Even Zoom Is Making People Return to the Office

PLUS: Major REITs have stopped originating new loans

Even Zoom Is Making People Return to the Office

PLUS: Major REITs have stopped originating new loans

Together with

Good morning. South Florida’s rental market softens due to increased construction and slower population gains. The Biden administration is encouraging federal employees to return to offices, receiving support from local leaders. Meanwhile, major CRE lenders like Blackstone and KKR have stopped originating new loans.

Today's edition is brought to you by LLoyd Jones. A global real estate investment firm focused on senior housing, multifamily, and hotels.

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Market Snapshot

S&P 500
GSPC
4,518.44
Pct Chg:
0.9%
FTSE NAREIT
FNER
710.23
Pct Chg:
-0.9%
10Y Treasury
TNX
4.101%
Pct Chg:
1.0%
SOFR
1-month
5.30%
Pct Chg:
0.0%

*Data as of 8/7/2023 market close.

END OF AN ERA

Even Zoom Is Making People Return to the Office

zoom offices

Zoom, the pandemic's poster child for virtual meetings, has come full circle (or at least half-circle). In a move that might make one raise an eyebrow, the company is beckoning its employees back to — wait for it — physical offices.

The hybrid pitch: If you are an employee within 50 miles of a Zoom office, prepare to swap your pajamas for a Patagonia vest twice a week. The company's "hybrid approach" aims to merge virtual efficiency with the benefits of face-to-face communication, optimizing both remote and traditional office dynamics.

Pandemic high: Zoom's stock value skyrocketed 15x its initial IPO price, reaching a peak valuation of over $140bn, driven by its popular video meeting platform amidst office closures. Yet, as companies resumed in-person operations, its value dropped by over 85%. Recently, its quarterly revenue increase was 3%, a stark contrast to the 400% growth in 2020.

Growing trend: Several major tech firms, including Google, Meta, and Amazon, are advocating for a partial return to the office, with some introducing a three-day office workweek. Salesforce has implemented role-specific attendance rules. These new policies have sparked some backlash, as seen with Amazon employee walkouts. But, many business leaders believe that such directives might be necessary to promote a return to in-person work.

Office occupancy: While companies play the pied piper, hoping employees will return back to their desks, full office occupancy remains an elusive dream. Statistics from Kastle Systems’ Back to Work Barometer indicate that weekly office occupancy was at 50.2% of pre-pandemic rates in mid-July but witnessed a slight dip by the month's end.

➥ THE TAKEAWAY

The big picture: The post-pandemic work landscape is much like a game of baseball – unpredictable and requiring strategic plays. As companies pitch their return-to-office strategies, it's clear that a standardized rulebook doesn't exist. Instead, adaptability, understanding the players (employees), and reading the field (the evolving situation) are key to hitting a home run in this new era of work.

TOGETHER WITH LLOYD JONES

AVIVA Country Club Heights: Invest in Senior Housing with a Trusted Sponsor

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Aviva Country Club Heights is a senior living community nestled in a prime location within Woburn, MA. The property exhibits attractive returns for accredited investors with a projected IRR of 15%* and cash yield of 9%*.

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Under Christopher Finlay's leadership for over 40 years, this integrated firm has overseen $1.2B in transactions and boasted an average gross IRR of 29%* on on realized investments.

*Disclosure: This post contains sponsored content. Past performance is not indicative of future results. This information should not be used as a basis for an investor's decision to invest.

SALES STALL

Banks Struggle to Sell Commercial-Property Loans as Market Dries Up

Property values have come under pressure in the past year

As property sales slow down and banks struggle to sell CRE loans, sellers face challenges determining asset values due to fewer transactions. Meanwhile, banks may negotiate with borrowers and sell loans at a discount to minimize risk.

Bid-ask blockade: With few sales occurring, determining the value of CRE loans has become challenging. Sellers, particularly banks, are cautious about accepting low bids, as it could lead to financial solvency concerns. This has resulted in an ongoing bid-ask spread, making deals few and far between. Buyers are hesitant to make significantly lower offers than asking prices, which in most cases are still too high, leading to a stalemate.

