Five Key CRE Investment Themes for Uncertain Times

Five CRE Investment Themes for Turbulent Times

While the CRE industry is navigating turbulent waters, there are promising indicators on the horizon. Here are five investment themes worth following.

Extend to the end: In the throes of the 2007-2012 Great Recession, CRE lenders adopted the "extend and pretend" strategy to mitigate further loan defaults. The present-day mantra is "extend to the end," pointing to the cessation of the Federal Reserve's interest rate hikes. It's predicted that after one more .25% hike, the Fed will hold steady, eventually decreasing rates by the first half of 2024, setting the stage for a CRE investment surge.

Anticipating a CRE boom in 2024: Once the Fed reduces interest rates in 2024, the CRE sector is set to flourish. Investors will find ripe opportunities to seize distressed assets like office spaces, retail hubs, and senior housing properties. The possibility to procure defaulted CRE property notes will emerge, supported by a still-thriving job market.

Seize distressed investment opportunities: It's crucial for CRE investment entities to amass capital for distressed funds now. Ready capital will position them to exploit defaults and discounted properties in the imminent years. Around $150 billion is already allocated for distressed assets, with high-crime Gateway city office properties presenting discounts of up to 50% from their pre-pandemic values.

Target suburban Midwest apartments: While the national apartment scene remains strong, suburban Midwest apartments stand out for their lucrative cap rates between 6.0% to 8.0%. Contrasting with the Coastal and Sunbelt areas, Midwest rentals witnessed a moderate rent increase of around 3.0% over the past half-decade, offering them at appealing risk-adjusted cap rates.

➥ THE TAKEAWAY

Prepare the war chest: Despite current challenges in the CRE industry, 2024 will present key investment opportunities, especially in distressed assets and specific regions. The anticipated Federal Reserve rate changes will drive these prospects, underscoring the importance of timely, strategic investments.

A BTR Investment in Columbus Market

Redwood Living, Inc—known for its single-story build-to-rent apartment developments across the suburban United States—has a new equity deal now accepting investors.

Located in the Columbus, Ohio MSA, Redwood Galloway Alton Darby Creek Road is a great option for investors looking for a long-term, passive real estate investment. With 12 stabilized neighborhoods of 24 LLCs, 1,800 CO’ed units in the Columbus market, Redwood’s average occupancy over the past 12 months sits at 95% with 5.1% rent growth.

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*Past performance is not indicative of future results. This post contains sponsored content.

A surge in New Households Ignites Boom in Multifamily Housing Market

In the wake of the pandemic, the U.S. has witnessed significant shifts in its housing market. With 2Q 2023 recording the highest household formation since COVID-19 struck, multifamily housing is experiencing substantial changes.

Mixed predictions: While Newmark remains optimistic about the steady rise in household formations, other reports, like those from Harvard and Marcus & Millichap, express potential future slowdowns. Concerns are especially tied to the impending end of student loan repayment pauses.

The allure of multifamily: Several factors, including exorbitant homeownership costs and climbing interest rates, have intensified the demand for multifamily housing. Potential homeowners are deterred by the mounting financial gap between renting and owning, which stood at a significant $763 in 2Q 2023.

Financial constraints: The current economic landscape presents challenges for potential homeowners, with U.S. credit card debt hitting record highs. Despite an uptick in building permits for single-family homes, the trend still trails the long-term average. Big cities like New York and Los Angeles have been outliers in the national homeownership surge, standing at 65.9% in 3Q 2022.

➥ THE TAKEAWAY

Zoom out: As the multifamily housing sector navigates financial hurdles and reduced lending from banks, a subtle but significant migration pattern emerges. Young renters, driven by heightened living expenses, are venturing from high-priced urban hubs to more cost-effective regions like Austin and Charlotte. This demographic shift, alongside evolving market dynamics, underscores the multifaceted repercussions of economic strains on the housing landscape.

📖 Read: CEO Elie Schwartz of Nightingale Properties misappropriated over $10M, intended for an Atlanta office purchase, to gamble on First Republic Bank's recovery before its collapse.

▶️ Watch: CNBC studied the financials of seven retailers to quantify losses from shrinkage and theft. Here’s why the impact might be overblown.

🎧 Listen: The TreppWire Podcast examines potential market downturns, contrasting rising unemployment with commercial real estate's resilience, especially in California's office scene.

WeWork's Potential Bankruptcy Puts Pressure on Landlords

WeWork, the global coworking giant, is facing the possibility of bankruptcy, prompting landlords across the globe to consider lease adjustments in an effort to curb potential losses.

Lease challenges: Facing $2.2 billion in rent dues next year, WeWork's survival hinges on renegotiating or breaking its leases. Should WeWork choose Chapter 11 bankruptcy, landlords might have to reconsider rent concessions or fall back on repayment priorities. Currently, WeWork is renegotiating its leases across 777 global locations, which will influence its potential bankruptcy decision.

Landlords' dilemma: In a potential Chapter 11 filing for WeWork, the ability to accept or reject leases becomes pivotal, placing landlords at a distinct disadvantage due to limited market options, as noted by Jim Van Horn of the Turnaround Management Association. Bankruptcy could see WeWork either renegotiating spaces at reduced costs or seeking buyers for their leases, further distressing landlords already coping with the effects of remote work.

Office distress: Landlords grapple with repurposing WeWork spaces due to its unique services and rising competition in the coworking sector. WeWork occupies 43.9 million square feet globally, with significant ties in major US cities. Although WeWork has faced challenges, competitors such as IWG PLC have reported record revenues.

➥ THE TAKEAWAY

The bottom line: When filing for bankruptcy, companies like WeWork can benefit by shedding burdensome leases, and paying significantly less than owed. In Chapter 11, leases can be rejected, limiting landlords' claims to just three years of rent, often paid out at reduced rates. WeWork has approximately $25 billion in lease obligations with an average of 11 years left. Immediate post-bankruptcy rents take payment precedence, prompting companies to act quickly on lease decisions. Landlords' choices are further complicated by the influence of their mortgage lenders and P&L.

Rising expenses are causing concerns nationwide. A Yardi Matrix report highlighted significant increases in operational expenses, with the Southeast (11%) and Southwest (10.3%) leading the surge.

Though traditionally, these regions had lower expenses compared to others, like the Northeast which saw a 5.5% hike. Insurance costs are notably rising, with Boston witnessing a 10% year-on-year surge and Orlando experiencing a whopping 35% jump. Given the stagnating rents in southern markets and higher interest rates, the viability of new deals remains uncertain.

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