the U.S. Treasury is about to release large sums of cash into the market, and everyone wins. Except for CRE borrowers seeking short-term loans. They’re likely to experience higher rates instead.

Auctions and interest rates: The rumored $1T the Treasury plans to raise by the end of the year has many implications for CRE. The schedule for upcoming auctions is a “full dance card” until the end of the month, and many banks will put some of their dry powder to good use. Shorter-term Treasurys are very attractive at 4.25% for a batch of 2-year notes issued on May 31st and 5.483% for 26-week bills issued on June 7th.

Supply and demand impact: Of course, funds are finite, which means that as investments in short-term bills go up, investors will continue pulling cash from banks. Banks have already hunkered down with higher CRE loan rates and lower LTVs, and could soon be starved for deposits, making it even harder to get CRE financing. Short-term bills will also drive up short-term loan rates as lenders need to make more money than Treasurys to justify risk.

CRE exposure concerns: There could be a third issue for CRE borrowers: selling property loans at a discount. Many banks already feel pressure from their CRE loan exposure and unloading at losses would likely push down property values, making financing even harder to access, according to The Financial Times.

➥ THE TAKEAWAY

Higher risks, slower growth: CRE borrowers will be forced to deal with higher short-term loan rates and stricter financing conditions. Rising rates could drive stock prices down, causing credit spreads to widen and leading to lower property values. So while short-term Treasurys are perceived to be guaranteed money, they may lead to higher risks and slower growth for CRE borrowing in the long run.

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TOGETHER WITH FNRP

Grocery-Anchored, 1031-Eligible CRE Deals

First National Realty Partners is inviting accredited investors to partner with them on their latest investment opportunity: Windsor Court.

Windsor Court is a 97% occupied, 78,500 SF, institutional-quality grocery-anchored shopping center located in Windsor, CT. The center is anchored by a high-performing Stop & Shop (subsidiary of Ahold Delhaize), benefits from strong competitive positioning, and is situated within an affluent demographic.

This investment is 1031-exchange eligible and offers investors the potential for long-term income stability plus upside at exit.

FNRP, with $2+ billion-dollar assets under management, was one of the most active acquirers of grocery-anchored retail in 2022 and generated investors an average of 19%+ IRR on full-cycle deals.

As a vertically-integrated private investment firm, FNRP has a team of over 130 full-time real estate experts dedicated to sourcing, managing, and optimizing your investment from start to finish.

If you’re an investor that craves "stable diversification", attractive returns, and a 100% passive white-glove investment experience, then you should take a look at First National Realty Partners.

To get access to Windsor Court and FNRP’s many other hand-picked retail, industrial, and multi-family deals, Create an Account.

Around the Web

📖 Read about how special servicers are managing troubled securitized mortgage loans right now amid an expected uptick in special servicing volumes in the near future.

🖥️ Watch ‘megadeveloper’ Jeff Blau, CEO of Related Cos., talk about how his company owns and operates over $60B in AUM, including a potential MLS stadium in NYC, on this segment from The Real Deal.

🎧 Listen to how StripMallGuy, one of the most followed real estate accounts on Twitter, uses his online presence to create a brand, build relationships, and uncover business opportunities.

MIDYEAR OUTLOOK

Experts Observe More Risk Aversion, Focus on Efficiency in Proptech

IMAGE: GETTY IMAGES

The global pandemic, rising inflation, and increased interest rates have all conspired to reduce funding for proptech. However, experts suggest that while funding is low, firms can expect accelerated demand for proptech solutions.

Decrease in proptech funding: Average weekly proptech funding was significantly lower in 2023 than in previous years. Q1 funding plummeted from $6.97B in 2022 to just $1.69B in 2023, down 77% YoY. CRE sectors are receiving most of the funding in 2023 as venture capitalists aim for profitability and lower risk aversion.

Acceleration in proptech adoption: Despite challenges, proptech experts predict that demand for specific areas of proptech, like software that enhances core business systems, will go up. While the pandemic has caused a shift in working patterns, startups prioritizing convenience for end-users should succeed even in the new economic climate.

