Distressed CRE Loans Surge to $64B: Retail, Office Bear Brunt

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Good morning. Distress is growing as troubled assets reach nearly $64B in Q1 this year. Meanwhile, Terra's $1.2B acquisition of a Miami waterfront, which was supposed to be the largest land acquisition in history, has collapsed.

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CRE Distress Surges to $64B: Retail and Office Bear the Brunt

The anticipated tidal wave of troubled CRE assets is nearing reality. The number of troubled assets rose 10% to almost $64B in the first quarter, with an additional $155B of potentially troubled loans on the horizon, according to a report from MSCI Real Assets.

A world of hurt: Skyrocketing borrowing costs have hammered the commercial real estate sector, driving down prices and pushing some investors into default. A significant portion of this looming distress is connected to properties needing refinancing during a period where lending conditions have become stringent following the failure of numerous regional banks.

From the horse’s mouth: "Assuming this potential distress escalates into a full-fledged crisis, a surge in distressed asset sales and plummeting prices would be unavoidable," said MSCI Real Assets researchers, including Jim Costello and Alexis Maltin, in their report.

Leading the way: According to the MSCI report, at the end of 1Q23, retail properties, including malls, were the most distressed, with almost $23B of assets under distress, followed by office at $18B. While retail is cooling off, office faces a bigger wave of maturing debt, accounting for $43B of the potential distress, which is the most of any sector.

Multifamily distress: Despite high demand, even the multifamily sector can't escape financial woes. The CMBS delinquency rates for multifamily loans within significant investment groups rose to 3% at the end of Q1, a jump from 2.9% at Q4's end and 2.77% in Q3, as per the Mortgage Bankers Association's reports.

➥ THE TAKEAWAY

Market misfortune: Manhattan was the most active market for distressed sales, accounting for a whopping 19% ($2.6B) of transactions over the past 12 months. LA was second with $746M, followed by Houston with $465M of distressed transactions. One thing is clear: in times of distress, there are always investors ready to capitalize on opportunities as long as they’re willing the weather the storm.

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Terra's Record $1.2B Miami Waterfront Purchase Falls Apart

A JV led by Miami-based developer Terra to purchase a waterfront site near Downtown Miami, which was set to be one of the largest land acquisitions in history, has fallen apart.

Waterfront wonder: Terra went under contract in April to purchase the site for $1.2B from Genting Group, a Malaysian casino operator that purchased the land in 2011 for just $235M. The company demolished the Miami Herald newspaper's HQ on the site to build a $3B casino complex, which never came to fruition. Five bids over $1B were placed on the land when it went up for sale last November.

Parcel potential: The 15.5-acre parcel sits between the MacArthur and Venetian causeways that lead to Miami Beach and offer 800 linear feet of direct frontage on Biscayne Bay. The parcel's size and location could transform the Miami waterfront entirely if the right buyer is found.

Agree to disagree: The deal was supposed to close later this year, but the buyers wanted an extension of the exclusivity period while seeking amendments to the terms of the PSA. Genting Group denied the request and ditched Terra's bid and is instead looking for another buyer. Terra is still interested in the site and could make a bid again for it.

Terra troubles: Terra was one of the parties that settled a class action lawsuit over the deadly collapse of the Champlain Towers South condo building in Surfside, FL. The developer, which had constructed a luxury condo next door to the ill-fated building, admitted no wrongdoing. The bid for the Miami waterfront site coincided with Terra's buyout of an oceanfront condo in Miami Beach for $500M, which could become Miami's most expensive condo buyout.

➥ THE TAKEAWAY

What happens’s next? Genting is expected to enter renegotiations with one of the four other bidders who submitted bids of over $1 billion for the property. However, securing financing for the deal might prove challenging for a potential new buyer due to difficult capital markets. The decline in commercial sales and cautious lending practices following recent bank collapses are contributing factors to this financing challenge.

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• Tallest tower: Developer BLDG Management received a $425M construction loan for a 69-story tower in Queens, planned to be Long Island City’s tallest tower.

• Multifamily moves: First National Realty Partners (FNRP) has expanded its reach in the necessity-based CRE sector by acquiring Champion Townhomes in Davenport, FL, a 132-unit luxury property.

• Bond market insights: Investors should look to the bond market for information on CRE valuations, as changes in credit spreads can significantly influence valuations.

• Botching Brooklyn: The once-promising fix-and-flip venture of Kushner Companies in Brooklyn Heights has taken a sharp turn towards failure, as an investor within their portfolio has now initiated a contentious lawsuit against the firm.

• Awful Austin: S2 Capital CEO Scott Everett believes Austin is currently the worst housing market based on skyrocketing prices, lack of affordability, and the influx of out-of-state buyers.

• Lease TBD: Citadel, the hedge fund led by billionaire Ken Griffin, is considering a significant office lease at 280 Park Avenue in NYC, potentially becoming one of its largest tenants.

• Single-family surge: Single-family home starts hit a remarkable three-decade high in May, along with an increase in permits as the cherry on top.

• The cost of financing: US commercial property pricing continued to fall in May, with all major sectors posting steeper annual declines.

• Insider trading: A former Goldman Sachs (GS) banker has been convicted for providing insider information to a friend and former Barclays trader.

• Suburban sprawl: Some Atlanta suburbs are warming up to the idea of multifamily developments to address housing affordability despite facing opposition from NIMBYs.

• Home away from home: The short-term rental market saw a rebound in bookings and an increase in average daily rates for May.

• Automated intelligence: AI is transforming how CRE professionals operate and make decisions by utilizing predictive analytics to automate more processes.

• Retail revolution: Experts discuss the innovative tech and trends that are shaping the evolution of brick-and-mortar retail, including immersive experiences, personalized customer interactions, and seamless online/offline integrations.

• The Sun is setting: The former Baltimore Sun building is set to be demolished this summer, making way for the Baltimore Peninsula’s transformation.

• Housing crunch: The number of home listings fell 7.1% to record lows in May as high mortgage rates discourage homeowners from selling.

• Betting against the crowd: Short bets on U.S. stocks have reached $1T, their highest level since April 2022, indicating increased pessimism among investors.

• Losing LA: Los Angeles has experienced the largest decline in office prices and values compared to other major US cities, according to the Commercial Observer.

A visualization of BlackRock's (BLK) top 25 holdings as of 1Q23, worth over $1T of the world's largest asset manager's $9T AUM. Their biggest holdings are:

• Apple (AAPL) at $170.7B

• Microsoft (MSFT) at $155B

• Amazon (AMZN) at $62.8B

• Nvidia (NVDA) at $51B

• Google (GOOGL) at $43.8B

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Disclaimer: Weighted Net IRR is defined as the average annualized, compound rate of return using equity contributions and distributions as they occurred on specific dates during the investment period. IRR is reflective of all fees charged and paid to First National Realty Partners, LLC and its affiliates and subsidiaries. An investment in commercial real estate is subject to risk, including the risk that all of your investment may be lost. Any representations concerning investing in commercial real estate; to include representations as to stability , diversification, security, resistance to inflation and any other representations as to the merits of investing in commercial real estate reflect our belief concerning the representations and may or may not come to be realized.