CRE Daily Weekend Roundup: October 22, 2023

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🏠 Single-family housing starts rose by 3.2% month-over-month in September, according to the U.S. Census Bureau and Department of Housing and Urban Development. Although private housing starts increased by 7%, they were still 7.2% below last year's numbers. Despite challenges like high mortgage rates causing reduced builder confidence, as highlighted by the NAHB/Wells Fargo Housing Market Index, builders demonstrated resilience in the current market.

🏢 Distressed US commercial real estate values hit $80 billion in Q3, the steepest in a decade, influenced by rising interest rates and reduced office demand. Office properties contributed 41% to this surge, accelerated by the shift to remote work. MSCI noted $215.7 billion in potentially at-risk properties, with apartments making up a third. Meanwhile, US commercial property values dropped 9% over the year, with transactions falling by 53%.

🗽 SL Green Realty (SLG) reported declining Q3 occupancy, as same-store office rates dipped to 89.9% from 92.8% the previous year. Yet, despite market headwinds, the NYC-based office REIT remains hopeful. They report an upward occupancy trend and have 1.1 MSF of potential deals lined up. Recognizing the challenges posed by increasing rates, SL Green is curtailing capital expenditures and considering selling stakes in JV properties to reduce costs.

💰 TA Realty has closed its largest fund, Fund XIII, with $1.8B, surpassing its initial target of $1.2B. The fund will acquire industrial, multifamily, and grocery-anchored shopping centers in major US markets. TA Realty has already begun investing in multifamily and industrial properties, including acquisitions in Raleigh and Nashville for $115M and $99M, respectively.

🌉 One of San Francisco's large apartment buildings has seen its value decline by nearly half in five years, posing a serious "imminent default" risk on its mortgage, as revealed in a recent report. NEMA, once valued at $543.6 million in 2018, the 754-unit tower is now appraised at $279 million by Trepp, a real estate data firm. This value is lower than its owner, Crescent Heights', mortgage of $384 million, underscoring the ongoing challenges in the Mid-Market area.

OpCo-PropCo Models Are Newest PropTech Investment Trend

This week’s Thesis Driven deep dive explores the OpCo-PropCo model, an increasingly popular way investors are balancing risk and return to fund new real estate ventures.

Historically, new real estate concepts have faced a challenge: traditional real estate investors typically shy away from high-risk, small investments, while VCs seek a 5x return that many real estate ventures can't offer.

However, new investment models are emerging to bridge this gap.

This week’s letter digs into the three most common OpCo-PropCo structures in the market today, analyzing the pros and cons of the most common ways real estate investors partner with new operators to share risk and returns:

• Joint Ventures with Institutional Investors: This is the most popular model, involving partnerships between OpCos and private equity real estate firms, hedge funds, or family offices. The OpCo handles day-to-day operations while institutional investor makes key decisions. Such structures are suited for OpCos that manage large portfolios and require immediate capital. Invesco’s partnership with Mynd to purchase single-family homes is an example of this structure in the wild.

• In-House Incubation with Vertically-Integrated Firms: In this model, vertically-integrated real estate companies invest in and incubate OpCo-PropCo ventures in-house. This offers a 'safe sandbox' for OpCo experimentation and scaling of the PropCo but limits an entrepreneur’s upside and autonomy. Vornado’s (VNO) incubation of short-term rental operator Placemakr is an example of this model.

• Purpose-Built OpCo-PropCo Funds: These funds provide integrated financing for both the OpCo and PropCo, allowing the OpCo to earn fees by managing the PropCo's initial portfolio. This model is optimized for long-term holding and is appealing to a variety of limited partner (LP) investors. Cloudland’s investment in vacation rental home operator Meadow Homes is an example of this structure in action.

In all three models, the incentives vary, but often include features like equity stakes in OpCo, investor-friendly fee structures, and rights of first offer or refusal on future acquisitions.

Such structures aim to seed new models with $10–$200M, allowing them to leverage first-mover advantages without requiring a decade-long track record. They mitigate near-term risks while capturing long-term value.

➥ THE TAKEAWAY 

These emerging investment models, once proven, will lead to the emergence of new types of real estate private equity funds and vertically-integrated investment platforms. You can read more about OpCo-PropCo models and the future of real estate finance at Thesis Driven.

U.S. renters feel undervalued and see themselves as second-class citizens, a study by The Center for Generational Kinetics for RealPage reports. This sentiment may stem from the American homeownership dream. Despite these feelings, most renters are content with their apartments.

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