Greater need for proptech M&A: To combat the lack of funding and increased demand, experts say industry consolidation and collaboration are needed. Startups face greater pressure to create cost-efficient solutions that solve multiple problems and improve net operating income. Improving NOI through property management tech and collaborating closely with stakeholders are two important themes where proptech companies can capitalize.

➥ THE TAKEAWAY

The proper way forward: Proptech industry experts believe that proptech firms should focus on building solutions that are suitable for various real estate sectors that serve the triple goals of increasing net operating income, reducing greenhouse gases, and improving the occupant experience. And as the CRE market continues to be highly competitive and funding becomes harder to come by, proptech organizations that cater to end-users are most likely to succeed.

⏩ Forward this article by clicking here.

TOGETHER WITH FNRP

Grocery-Anchored, 1031-Eligible CRE Deals

First National Realty Partners is inviting accredited investors to partner with them on their latest investment opportunity: Windsor Court.

Windsor Court is a 97% occupied, 78,500 SF, institutional-quality grocery-anchored shopping center located in Windsor, CT. The center is anchored by a high-performing Stop & Shop (subsidiary of Ahold Delhaize), benefits from strong competitive positioning, and is situated within an affluent demographic.

This investment is 1031-exchange eligible and offers investors the potential for long-term income stability plus upside at exit.

FNRP, with $2+ billion-dollar assets under management, was one of the most active acquirers of grocery-anchored retail in 2022 and generated investors an average of 19%+ IRR on full-cycle deals.

As a vertically-integrated private investment firm, FNRP has a team of over 130 full-time real estate experts dedicated to sourcing, managing, and optimizing your investment from start to finish.

If you’re an investor that craves "stable diversification", attractive returns, and a 100% passive white-glove investment experience, then you should take a look at First National Realty Partners.

To get access to Windsor Court and FNRP’s many other hand-picked retail, industrial, and multi-family deals, Create an Account.

STAY THE COURSE

Brokers Under Pressure as Challenges Weigh on CRE Deals in 2023

Image by retrorocket/iStockphoto.com

In 2023, commercial real estate deals are slowing due to various factors: higher interest rates, cap rate fluctuations, a wider bid-ask gap, and changing work strategies. While these challenges primarily affect the office sector, proactive adjustments can create growth opportunities for service firms.

State of the market: During the first quarter of 2023, commercial real estate sales volume decreased by 56% compared to the previous year. Office sales, especially in central business districts, were hit the hardest, declining by 77% from the long-term average. Additionally, pricing for all commercial asset categories declined in April, with a 0.8% drop in pricing for industrial properties compared to the previous year.

Impacts and challenges: The market's current conditions have created a disconnect between market expectations and pricing, especially in the public markets. Investors are reluctant to sell assets at current cap rates, leading to a decrease in leasing and tenant representation volume. This drop in volume affects brokerage firms that solely focus on sales and don't cross-sell or communicate with other business lines.

Strategies for brokers: In this challenging market, maintaining a steady revenue stream becomes difficult, especially if leasing and tenant representation volume is below par. Brokers must leverage long-term relationships to tap into financing sources and stay competitive. They should also consider emphasizing new services, strengthening client relationships, and exploring innovative solutions. By adapting to changing market conditions and focusing on problem-solving, brokers can find opportunities and improve their position.

Strategies and opportunities: Despite the decline in deal activity, there are opportunities for innovative solutions and business improvements. Advisory firms can reinvest in their businesses, shift emphasis to new services, and strengthen client relationships. Expanding into new areas and adapting to changes in ownership dynamics can provide new sources of business. Additionally, brokers can take advantage of the demand for second-generation spaces due to high construction costs.

➥ THE TAKEAWAY

Investing in resilience: Despite the decline in commercial real estate deals, brokerage firms have the opportunity to innovate, adapt, and focus on exceptional service. By reinvesting in their businesses, expanding into new services, strengthening client relationships, and leveraging talent, brokers can position themselves for success. Challenges exist, but significant opportunities for growth and disruption await those who proactively navigate the changing market landscape.

