CBRE's Prediction: Mild Recession, Rapid Recovery

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Good morning. CBRE’s chief economist says that although a mild recession is certainly still in the forecast, he expects a rapid recovery by the end of 2024. Meanwhile, Las Vegas’s largest landlord is looking to diversify its portfolio and add other entertainment options.

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CBRE’s Chief Economist Optimistic About Recession Recovery

According to CBRE's chief global economist Richard Barkham, a mild recession is on the horizon, but he expects a rapid economic recovery by the end of 2024.

Recession on the rise: According to Barkham, the sharp rise in interest rates will lead us into a mild, policy-driven recession. But now that inflation is getting under control, rates may come down as early as the end of this year, with an economic recovery well underway by next year. Barkham sees this downturn as any other economic cycle. And in the grand scheme of economic cycles, this one is pretty mild.

CRE's impact: With CRE making up $21T of the $43T U.S. real estate pool (office comprises $7T), Barkham doesn't anticipate another GFC. Falling valuations may cause more regional bank failures, but not enough to really shake up the whole financial system. That being said, valuations will fall as the recession sets in. Industrial could see a 16% drop with a 2-year recovery, retail could fall 17% with a 4-year recovery, and multifamily's drop could be 22% with a 3-year recovery period.

Office outlook: Then there’s office, which could see a 34% drop in value and take as long as 9 years to recover. While Office is distressed and will stay distressed for some time, Barkham claims that just 10% of offices account for 80% of the vacancy rate, with most vacancies attributed to older buildings in weaker submarkets. He also found that companies are reducing their office space to lower costs, not because workers don't want to return.

➥ THE TAKEAWAY

Not too hot, not too cold: Many factors give Barkham reason to be optimistic. Strong employment, digital economy demand, and population growth are all good news for CRE owners. While the oversupply of multifamily in Sun Belt areas could stifle near-term rent increases, many regions still have supply shortages and pent-up demand. And there’s still a lot of capital ready to deploy into U.S. real estate.

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Las Vegas’ Top Landlord Looks at Spas, Water Parks for Future Growth

Vici Properties (VICI), one of the largest casino landlords, looks to diversify its portfolio as growth in gaming and entertainment venues finally stalls.

Crossing the Rubicon: Vici emerged from the troubled leveraged buyout of Caesars, a $30B deal completed just before the GFC. Vici was created to improve Caesars’ recovery. Since then, the REIT has doubled in size, acquiring big-name properties like the Venetian and rival MGM Growth Properties. With only 26 employees, the company generated $2.6B in revenue last year with a market value exceeding $32B. Vici shares returned 130% since they began trading in October 2017, 5x better than the Bloomberg US 3000 Real Estate Index.

The game of kings: Vici Properties owns 54 properties across the country and Canada, including Caesars Palace in Las Vegas and the Borgata in Atlantic City. They are the most prominent casino owner on the Las Vegas strip, owning over a quarter of all hotel rooms. But while Vici owns the properties, industry giants like Caesars, MGM, and Hard Rock operate the facilities and pay rent under long-term leases that remain very profitable.

Are you not entertained? While the company's stock has performed well since inception, it's finally trailing industry averages this year with a 1.6% return. With higher interest rates, investors aren't a fan of the 4.8% dividend and believe Vici will have difficulty finding new properties to keep up its rapid growth. That’s why Vici is looking to diversify beyond casinos by scooping up golf courses, water parks, and a high-end Texas spa, as well as sports arenas and amusement parks.

➥ THE TAKEAWAY

Veni, vidi, vici: Vici CEO Ed Pitoniak didn't have a gambling background before taking the reins, but he's been instrumental in the REIT's growth. While the pandemic led casinos nationwide to close for a few months, Vici's tenants never missed a rent payment, showing investors that gaming remains a safe and profitable asset class. Pitoniak hopes diversifying beyond casinos will allow the company to continue its growth trajectory and bring the stock price back above industry averages.

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• For rent: The state-run Pakistan International Airlines Corp rented its iconic Roosevelt Hotel, which was shut down due to the pandemic, to the NYC government for $220M.

• Meager morsels: The LA mansion tax, which went into effect April 1st, generated $3.6M in its first month, significantly lower than the city’s $56M per month projection.

• Insurance hikes: NMHC found that property owners are paying up to 26% more YoY for insurance, with limitations in coverage, hikes on deductibles, and a shrinking private insurance market.

• Opportunity zone: Standard Real Estate Investments began pre-construction on phase 1 of Congress Heights, an upcoming $290M, 240 KSF mixed-use development in D.C.’s Ward 8.

• Tools of the trade: Property managers look to innovative proptech to find new ways to solve common maintenance issues that plague properties.

• Refinancing hardships: As property values continue sliding, office isn’t the only sector where owners may have a hard time refinancing.

• Development faceoff: The demolition of a downtown Montreal apartment tower is at a standstill after the building’s last tenant refused to move out of her dilapidated $400/mo. unit.

• Diplomatic acquisition: Trinity acquired The Diplomat Beach Resort in Hollywood, Florida, for $835M after 2 failed attempts by Jeffrey Soffer.

• Special servicing: What role do special servicers play in managing distressed CMBS? Bisnow breaks down the process.

• Offloading office: Microsoft (MSFT) is the next big company looking to reduce its office footprint as it aims to sublease a quarter of its Times Square space.

• Head to Houston: According to payroll provider Gusto, college grads should head to Houston for its strong job market and competitive salaries.

• Fixed-rate refi: Harbor Group secured $440M to refinance 25 multifamily properties with a fixed rate, crediting its strong lender relationships for securing favorable terms.

• Commercial conundrum: Treasury Secretary Janet Yellen warns that CRE is at risk as property values continue to fall and banks keep tightening lending standards.

• Turning to teachers: Sterling Bay requested a $300M investment from the Chicago Teachers Pension Fund to help move the Lincoln Yards project along at the expense of current investors.

• Rent control: Newark City Council has passed an ordinance limiting rent increases at new buildings to 5% annually, ending their exemption from rent control.

Before the pandemic, Manhattan was the largest office market in the U.S., but Dallas apartments have overtaken it recently. Both markets saw healthy price growth, but rising interest rates pose challenges to asset prices.

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*Past performance is not indicative of future results. This information should not be used as a basis for an investor's decision to invest. Investment opportunities on the RealtyMogul Platform are speculative and involve substantial risk. Nothing on this page should be regarded as investment advice. Please carefully review all Defined Terms herein and the additional Disclosures on the RealtyMogul website. All information and any calculations used herein is based on information from inception through December 31, 2022.2024 or Bust: Rapid Recovery on The Horizon