LA Investors Spooked By The ‘Mansion Tax’

Good morning. LA commercial property owners are frustrated by the city’s ‘Mansion Tax. Travel sites Airbnb (ABNB) and Expedia (EXPE) invest billions of customer funds for profit. Meanwhile, Blackstone (BX) filed eviction lawsuits against hundreds of tenants nationwide.

This week, our partner Bullpen is bringing a few new commercial real estate roles to the Talent Collective, including one particularly interesting opportunity with a PropTech firm.

📖 Read: With nearly 14% of multifamily properties having a DSCR of less than 1x, the St. Louis, MO-IL MSA topped the ranking of 50 multifamily markets for potential distress.

🖥️ Watch: Moody’s (MCO) analyst Kevin Fagan sees 2023 as the first true test of what the evolved office sector may look like in a post-pandemic world.

🎧 Listen: The Twitter saga has been exciting to watch from the sidelines, but this week, Deconstruct breaks down how Twitter's fights at its San Francisco HQ are impacting the local office market.

CRUNCH TIME

LA Investors Race to Beat The ‘Mansion Tax’ Clock

Back in November, we covered Prop ULA—LA’s attempt to raise between $600M–$1.1B of tax revenue annually, with 70% of funds going to affordable housing and the rest to homelessness prevention. The legislation will take effect in April.

Supersize me: As a reminder, current transfer taxes in LA County are just 0.45%. In April, Prop ULA will bring these rates up to 4% (nearly 10x higher) for all properties sold for more than $5M and 5.5% (over 12x higher) for all properties sold for more than $10M. Understandably, investors are concerned about the city’s real estate prospects.

Hot potato, not my potato: In late December, China-based developer Greenland grew worried about the implications of Prop ULA and sold its 59-story apartment tower, Thea at Metropolis, to Northland for $504M. Matthew Gottesdiener, CEO of Northland, believes the sale resulted from Greenland’s expectation that increased transfer taxes would negatively impact demand in LA. For reference, if Greenland had sold the property after April, the transfer tax would have been a whopping $27.2M.

When it rains, it pours: Critics are fed up with Prop ULA’s timing, arguing that the legislation, coupled with higher interest rates, will tank real estate across the city. Opponents are gathering signatures for the Taxpayer Protection and Government Accountability Act in 2024, which would give voters the final say on all proposed state tax measures, after achieving a ⅔ vote in the state legislature.

➥ THE TAKEAWAY

Follow the leader: Dan Yukelson, executive director of the Apartment Association of Greater LA, suspects other major cities may follow in LA’s footsteps, citing that San Francisco had already done so. Others, like Aaron Cohen, CEO of CGI+, aren’t supportive of the measure, but still expect buying and selling activity to remain strong over the long term.

PAY-NOW, STAY-LATER

Airbnb and Expedia are Raking in Big Profits by Holding Customer Cash

Travel sites like Airbnb (ABNB) and Expedia (EXPE) hold onto customer payments for extended periods of time, investing the money for their own profit. With rising interest rates, the returns on these investments are now higher, making them an unexpected benefit of the Federal Reserve's efforts to combat inflation.

Finally, some yield: Thanks to higher rates, booking sites can invest this spare cash into money market funds, Treasurys, and other short-term investments to generate a decent return. Back when rates were near-zero, these investments didn’t move the needle. But nowadays, these low-risk investments can bring in millions in additional income with minimal effort.

Times have changed: In Q3 2022, Expedia (EXPE) earned $20M, while Airbnb (ABNB) earned $58.5M in interest income. These earnings are up an eye-popping 10–20x, respectively, from the same period in 2021. Of note, neither company mentioned how much of that interest income came from customer money, but it’s likely around 30%.

➥ THE TAKEAWAY

Lemons into lemonade: According to Brad Erickson of RBC Capital Markets (RY), “most businesses don’t get to hang on to $7.5 billion of other people’s money.” Companies like Airbnb (ABNB) and Expedia (EXPE) are wise for using it to their advantage, but probably won’t be rewarded by their investors for doing so. After all, interest income is only a small part of their massive bottom line.

