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Recent study claims about 14% of U.S. CRE loans are in negative equity status, in other words the assets are worth less than the outstanding loan balance. In an unrelated report, the Financial Stability Oversight Council also urged caution over CRE loans, stating they could lead to widespread distress in credit markets if losses accumulate. Affordable housing deal volume grows with respect to the share of multifamily transactions. And buyers and sellers sit at a standoff over values. In more general news, many miss their first payment after student loans are brought back. Global supply chains are disrupted due to war in the middle east. Optimism spreads in the market as Goldman predicts 5 rate cuts in 2024 (Fed hinted at 3 last week). And homebuilder confidence grows in December.

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Merch Spotlight

Capital Markets

Market News

• 60% of Borrowers Missed First Payment On Student Loans

  Roughly 40% of the 22mm borrowers who had bills due in October did not make payments by mid-November. Nearly 9mm borrowers missed their first student loan payment after the pandemic-related three-plus-year freeze brought many borrowers bank into repayment. In October 2019, less than 26% of borrowers had missed payments. Borrowers who miss payments through September 2024 wont be reported to the credit bureaus but will have interest continue to accrue

• Global Supply Chain Disrupted After Houthi Attacks in Red Sea

  Several major shipping lines and oil transporters have suspended their services through the Red Sea as more than a dozen vessels have been attacked since the start of the Israel-Hamas war. The disruptions could lead to more price increases for shipments of goods and fuel. Asia-U.S. East Cost container prices have already climbed roughly 5% since the start of the war. Major ocean carriers, representing roughly 60% of global trade, have recently diverted their routes and stopped accepting Israel-bound shipments

• Goldman Predicts 5 Rate Cuts In 2024

  According to Goldman Sachs, lower inflation in 2024 will lead the Federal Reserve to cut interest rates as many as five times next year. Goldman and traders in the market are forecasting that the Fed will slash rates by 25bps three times between March and June and then twice more over the second half of the year

• U.S. Homebuilder Confidence Goes Up With Falling Interest Rates

  The National Association of Homebuilders/Wells Fargo Index showed builder confidence increased to 37 in December, up from 34 in November. A Reuters poll showed economists expected 36

  • Index Explained: The National Association of Home Builders (NAHB) surveys 400 members every month on the health of the housing market. The respondents are asked to rate the current market conditions for 1) sales of single-family homes, 2) sales expectations for the next six months, and 3) traffic of prospective buyers. Ratings for the first two items include: good, fair, and poor; ratings for the traffic item include: high to very high, average, and low to very low. With 50 as the midpoint, a value above 50 indicates that the single-family housing market is performing well

CRE Headlines

• 14% of All U.S. Bank CRE Loans Face Property Values Below their Outstanding Loan Balance

  According to a study from four economists, CRE loans account for about a quarter of assets for an average bank and about $2.7tn of bank assets in the aggregate. Using loan-level data, recent declines in property values put about 14% of all loans, and 44% of office loans, in a “negative equity” status where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges. A 10% default rate on CRE loans – a range close to the one seen in the Great Recession on the lower end -- would result in about $80bn of additional bank losses. The report concludes CRE distress can induce anywhere from dozens to over 300, mostly smaller regional banks, joining the ranks of banks at risk of solvency runs

• FSOC Annual Report Signals Out CRE and Urges Caution

  The Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, released is annual report which expressed concern over banks with high exposure to CRE loans that also face other credit or interest rate–related losses which may be particularly vulnerable to CRE loan distress. The report states that if CRE loan portfolio losses accumulate, they can spill over into the broader financial system. Sales of financially distressed properties can reduce market values of nearby properties, lead to a broader downward CRE valuation spiral, and even reduce municipalities’ property tax revenues. The widespread CRE distress could contribute to tightening credit availability as it represents the largest loan category amongst nearly half of U.S. banks.