Alternative financing: Sellers are starting to consider alternatives to entice buyers. One option is seller financing, where the seller helps the buyer finance the purchase of the loan. However, this approach may only be viable for certain property types. The value of offices, in particular, has plummeted over the past year. Job cuts and remote work have resulted in record vacancies in major cities, while higher borrowing costs have made office financing more challenging.

Selling winners: While banks struggle to sell office debt, pricing for other types of real estate, like apartments and hotels, has held up better. According to Green Street, apartment values dropped 16% over the past year, compared to a 27% decline for offices. Hotel prices remained unchanged. Banks like Goldman Sachs and M&T have sought to offload loans tied to hotels and apartments, capitalizing on the comparatively stable values of these property types.

➥ THE TAKEAWAY

Not enough data: As banks struggle to sell loans, the CRE market continues to face uncertainty. Fear surrounding office values and wide bid-ask spreads contribute to a challenging environment. Repositioning and repricing assets could lead to significant shifts. However, while distressed loan sales remain limited, banks are finding other ways to manage their exposure, such as halting new debt origination. Pricing clarity via more loan sales would provide valuable insights into the current state of the market.

PORTFOLIO STRATEGY

Simon Property Group Replans Portfolio Due to Changing Retail

Simon Property Considers Stepping Up Sales and Acquisitions

Simon Property Group once owned the Crystal Mall in CT, but after the property's foreclosure, it was sold to Namdar Realty Group last month for $9.5 million. (CoStar)

Simon Property Group (SPG), the largest mall owner in the United States, is in the middle of restructuring its portfolio. According to the company's CEO, this involves divesting underperforming retail sites, pursuing acquisitions, and undertaking redevelopment projects.

Rueful retail: Simon Property Group aims to axe underperforming retail sites. This strategic move comes in response to the changing retail landscape and traditional brick-and-mortar stores' challenges. The company hopes to optimize its portfolio and allocate resources toward more promising ventures by divesting these properties.

Acquire & redevelop: After the Crystal Mall in Connecticut foreclosed last month and was sold to Namdar Realty for $9.5M, the mall giant began to explore opportunities for acquisitions and redevelopments. The company aims to enhance its portfolio and adapt to consumers' evolving preferences by acquiring well-performing properties or investing in the redevelopment of existing sites.

➥ THE TAKEAWAY

Adapting for success: Simon Property Group's portfolio rejiggering reflects its proactive approach to navigating the dynamic retail environment on a month-by-month basis. The company aims to position itself for success amidst evolving retail consumer preferences and behaviors. By proactively managing its portfolio, the company aims to optimize returns and maintain its position as a leading player in the retail real estate market.

🌐 AROUND THE WEB

📖 Read: China's top developer, Country Garden, saw its shares and bonds plummet in value due to a canceled equity placement. The company's dollar bonds now trade at just 25% of their initial worth, a sharp decline from the 81% they held in mid-June.

▶️ Watch: In this episode of The Fort, Artem Tepler discusses SCHON | TEPLER's involvement in over $400M of real estate development since his initial purchase of a $300k single-family house at 23 years old.

🎧 Listen: In this episode of The TreppWire Podcast they discuss the latest green shoots springing up in the CRE market and analyze the data to see whether investors and owners sitting on the sidelines should be buyers or sellers right now.

CHALLENGING CONDITIONS

High Rates & Frozen Transactions Impact Brokerage Bottom Lines

Big Brokerages Increase Cuts, Lower Forecasts For Rest Of 2023

CBRE's headquarters at 2100 McKinney Ave. in Dallas (Google Maps)

Public brokerages, including Cushman & Wakefield (CWK), Newmark (NMRK), JLL (JLL), CBRE (CBRE), Colliers (CIGI), and Marcus & Millichap (MMI), suffered hits to revenues and profits in 2Q23. Challenging conditions and the impact of high rates and low transaction volumes have led to lower-than-expected financial performance.