FRIENDLY NEIGHBORHOOD LANDLORD

Blackstone Ramps Up Tenant Evictions, Ready to Rake in Returns

Blackstone has initiated eviction proceedings against hundreds of tenants throughout the US as it ends its pandemic-era forbearance program, one of the most lenient in the real estate industry. The company's executives believe this will improve the financial performance of its real estate fund, which redemptions have impacted.

Don’t sweat it: Blackstone’s (BX) BREIT bought billions of dollars of apartments and homes during the pandemic. In light of their recent investor redemption limits, the company’s real estate chief called out the easing of pandemic-era eviction restrictions as a reason to have faith in the fund’s future performance.

Good cop: In fairness, Blackstone (BX) did offer a helping hand to tenants for longer than it was legally required to. The company waived late fees, let tenants break leases, and didn’t evict anyone for over two years. Despite these measures, BREIT still outperformed its publicly traded peer group, returning 8.4% last year.

➥ THE TAKEAWAY

Heads up: Despite its willingness to help, the fund needs to perform. Blackstone (BX) has engaged consultants to inform city officials that the lax policies are coming to an end. Unfortunately, the company’s decision will have far-reaching effects across the housing market due to their vast ownership of residences.

• Barry's big bet: Starwood (STWD) CEO Barry Sternlicht is launching Field & Stream Lodge Co., a hotel chain looking to capitalize on the great outdoors.

• The 'new normal': As rates remain high and more families look to rent single-family homes, the build-for-rent market is expected to grow.

• Kinda good news: Over 50% of workers in major US cities returned to the office last week for the first time, according to access-card activity from Kastle Security Systems.

• The good old days: After two years of record performance during the pandemic, the self storage sector’s best days may be behind it.

• Billion-dollar question: According to AEW (AEWU), there’s a $55B gap between what’s owed by commercial landlords in Germany, France, and the UK, and what’s available from lenders when the properties come up for refinancing.

• MVP—Most Valuable Property: The 1.8 MSF GM Building is officially the most valuable property in NYC, with a market value of $1.9B—up 17% from last year.

• Pony up: According to Morningstar (MORN), nearly $30B of CMBS debt secured by 400 commercial properties in LA and Orange Counties will come due this year, with only 12% of it already paid back.

• Pls fix: The CRE industry needs clarity from the Fed on a path forward for inflation, rate hikes, the labor market, and economic stability.

• Bullish on class B: According to Cushman & Wakefield (CWK), Portland and other West Coast cities are the most expensive markets in the US for building industrial assets.

In partnership with Bullpen

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• Controller/Accountant

💰 Hourly (Remote) 📍 Geography: Upper Rocky Mountain area

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• Associate, Multifamily

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🤝 Deals & Dealmakers

• What gives? A major Chinese bank is suing the developer of the billion-dollar Oceanwide Plaza project in LA.

• Not in England: Stonehenge, a NYC-based landlord, bought a 32-story apartment tower in the Upper East Side for $115M from UBS (UBS).

• Just add water: Desperate for liquidity, investors look to sell off fund interests in secondary markets.

• Bronx Bombers: Taconic Partners & Clarion Partners are selling a seven-property multifamily portfolio in the Bronx to InterVest Capital Partners for $65M.

• Grocery-anchored retail: First Washington Realty sold River Center, a 107 KSF retail asset in Tucson, AZ for $31.1M.

• Big box: Walmart’s (WMT) Sam’s Club is opening over 30 stores across the US, its most aggressive expansion push in many years.

• Fire sale: Ivanhoé Cambridge is trying to part ways with the PacMutual building in Downtown LA for $100M, half of what it paid for the property in 2015.

• Chicken, anyone? Tyson Foods (TSN) is looking for someone to take over its 233 KSF office space in Chi-town.

• Used > New: Bridge Investment Group (BRDG) is raising $2.3B to chase Class B, fixer-upper apartments.

📈 Chart of the Day

Single-family “serious delinquency rates”—90+ days or in foreclosure—ticked up in December. Thankfully, they’re far below the levels we saw during the Great Financial Crisis.

😎 Offering-MEME-Orandum

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