ICSC: Retail is 2023 CRE’s Golden Child

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Retail Emerges as CRE's Golden Child at ICSC

Despite uncertainty facing the economy this year, one theme emerged from this week's ICSC conference in Vegas: retail optimism.

Golden child: Blackstone (BX) and other institutional players are bullish on retail despite economic uncertainty. Stephanie McGowan, a managing director at Blackstone, said at the ICSC in Las Vegas that the firm is enthusiastic about retail, which has proven resilient through many cycles. Other firms love retail right now because there's strong demand for space from tenants, driven in part by limited new construction over the past 5–10 years. Recently, Crow Holdings formed a $2.6B JV to expand its retail strategy of acquiring small, convenience-oriented, open-air food and service shopping centers.

Cautiously optimistic: The retail space isn't free of bad headlines. Higher interest rates and inflation affect consumers struggling to buy what they need. But Blackstone and other firms are cautiously optimistic because vacancies are down, supply is constrained, and consumers are still spending. Despite big retailers such as Tuesday Morning and Bed Bath & Beyond shutting their doors, retail store openings are still outpacing closings, although the pace of closings is up since last year.

Investing responsibly: Although retail is performing well this year, it faces numerous headwinds. Inflation continues to hurt incomes, the economy is anyone’s guess, and sales are weakening, all of which could get worse before they get better. Retailers that tend to get hurt, such as Kohl's () and Macy's (), cater to middle-income shoppers. Discount stores could do well once again, just as they did during the pandemic, as consumers cut costs. Meanwhile, high-income shoppers will likely continue to spend money on luxury brands.

➥ THE TAKEAWAY

Survival of the fittest: UBS predicts as many as 50K stores will close by 2027, but brokers aren't worried. They view this as the natural real estate cycle trimming the fat of stale business. Retailers must continue reinventing themselves by cutting costs, automating supply chains, reducing inventory, and being more conservative to survive the current economy. But with low unemployment, inflation calming down, and steady consumer confidence and spending, it’s no wonder industry experts have a positive outlook for the sector. 

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Finally, An End to the Flatiron Building's Drama

After the failed bid last month for the Flatiron Building, the drama surrounding NY's iconic building has come to an end as majority owner Jeff Gural won the bidding war with $161M.

Big relief: Gural, Chairman of GFP Real Estate, represented the building's majority owners in the public auction. Prior to the auction, GFP and partners owned a 75% stake in the building, while Nathan Silverstein owned the remaining 25%. The owners couldn't agree on renovation and leasing plans, so the NY Supreme Court agreed to the auction. Gural said it is a "big relief" to finally own the building.

Past drama: The second auction came after Jacob Garlick won with a bid of $190M in the first auction but failed to make the 10% down payment. The building's owners, represented by Gural, declined to go with the next highest bidder, hoping to secure a lower price if another auction occurred. That bet paid off.

More drama: During the second auction for the Flatiron Building, an unexpected incident occurred involving a man named Paul Gottsegen, who claimed to represent 184 Broadway Equities LLC. He loudly confronted Gural's lawyer, threatening lawsuits and causing speculation among onlookers about his identity. Gottsegen argued that Gural had not brought the required $100,000 certified check, but it was later confirmed that Gural did have the check and submitted it at the end of the auction. Other bidders were confused by Gottsegen's claims, as Gural's financial capability was well-established.

➥ THE TAKEAWAY

Looking ahead: Flatiron's future is uncertain, with $100M needed for essential upgrades. GFP may convert it into residential or a hotel due to market challenges. Gural acknowledges the building's significance, stating, "The Empire State Building, Chrysler [Building], and the Flatiron are three iconic structures in New York... I'm committed to upholding my legacy. It's a matter of determining the next steps in these hectic times of limited borrowing options."

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📖 Read about what San Francisco Chronicle readers think should take over Nordstrom’s space in the city’s downtown.

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🎧 Listen to this episode of The TreppWire Podcast, where Mike Flood of the Mortgage Bankers Association shares his perspective on the debt ceiling and bank regulation.

Downtown LA Under Distress, Vacancy Rates Hit New Record

Downtown Los Angeles is front and center among cities facing widespread defaults and growing vacancies.

The problem: LA's vacancy is at a record 30%, as fewer workers want to deal with LA rush hour traffic. And while LA isn't the only city facing these issues, the city's downtown wins the award for the most distressed borrowers. The top 3 dozen office buildings in DTLA are almost all underwater, with debt averaging more than $230 PSF. To put that in perspective, this year's only major sale was at $154 PSF.

