CRE Prices Experience Sharpest Annual Decline Since 2010

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Good morning and welcome back to the week. Commercial real estate prices tanked in January, suffering their sharpest declines since the Great Financial Crisis. Meanwhile, Credit Suisse’s (CS) Real Estate Fund’s NAV fell nearly 10% as the firm reduced payouts, fearful of a shaky interest rate environment.

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FIND THE FLOOR

CRE Prices Slide at a Rate Not Seen Since 2010

Commercial real estate prices fell sharply this January, posting drawdowns of nearly 28% on an annualized basis. According to the RCA CPPI National All-Property index, the decline represents the largest drop since 2010, after the Great Financial Crisis.

A tale of two properties: The golden child of CRE investors, Industrial real estate, was the only sector that saw positive growth in January, up 6.4% from last year. Multifamily prices, on the other hand, were hit hardest, falling 4.6% from last year. Retail and office stayed relatively constant, falling just 0.1% and 0.5% from last year, respectively.

Like a broken record: Yet again, higher interest rates meant fewer investors could afford financing, which led to lower demand and lower prices. Additionally, the flood of cash pumped into the markets from the GFC and the pandemic caused prices to skyrocket and cap rates to steadily compress. Those days are long gone!

➥ THE TAKEAWAY 

So, how much?: With all this uncertainty in the air, rent growth has slowed and financing has become difficult. Investors aren’t quite sure how to price deals, and future conditions remain in flux as inflation isn’t yet under control. We won’t see “price discovery” until the market finds some semblance of stability.

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REDEMPTIONS

Credit Suisse Cuts Payouts on $3.5B RE Pool as Clients Seek Withdrawals Amid Rising Rates

Credit Suisse’s (CS) $3.5B real estate fund is cutting payouts as interest rates wreak havoc on its commercial property portfolio. The drastic move is leading some clients to pull their cash from the fund. 

Cashing out: The Net Asset Value (or NAV) of Credit Suisse’s (CS) real estate fund is expected to fall at least 10%, reducing investor distributions by at least 12.5%. As such, investors who own 13.3% of the fund’s shares are withdrawing their money. 

Blame the market: While Credit Suisse’s (CS) fund has underperformed its peers for years, the firm isn’t solely to blame for its returns. Private REIT valuations adjust more slowly to market conditions than their publicly traded peers. Unfortunately for the fund’s investors, healthy rental results weren’t enough to offset impacts of rising global interest rates. 

➥ THE TAKEAWAY 

A sign of the times: Credit Suisse (CS) isn’t alone in dealing with market turmoil. BlackRock (BLK) and Blackstone (BX) funds are also suffering losses as investors seek to redeem their cash. The era of cheap money is over and we’re just starting to feel the consequences

• Hard landings only: According to former Fed Governor Frederic Mishkin, the Fed is unlikely to tame inflation without raising interest rates more, which could lead to a full-blown recession.

• Welcome to the club: Brokerage Cushman & Wakefield (CWK) is in cost-cutting mode, hoping to save $90M this year through temporary and permanent job cuts.

• Stirring the pot: Boston Mayor Michelle Wu’s proposed rent control legislation has local landlords up in arms in opposition. 

• Par for the course: VC funding for the Life Sciences sector hit records over the past few years, but activity is freezing up as layoffs and shutdowns ravage the industry. 

• Funding secured: Ian Schrager and Ed Scheetz secured $86.7M in funding from iBorrow & Reuben Brothers for an acquisition of a former hotel in West Hollywood, CA.

• Close the door: iBuyer firm Opendoor (OPEN) reported a loss of $399M in Q4 2022, due to sharply declining home sales.

• What pandemic?: Google (GOOGL) will require some employees to share desks next quarter, in its latest effort to cut costs and achieve “real estate efficiency”.

• Hidden fees: Blackwells Capital is accusing AR Global of self-dealing, as the investment manager charges ridiculous fees in two REITs. 

• California Love: In a shocking move, Elon will establish global engineering headquarters for Tesla (TSLA) in Palo Alto, CA. 

• Not your iPhone: IOS, or Industrial Outdoor Storage, is the newest CRE asset class born out of ever-increasing demand for industrial logistics space. 

• Just a slice: GDS Holdings (GDS), a Shanghai-based data center operator, is considering selling a minority stake in its business for $300-$400M.

• Big win for affordable housing: HUD announced $3.16B in funding to nearly 2,770 public housing authorities across all 50 states to invest in the public housing stock.

⏪ ICYMI: Last Week's Highlights

📈 Chart of the Day

If Fannie’s forecasts are right, we’re heading into a modest correction in the housing market. But don’t sweat it. According to their forecasts, we’d head into 2025 still 29% above March 2020’s pandemic price levels.

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