Bottoming bottom line: CBRE reported a 49% decrease in property sales revenue due to limited credit availability and differing buyer and seller expectations. Newmark also experienced a 63% drop in US investment sales and a 52% decline in industrywide loan origination. Colliers reported a 4% decrease in revenues, mainly attributed to drops in capital markets and leasing service lines.

When all else fails: Many brokerages are taking measures to reduce expenses. JLL reduced annual fixed costs by $70M, adding up to $210M in annual cost-cutting so far (primarily focused on non-revenue-generating roles). Meanwhile, Colliers, Cushman & Wakefield, and Newmark have also announced budget cuts to adapt to the challenging market environment.

Relief on the horizon: Despite the current downturn, some brokerages foresee signs of recovery in the near future. Newmark's CEO anticipates a robust 2H24, with rebounding capital markets activity as interest rates stabilize. Similarly, CBRE predicts an economic recovery starting next year, although a mild recession may occur, slightly delayed from initial predictions. Marcus & Millichap notes significant demand for appropriately priced assets and sufficient available capital, indicating the potential for a reversal.

➥ THE TAKEAWAY

Winter is still coming: The disruption caused by the banking crisis, the Federal Reserve's interest rate policies, and the slowdown in transactions have all led to a difficult 1H23 for brokerages. And things are likely to get worse before they get better. However, despite the challenging landscape, there is anticipation for a realignment in the marketplace and a trend reversal. Both buyers and sellers are gradually adjusting pricing expectations, indicating the potential for improvement in the near future.

✍️ DAILY PICKS

  • Filling the void: Banks tend to reduce lending activities after failures, leading to the increased presence of private credit funds in consumer lending.

  • Office or exit: Forcing workers back into offices backfires as remote work increases in value, with slower hiring rates and employee strikes, according to reports.

  • Vacant victories: Developers Saxony Capital and Farpoint Development are set to buy a vacant retail property on Chicago's Magnificent Mile for $40M, a significant discount from its previous sale price of $166M in 2013.

  • Google's summer special: Google (GOOGL) is offering full-time employees the opportunity to book a room at an on-campus hotel in Mountain View for $99 a night to encourage a transition to hybrid work, but some workers find it too expensive.

  • Leads on autopilot: Unlock the benefits of LinkedIn automation with AutoLinkGuru to connect with prospective clients and investors. They put you right in front of the people who matter most to your business.

  • Stash your stuff: America's self-storage addiction remains strong as entrepreneurs and corporations rely on customers' accumulation of belongings. A lucky few have profited greatly.

  • Transit trouble: Montreal's new Réseau express Métropolitain light rail experienced breakdowns on its first days, highlighting the challenges of creating new public transit.

  • Valuation freefall: Retail and office valuations have dropped significantly, with a 41.2% average decline across the country, according to CRED iQ.

  • Faster delivery, happier customers: Amazon (AMZN) plans to double its number of same-day or next-day delivery centers in major US cities, aiming to improve delivery speed and cut costs.

  • Fees and charges: Counterintuitively, operating a low-income housing tax credit (LIHTC) property actually entails various fees and charges for residents.

  • Peak rent reached: Rent for single-family homes in the US remains high, with a slight yearly increase of 0.2%, suggesting rents have likely peaked.

  • Accreditation loss: After losing accreditation, Christian College in Lower Manhattan will shut down, leaving its lender in an uncertain situation.

  • Storage boom: A JV between Criterion Group and Columbia Pacific Advisors secures a $132.3M refinancing for a 22-property industrial outdoor storage portfolio.

  • Revitalizing Ohio: Ohio Governor DeWine signed the FY24-25 Budget, allocating $350M over 2 years for the Brownfield Remediation Program.

📈 CHART OF THE DAY

QOF fundraising over time

Qualified opportunity funds (QOFs) tracked by Novogradac raised $1.33B in equity in 2Q23, turning around a slow start to the year, when just $682M of equity was raised in Q1.

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