The culprits: Brookfield (BAM), downtown LA's largest landlord, defaulted on $1.1B of loans on 3 buildings. And its Well Fargo North and South Towers have $763M in debt maturing this year. Aon Center, LA's 3rd tallest tower, on sale since Feb below its 2014 purchase price—with no buyers in sight. The Union Bank building sold in March for half its 2010 price ($104M). Finally, the US Bank Tower sits 20% vacant after Silverstein Properties spent $490M to buy and renovate.

Why is LA different? While San Francisco and NYC have been hit hard, both cities rebounded after the dot-com bust and 9/11. On the other side of the spectrum, downtowns with more suburban sprawl and scattered business districts, like Atlanta, Chicago, and Houston, have some of the highest office vacancies. LA County is 4.75K square miles with a population of 10M. It's been called "72 suburbs in search of a city" and isn’t home to any S&P 500s. The entertainment industry occupies everywhere else except downtown. With the awful traffic and public transportation, it's no wonder workers have no desire to return.

➥ THE TAKEAWAY

It might get worse: According to Boston Consulting Group, about 25% of US office space risks becoming "zombie buildings" with low occupancy and diminishing financial viability. Office values are expected to drop from pre-pandemic levels by as much as 60% in San Francisco, 55% in LA, and 50% in NY, Philadelphia, and Washington. Without new investment, more stores, restaurants, and other downtown tenants will close. As owners refrain from making improvements or decide to give up and hand over the keys to lenders, the vacant office spaces threaten downtown vibrancy across the US.

⏩ Forward this article by clicking here.

Triple Play - Yield, Income, & Flexibility

Halfway through 2023, stocks remain predictably unpredictable and commercial real estate is fighting for positive territory amid rising rates and market disruptions. Where can investors turn for income and yield?

Many institutional investors are moving upstream into private credit, offering higher interest rates and less exposure to public markets. Asset-backed deals provide predictable, stable income and yields that typically exceed benchmark rates.

Until recently, you had to be a Blackstone or Goldman to access these opportunities. No more.

Meet Percent, the only platform exclusively dedicated to private credit.

We bring private credit opportunities to retail accredited and institutional investors like you.

Priced at prevailing rates, private credit transactions are more responsive to current market conditions and the macro credit and interest rate environment. Shorter-term investments let you regularly calibrate your investments to meet your portfolio goals.

Access a wide variety of high-yield, short duration (9-month average) offerings.

• Get up to 20% APY

• Invest as little as $500 to get started.

• Earn up to a $500 bonus with your first investment.

Private credit offers a rare combination of yield, income, and flexibility – everything investors are seeking. Choose private credit through Percent .

• Looking for alternatives: While CRE faces a weakened economy, soaring interest, and high inflation, institutional investors are looking at niche real estate sectors.

• M&A activity: Global Net Lease (GNL) will acquire Necessity Retail REIT (RTL), expanding its global presence and internalizing management while declassifying its board.

• Data-driven decisions: Manulife is acquiring Serverfarm, a data center company with 1.5 MSF across North America, Europe, and Israel.

• Fund on the rise: Fundrise is trying to raise a $500M credit fund to take advantage of current distress in the US CRE market.

• Default of the day: RXR defaulted on its $240M loan for a 33-story FiDi office tower in Manhattan.

• Flight to affordability: College grads are increasingly moving to lower-cost, smaller metros that offer more affordable housing than big cities like NYC and San Fran.

• King of the Hill: Mark Van Zandt, co-head of real estate at King Street Capital Management, sees a massive gap between buyer and seller expectations in today’s market.

• Eminent domain: The Village of Bloomingdale, IL, is suing Namdar Realty Group, owner of Stratford Square Mall, in an effort to revitalize the failing mall.

• Ask the architects: NYC architects rank which of the city’s buildings they like and dislike the most. Some of their opinions might surprise you.

• Special servicing: Blackstone (BX) is looking to refinance a $310M loan on its River North office tower in Chicago, which is already in special servicing ahead of its July maturity.

• Betting on BTR: Build-to-rent (BTR) is on the rise and could help millions of Americans who can’t afford home ownership but still prefer a house over an apartment.

• Take your time: Private investors are cautiously adjusting strategies, taking more time to make decisions, and finding new ways to raise capital.

Rent is growing faster than incomes nationwide, with the average renter spending 29.6% of their income on rent in 1Q23. While that's a lot, it's still cheaper to rent than buy right now.

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