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📰 Daily Picks
  • What not to do: Farmers Group’s new CEO pulls a bait-and-switch by telling employees they can’t work remotely after many had already sold cars or relocated. A rebellion ensues.

  • Artemis Fund IV: Artemis Real Estate Partners raises $2.2B for its largest-ever investment fund, Artemis Fund IV, aiming to invest in distressed office buildings and hard-hit coastal cities.

  • Time to pay up: CRE landlords are staring down a $1.5T bill for commercial mortgages due in the next three years, and many are vulnerable to default.

  • Feasting on fresh funds: Cava Group seeks $274.4M in an IPO, becoming the first U.S. restaurant chain to go public in 2023, with revenue of $203.1M in Q1.

  • Invenergy expansion: Chicago landlord 601W Companies may get a lifeline from Invenergy's 200 KSF lease expansion at its Wacker Drive tower, which faces $310M in debt maturities.

  • Apple's retail revolution: Apple (AAPL) plans to expand and relocate stores globally with 53 new locations, including four new locations in the US and Canada.

  • Hines breaks ground: Hines breaks ground on Chelsea Point, an 8.6-acre infill site in Chelsea, MA, for a 146.4 KSF Class A distribution facility with a $57.9M loan from Chase (JPM).

  • Hotels in a hurry: Hotel sales have outperformed office sales by 2x in recent months, with annual transaction volumes reaching a new high of $74.9B in 2022.

  • Waiting on the sidelines: Q2 investment volume in U.S. CRE dropped 57% YoY to $78B, led by apartments and industrial buildings, according to BofA Global Research.

  • Houston, we have a problem: Houston's CRE sales slumped 74% YoY in Q1 due to interest rate hikes and tighter lending standards, part of a nationwide trend.

  • Check-in to luxury: Rambagh Palace in Jaipur, India, has been ranked as the best hotel in the world for 2023 according to TripAdvisor.

  • Follow the lawyers: Par Funding Joseph LaForte allegedly threatened to kill Philly property broker Ori Feibush and his wife over a dispute last year.

  • Weighty insurance woes: Numerous stressors in the insurance market have limited property owners' ability to invest due to a lack of affordable options.

  • Scott's Scores $133M: Hoffman & Associates is planning a $133M, 400 KSF mixed-use development in Richmond, VA's Scott's Addition neighborhood, featuring 368 apartments.

📈 Chart of the Day

Everything’s bigger in Texas, including population growth. Texas metros led the nation in population growth from 2021 to 2022, with DFW far and away in first place with around 170,000 new residents, followed by Houston.

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*Advertising Disclosure: Targeted Net IRR (Net IRR): is defined as the annualized, compound rate of return using equity contributions and distributions as they occurred on specific dates during the investment period. Net IRR is reflective of all fees charged and paid to First National Retail Partners, LLC and its affiliates and subsidiaries. “Targeted” refers to a goal which may or may not be attained based on a variety of assumptions which may or may not be realized. Securities are only available to verified accredited investors who can bear the loss of their investment. Please contact FNRP for an explanation of how such numbers are calculated. Equity Multiple (Net EM): the total distributions and remittances to equity investors divided by the total equity contributions from investors during the investment period. Net EM is reflective of all fees charged and paid to First National Retail Partners, LLC and its affiliates and subsidiaries. Targeted Cash-on-Cash: Targeted average annual cash flow return on invested equity. Please consult annual cash flows (Net-Net to the Partner) in the Financial Model. Cash distributions are not guaranteed. An investment in commercial real estate is subject to risk, including the risk that all of your investment may be lost. Any representations concerning investing in commercial real estate; to include representations as to stability , diversification, security, resistance to inflation and any other representations as to the merits of investing in commercial real estate reflect our belief concerning the representations and may or may not come to be realized.

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