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

USA Tops Global CRE Despite Market Turbulence

While the global professionally managed real estate market saw a $600B drop in size, US dominance shot up, according to a recent report by MSCI.

USA Tops Global CRE Despite Market Turbulence

While the global professionally managed real estate market saw a $600B drop in size, US dominance shot up, according to a recent report by MSCI.

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Good morning. Amid a $600B global real estate slump, U.S. dominance grows. SF office demand rises 10% in Q2, propelled by AI firms. Meanwhile, apartment developers lean on alternative lenders.

Today's edition is brought to you by FNRP. Access necessity-based CRE assets previously available only to institutional investors.

Market Snapshot

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*Data as of 7/26/2023 market close.

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USA Tops Global CRE Despite Market Turbulence

office buildings with US fllags

While the global professionally managed real estate market saw a $600B drop in size, US dominance shot up, according to a recent report by MSCI.

Leading the pack: With high rates and inflation, the macro environment has not been CRE friendly. While MSCI estimates the size of the overall investable market at $19.5T, the professionally managed real estate market dropped 4.1% from $13.9T in 2021 to $13.3T in 2022. The Americas hold the largest market share at 43.9%, up 0.6% from 2021, followed by EMEA (30.4%) and APAC (25.7%).

size of global cre markets

Source: KTI (Finland), MSCI

Dwindling transaction volumes: The brisk and extensive hikes in interest rates have significantly altered the investment landscape, leading to a sharp decline in transaction volumes over the past year. This decline appears more pronounced given the record transaction volumes observed in 2021. Since the second half of 2022, deal volumes have witnessed a drop of over 50% across all three regions, albeit with varied adjustments in valuations.

Currency's contribution: According to the report, currency also played a role in the decline in market size. The dollar strengthened against most global currencies in 2022, except for the Brazilian real and Singaporean dollar. The currency impact was the greatest for Sweden's krona (down 13.1%) vs. USD and the Japanese yen (down 12.7% vs. USD).

Global market showdown: MSCI follows 37 markets, with the US being the largest ($5.4T), followed by China ($990B), Japan ($886B), the U.K. ($881B), and Germany ($793B). These top five markets represent 67% of the global professionally managed real estate market. Ten of the 37 markets increased their share in 2022, while the other 27 declined. The sharp drop in transactions also impacted turnover ratio, which was 8.7% in 2022 compared to 10% in 2021.


Zoom out: Macroeconomic pressures have triggered significant changes in the global commercial real estate landscape, with the impacts differing across various regions and sectors. Nevertheless, certain markets demonstrated growth despite these obstacles, underlining the complex and multifaceted nature of the global real estate market.

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San Fran Office Market Rebounds: AI Companies Lead The Charge

san francisco skyline

San Francisco's office space market appears to be rebounding, with a reported 10% increase in demand in Q2, reports VTS. This is largely attributed to a rise in artificial intelligence companies seeking expansive spaces to lease, signaling a potential reprieve from the city's previously stagnant office real estate scene.

Praise AI: The rising demand is a breath of fresh air for San Francisco's office owners, who have grappled with high vacancy rates as technology firms downsized their office requirements. Large office spaces exceeding 50,000 SF (4,645 square meters) have been particularly sought after since March. This shift has been primarily fueled by the rapid expansion of artificial intelligence firms, as noted by VTS's CEO, Nick Romito.

Positive impact: This resurgence is not only beneficial for office owners but also vital for the city that has faced several challenges due to the pandemic, such as a faltering downtown area and social issues like homelessness and rampant drug usage. Mayor London Breed highlighted that the city is not only luring artificial intelligence companies but also life science firms requiring laboratory spaces. Currently, around 10 companies are scouting for nearly a million square feet of office space, indicating a substantial increase in space requirements.


Still a long road ahead: Despite positive trends, San Francisco's commercial real estate still faces a considerable challenge to revert to pre-pandemic occupancy rates, as current utilization rates linger at less than half of the earlier figures, according to Kastle Systems. This is in stark contrast to cities like Los Angeles, Seattle, Chicago, Boston, and Washington, which have all seen a dip in new office demand. Nevertheless, San Francisco's historical resilience amidst economic downturns offers a ray of hope for recovery, echoing Mayor Breed's optimistic outlook for the city's future.

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πŸ“–Β Read: Rithm Capital Corp. (RITM) caught the eye of Wall Street after buying a $1.4B consumer loan portfolio from Goldman Sachs (GS) and acquiring Sculptor Capital Management for $639M.

πŸ–₯️ Watch: This episode of The Real Deal’s Paydirt breaks down the definition of a Class A office building between physical attributes and reputation.

🎧 Listen: On this episode of The Fort, Chris talks with Mark Brooks, COO and Co-President of Permanent Equity, about his PE experience managing a portfolio of 13 small and medium-sized businesses.


Financing Emerges For Apt. Developers Amid Bank Loan Setbacks

Financing Emerges For Apt. Developers Amid Bank Loan Setbacks


Apartment developers are turning to alternative lenders for construction loans as traditional banks scale back on their real estate activity.

