Investment Giant BGO Launches New Industrial REIT

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Good morning. BentallGreenOak (BGO) is launching a new nontraded industrial real estate investment trust. Meanwhile, the performance of real estate loans tied to office properties worsened for two U.S. banks and is expected to continue sliding for the rest of 2023.

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BGO's Freshly-Minted Industrial REIT Secures Stake in 9.4M SF Portfolio

BentallGreenOak (BGO) is launching a new industrial-focused REIT to benefit from the rising trend in e-commerce buying behaviors.

Ready for takeoff: The nontraded REIT, which has acquired a 9.4 million square feet "seed portfolio" of Midwest buildings, debuted with an initial stock offering of $5 billion across various common share classes. BGO IREIT's primary focus is on US warehouse and logistics assets, but it will also venture into real estate debt and related securities.

Investor appeal: BGO IREIT's debut underscores the growing investor attraction to nontraded REITs and alternative lenders in the CRE sector. Nontraded REITs have shown robust and steadier returns versus traded REITs over the last five years, says Kevin Gannon, CEO of Robert A. Stanger & Co. Alternative investments witnessed record fundraising of $104 billion in 2022, a 23% annual increase, mainly driven by nontraded REITs.

Diversification strategy: BGO IREIT's seed portfolio, housing assets in St. Louis, Cincinnati, and Kansas City, plus a standalone industrial property in Kenosha, Wisconsin, signifies a diversification strategy within the industrial sector. Developed by NorthPoint Development and Northwestern Mutual between 2012 and 2023, the portfolio has been applauded for its assembly and institutional sponsorship by Gannon.

➥ THE TAKEAWAY

Zoom out: The emergence of nontraded REITs like BGO IREIT marks a shift in the real estate landscape. These entities offer strong returns and lower volatility, outperforming publicly traded REITs. This trend was emphasized in the past year when no new publicly traded REITs were launched for the first time since 2001, due to a dip in REIT stocks and underlying valuations. Despite temporary redemption challenges, the future for nontraded REITs like BGO IREIT looks promising, marking a new era in the CRE market.

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JPMorgan, Wells Fargo Increase Reserves Amid Office Loan Risk

Major US banks, like JPMorgan Chase (JPM) & Wells Fargo (WFC), increased allowances for potential losses in CRE lending due to higher borrowing costs and lower demand from tenants. Even prominent landlords such as Blackstone Inc. (BX) and Brookfield Asset Management Ltd. (BN) are affected.

The bigger they are: Loan-loss provisions and allowance have increased for Wells Fargo and JPMorgan Chase due to the projected weakness in office-based loans. Wells Fargo, CRE's largest U.S. bank lender, raised its loan-loss allowance by $949M in 2Q23, with a significant portion attributed to office-related loans. The bank also recorded $62M in commercial mortgage losses, primarily driven by office lending.

Birds of a feather: JPMorgan Chase followed suit, increasing its loan-loss reserves by $389M in 2Q23 as the bank anticipates rising delinquency rates for commercial mortgages tied to office properties. While JPMorgan's exposure to dense urban offices is limited, the bank opted to build reserves to stay ahead of the cycle. However, JPM did not provide specific information on loan balances related to office properties or comment on other property types.

Neck-and-neck: Despite higher loan-loss provisions, JPMorgan expanded its CRE loan portfolio by 32% in the same period, primarily due to its acquisition of First Republic Bank. With an added $34.3B in loans, the bank’s total CRE portfolio reached $142.9B. However, Wells Fargo remains the largest CRE lender, with $154.3B in CRE loans at the end of 2Q23.

➥ THE TAKEAWAY

Office uncertainty persists: The projected weakness in the office market indicates that deteriorating loan performance may continue throughout 2023. However, evaluating future loan performance based solely on current factors is challenging. Resolving office loans is expected to take several quarters, and factors such as property type, location, lease rates, lease renewal notice rates, loan structure, and borrower behavior will influence the extent of loss content.

• Boost for The Bronx: New luxury apartments in the Bronx’s Mott Haven are attracting crowds, with listing traffic up 50%.

• Back to the mall? Despite economic challenges and the rise in interest rates, retail returns have fared far better than many other CRE sectors in 1Q23.

• Vote of confidence: In 2024, BlackRock will allow retail investors in its leading ETF to proxy vote, countering allegations of a "woke agenda."

• Breaking the rules: NYC officials, including Mayor Eric Adams, were found violating their own rules on bed bug reports and property taxes.

• Sliding space: San Francisco's office market experienced one of its worst quarters in 2Q23, with a net negative absorption of 2.2MSF.

• If you can build it here: Here’s a look at some interesting proposals for NYC, including cantilevered condos, a thimble in Central Park, and the "longest building in the world."

• Covering climate chaos: Florida insurer Farmers (ZURVY) is cutting policies due to the rising costs of covering climate change damage, worsening a property crisis with no clear solution.

• Uniting for Section 8: The NMHC and NAA support a bipartisan bill aimed at increasing private landlord participation in the Section 8 Housing Choice Voucher Program.

• Manhattan Marvel: MaryAnne Gilmartin's MAG Partners secured a $196M refinancing loan for its luxury rental project in Manhattan's West Chelsea, achieving 40% leasing capacity after 4 months.

• From office to living space: Sterling Bay plans to demolish a former office building in Chicago and build 609 apartments while seeking investors for the $6B Lincoln Yards project.

• From Texas to Florida: Texas leads in Google searches and population growth, while Florida is popular for relocation despite its high hurricane risk.

• The robots are coming: Industrial vacancy rates have risen to 4.7% in 2Q23, matching pre-pandemic levels, according to CoStar Group.

• Rental rollercoaster: The current U.S. rental market is stronger than before but weaker than its long-term norm, with positive absorption of approximately 84K units in 2Q23.

• Brick by brick: BGO Industrial Real Estate Income Trust, a nontraded REIT, acquired a 9.4MSF industrial seed portfolio in the Midwest, with an initial stock offering of $5B.

• Retail revival: Due to workers spending less time in offices, CBD retail availability in U.S. central business districts now exceeds suburban space. Fancy that.

• Bold tax breaks: To combat a housing shortage, Boston's Mayor Wu proposes 75% tax breaks for 29 years for downtown office-to-residential conversions, a first for the city.

• Parking profits: A parking services company is considering buying LA's third-tallest building, the Aon Center, as investors seek discounted workspaces.

• The Green Giant: WS Development topped out One Boston Wharf, a 707 KSF office building set to be the city's largest net-zero carbon office building with 630 KSF already leased by Amazon.

Commercial real estate delinquencies rose 19% early this year, marking the second straight quarter of increases. Multifamily loan delinquency surged 22.4% in Q1, reaching a near five-year high. Despite being low historically and less than the pandemic peak, the underlying causes persist. FDIC's Q2 data is due in mid-August.

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