• Affordable Housing Represented Higher Share of Multifamily Investment in H1 2023

  Total affordable housing grew to $13.5bn in 2021, representing roughly 4% of multifamily deal volume. However, in the first half of 2023 affordable housing represented nearly 8% of multifamily deal volume despite a slowdown. The vast majority of markets are seeing an increase in the share of affordable housing, with the annualized quarterly average being up nearly 50% from pre-pandemic

  Affordable Housing Investment Volume and Share of Multifamily

  

• Pricing Differences Between Buyers and Sellers to Slow Deal Volume

  Despite the Fed’s announcement of lower rates to come for 2024, the real estate world can expect a sluggish flow of deal volume as price discovery might take time. Current sellers are largely still expecting 2021 pricing, while active buyers are seeking a deal. Pricing will have to come down for the deal volume to recover. On top of pricing differences, there are still financing constraints from lenders as potential new banking regulations and nonperforming loan portfolios weigh on lending activity

Deals Deals Deals

Sales

• Medical: The Board of Regents of the University of Texas exercised a purchase option and acquired a 373k sf hospital in Houston, TX from Sila Realty Trust for $258mm. The University of Texas Medical Branch fully occupied the 199-bed hospital

• Office: Franklin Street Properties sells 5505 Waterford, a 213k sf suburban office, in Miami, FL for $68mm

• Retail: BKM Capital Partners acquires a five-building, 451k sf industrial park in Portland, OR, in an off-market transaction with Kansas City Life Insurance Co. for $67mm

• Hospitality: Slate Property Group, in partnership with RiseBoro Community Partnership, acquired the former JFK Hilton Hotel in Queens, NY for $64mm. The former hotel will be converted into 318 affordable housing units

• Office: Sava Holdings acquires Stemmons Towers, a 285k sf, two-building office asset in Dallas, TX. The company plans to convert the towers into residential

Debt

• Office: RFR has secured a $1.1bn refinancing for 375 Park Avenue in Midtown in New York, NY. The recap replaces the existing $789mm loan and includes roughly $360mm in equity from JVP Management

• Multifamily: Passco Cos. secures a $78mm Fannie Mae non-recourse loan for the refinancing of Ocean Walk, a 297-unit multifamily asset in Key West, FL

Developments

• Industrial: A JV between Rockefeller Group and PCCP LLC will redevelop a 657k sf industrial project in Philadelphia, PA. The 50-acre site at 1500 Roosevelt Blvd., formerly Byberry State Hospital, will feature two buildings totaling 319k sf and 338k sf. The seller was an affiliate of the Philadelphia Industrial Development Corp.

• Office: Hines planning to build a three-building, 637k sf office campus in Midtown in Atlanta, GA

• Industrial: Lincoln Property Co. completes three industrial facilities in Glendale, AZ. The three buildings measure 630k sf, 484k sf , and 1.3mm sf

• Multifamily: TPG Angelo Gordon, in association with Toll Brothers, acquires a 46-acre plot of land consisting of 169 single-family lots from Koart Residential for $34mm in California’s Inland Empire

• Multifamily: Related Group and BH Group acquire a 4.5 acre lot for $22mm from Trinity Investments and Credit Suisse in Hollywood, FL to develop a 38-story residential condo building

• Senior Housing: Pinnacle secures nearly $61mm in financing for a 110-unit affordable senior housing development in Miramar, FL. The financing package includes $33mm of construction financing, including a $22mm construction loan from Bank of America. Bank of America also supplied $27mm in housing tax credit equity toward the project

Leasing

• Life Sciences: Novo Nordisk, a global health-care and pharmaceutical company. signs a 166k sf lease with Alexandria Real Estate Equities Inc.’s 60 Sylvan Road in Boston, MA

• Office: Sheppard Mullin, an international law firm, signed a 119k sf lease at CIM Group’s City National 2CAL, a 1.4mm sf office, in Los Angeles, CA

• Industrial: DCW. a distribution and transportation services company, signs a 116k sf lease at 3040 East Ana Street in Los Angeles, CA

Meme Summary

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