The glaring issue: Before the market tightened, developers relied on bank construction loans that covered 75% of the development cost with a relatively low floating rate. The developers typically filled the rest of their capital stack with mezz loans and GP/LP equity. However, rising rates and regional bank failures have thrown a wrench into the equation. Many regional banks are no longer originating new loans or are being more conservative with higher interest and lower LTC ratios.

Stepping up to the plate: Developers are turning to alternative lenders like FHA, private debt funds, and commercial mortgage REITs. These alternative lenders will fill the gap for developers to finance their projects. If developers can be patient, they can get fairly large loans with relatively low fixed rates from FHA. Private debt funds and commercial mortgage REITs also provide construction loans with generous leverage, although rates are higher than traditional banks.

The FHA Advantage: FHA loans are non-recourse and have a fixed rate based on the 10-year Treasury yield. Once a property is all leased up, the loan automatically converts to a 40-year, fully-amortizing permanent loan. FHA has also not tightened its credit or loan sizing parameters. The downside is that FHA loans take about 12 months to close, with lots of hoops to jump through, causing many to stay away.

Evolving capital stack: Recent construction financing from banks have been 55–65% LTC with a minimum DSCR of 1.25–1.30x. That DSCR requirement is difficult to meet as short-term rates keep rising. Many banks now offer construction loans to developments with rates that float 400 bps over SOFR, which means an all-in rate of 9%, a significant increase from a year ago. With banks offering smaller loan proceeds, developers are adjusting their cap stack with mezz loans.


New construction starts: Despite having a more challenging time securing financing, developers are still finding ways to build. New multifamily construction starts are at 482K units, down from 2022’s 600K-unit high. That's still a lot compared to historical norms. With access to alternative financing, developers are finding ways to get their projects started.

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  • Is this the last time? Federal Reserve Chairman Jerome Powell has increased the Federal Funds Rate by 25 basis points, a move in line with economists' expectations.

  • Streak ended: The winning streak for alternative assets has ended for public pension funds, as benchmark private equity returns turned negative for the first time since the GFC.

  • Where deals are done: CRE sales volume dropped in the top 25 US markets in 1H23, with significant declines in some markets ranging from 37–75%.

  • Warehouse wins: In 1H23, million-square-foot warehouse signings dropped by 33%, but brick-and-mortar retailers remained active, signing 34 of the top 100 industrial leases.

  • Remotely productive: Remote employees work slightly longer hours and appear to be more productive, with as much as a 10% boost in weekly hours and 13% better performance.

  • Silver medal: CoStar Group's residential platform, which includes Homes.com and Apartments.com, has surpassed Realtor.com and Redfin (RDFN) to become the second-most visited residential platform after Zillow (ZW).

  • Bad news for borrowers: CRE borrowers are facing new challenges as secured debt costs climb to their highest level in 20 years while lower-grade CMBS carries unusually high rates.

  • Rising revenues: Life sciences powerhouse Alexandria Real Estate Equities (ARE) reported positive Q2 earnings, signing 1.3 MSF of leases while seeing a 10.9% YoY increase in revenues.

  • The voucher conundrum: Insurance denials based on voucher usage are causing NYC landlords to reject tenants with housing vouchers, leading to higher insurance costs for building owners.

  • Building buyback: Thor Equities repurchased 470 Broadway in SoHo for less than $8.1M, just a year after transferring the deed to LNR Partners in a foreclosure lawsuit valued at $25.4M.

  • Better together: Banc of California will buy PacWest Bancorp (PACW) in a deal valued at over $1B, as both banks aim to fortify following the regional banking crisis earlier this year.

  • Risk on the rise: The cost of insurance is surging, impacting commercial real estate nationwide, but the rise is driven by more than extreme weather.

  • Retail revival: The Manhattan retail market is seeing a revival with increased tourism and attractive lower asking rents drawing retailers back to the city.

  • Default of the day: A San Jose office building linked to former WeWork (WE) CEO Adam Neumann is in default on its $31M loan. Shocking!

  • Power play:Β As the EV industry surges to a $100B market, CRE faces both challenges and opportunities in adapting to the growing demand for EV charging stations.

  • Insta-probe:Β Brandon Charnas, an Instagram influencer behind Current Real Estate Advisors, is under investigation by the SEC for alleged insider trading related to Office Depot's acquisition.

  • Enhanced scrutiny: US national security officials are investigating Abu Dhabi's Mubadala sovereign wealth fund's planned $3B takeover of Fortress Investment Group, raising concerns about the UAE's ties to China.

  • Hotel hiccup: Cerberus Capital Management and Highgate have missed two months of payments on a $415M loan for 30 Courtyard by Marriott.

  • Chi-town surge: Chicago's home price growth has surged ahead of other cities in the US, marking a significant turnaround after years of trailing behind the national market.


1 month term SOFR forward curve

A 3-month comparison of the forward SOFR curve. Two months ago, the market projected SOFR at the end of 2024 to be 4.58%, but it’s since shot up 83 bps to 5.41%.

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*Disclosure: This post contains sponsored content. Past performance is not indicative of future results. Weighted Net IRR is defined as the average annualized, compound rate of return using equity contributions and distributions as they occurred on specific dates during the investment period. IRR is reflective of all fees charged and paid to First National Realty Partners, LLC and its affiliates and subsidiaries. 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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