PacWest Offloads $2.6B in CRE Loans to Kennedy Wilson

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Good morning. PacWest enhances liquidity by selling $2.6B in real estate loans to Kennedy Wilson. LVMH anticipates the outcome of a special election on May 23 to proceed with a luxury hotel project on Rodeo Drive, likely spurring demand for hospitality properties nearby.

Meanwhile, despite their creditworthiness, notable property owners like Brookfield may face loan defaults, posing risks for creditors.

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PacWest Bank's CRE Loans Sold to Kennedy Wilson for $2.4B at Discount

PacWest Bancorp (PACW), a lender struggling amid the U.S. regional banking crisis, announced on Monday that it would sell a $2.6 billion real estate construction loan portfolio at a discounted price. The move is aimed at raising cash in a bid to improve its balance sheet.

What happened: Since the regional banking crisis began on March 8, PacWest has seen its market value plummet by 75% and initially lost 16.9% of its deposit base. To regain stability, PacWest is selling a portfolio of 74 real estate construction loans worth $2.6 billion to Kennedy-Wilson Holdings for $2.4 billion—a $200 million discount. Kennedy-Wilson will also assume potential funding obligations of $2.7 billion and take over six additional construction loans worth approximately $363 million, pending PacWest's clearance.

Loan details: Kennedy-Wilson Holdings has announced that it expects to complete the acquisition of the real estate loans in multiple tranches this quarter and early into Q3. The loans carry floating rates, with an average of 8.4%. PacWest will also sell six more loans to Kennedy-Wilson for $363M if it wins the right approvals and aims to offload more than half of its real estate construction and land loans.

Impact of the deal: PacWest Bancorp's shares surged yesterday when news of the deal emerged, with the bank's stock rising 12.5% in Monday’s early morning trading. After the sale, PacWest's real estate construction and land loan offerings will be cut drastically. Meanwhile, Kennedy-Wilson, which primarily focuses on multifamily, office, industrial, and debt, will add the newly acquired real estate loans to its $23B in AUM.

➥ THE TAKEAWAY

Big picture: PacWest Bank aims to avoid the fate of other failed regional lenders by selling assets and boosting liquidity. With a loan book heavily tied to commercial real estate-backed loans and residential mortgages, the bank holds $4.6 billion in construction loans, $3.8 billion in commercial loans, $5.5 billion in multifamily loans, and $15.4 billion in residential mortgages. Additionally, CEO Paul Taylor has revealed plans to explore the sale of the bank's $2.7 billion lender finance division.

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Beverly Hills Voters To Decide Whether World's Richest Person Can Build Hotel

A planned upscale hotel in the affluent Beverly Hills, California, aims to attract guests to an area that is currently lacking in hospitality options, but only if the residents vote in favor of the wealthiest individual on planet Earth.

Approval needed: To proceed with the redevelopment of the former Brooks Brothers site at 468 N. Rodeo Drive into a 109-room Cheval Blanc hotel, French luxury conglomerate LVMH must secure a victory in a special election scheduled for May 23. Forbes and Bloomberg recognize Bernard Arnault as the wealthiest individual globally, the founder, chairman, and reputed owner of around half of LVMH.

The blueprint: The Beverly Hills hotel market holds a prominent position in Los Angeles, benefiting from its renowned shopping destinations, limited competition in the hotel sector, and popular tourist attractions. Positioned on Rodeo Drive, one of the world's most prestigious shopping districts, the proposed hotel offers exceptional amenities and a commitment to top-notch quality, making it highly desirable. Anticipated demand for the hotel already surpasses the projected supply, indicating a promising and successful venture.

The background: California is known to have limited land for hotel developments, making it tough to build new hotels in the state due to resistance and lengthy processes. This limited inventory creates new demand for existing properties, leading to high values for such properties. In-demand neighborhoods like Beverly Hills benefit greatly from this setup. The average daily rate for the Hollywood-Beverly Hills hotel market is $348.82, compared to $199.18 in the greater LA area.

➥ THE TAKEAWAY

Crucial vote: Beverly Hills' Special Election on May 23rd holds the fate of LVMH's luxury hotel proposal and sets the tone for future hospitality projects. The city is expanding its offerings with 216 hotel rooms currently under construction across 17 properties. Approving LVMH's plan is seen as a boost, generating an estimated $7M for the city's general fund and enhancing Rodeo Drive's retail scene.

Why it matters: This decision is critical for LVMH's California operations, potentially signaling more luxury hotels in the future and fueling its ongoing buying spree. With recent purchases, including a $43 million retail property and a remarkable $200 million acquisition of the former Luxe Hotel, LVMH has firmly established itself as one of the Hills' most active buyers.

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🌐 Around the Web

📖 Read about the current significant deterioration of values in CRE, mainly office buildings, as their values have decreased the most, causing concern across the industry.

🖥️ Watch Cadre CEO Ryan Williams discuss the current challenges in the CRE market and how his firm is leaning into multi-family and industrial properties in 2023 with CNBC.

🎧 Listen to how the SEC’s proposed changes to custody rules could impact how registered investment advisors handle real estate on this episode of the Ropes & Gray podcast.

🔍️ Download Moody's Analytics' analysis of the Fed’s 1Q23 Senior Loan Officer Opinion Survey (SLOOS) report, and find out why Moody’s thinks it will make CRE borrowers launch into “angry tirades.”

Despite Creditworthiness, Top Property Owners Could Default

Experts argue that real estate investors in the current market are more creditworthy than the overly indebted and flighty homeowners who got banks into hot water during the GFC. However, recent high-profile defaults show that creditors face risks even from star borrowers.

The harder they fall: CRE delinquency rates are close to record lows today, but big-name borrowers are starting to cut losing real estate bets to protect returns. Brookfield (BAM) skipped payment on a $275M loan on the EY Plaza in LA. The delinquent loan is in the same portfolio as a pair of offices tied to more than $750M of debt that Brookfield defaulted on earlier this year. It’s also missed payments on a smaller loan on offices in DC. Pimco-owned Columbia Property Trust (CXP) also defaulted on a huge $1.7B office loan earlier this year.

Special servicing: In other news, Blackstone (BX) sent two separate loans on a Manhattan office block and residential building to special servicing, where a third party steps in to manage debts at risk of not being paid off. Among a Trepp list of office loans valued at $7.7B that have been sent to special servicing, more than a quarter is owed by big-name institutions like Brookfield and Blackstone.

A game for the rich: Replacing interest rate hedges once they expire is also getting much more expensive. A 3-year cap at 3% for a $100M loan cost $23K in 2020. Today, a one-year extension costs $2.3M, according to data from risk adviser Derivative Logic. That’s not appetizing no matter how you look at it. So it’s no surprise that many property investors who can’t or won’t cough up this kind of cash may simply have no choice but to default.

➥ THE TAKEAWAY

Don’t like it, don’t want it: While experts argue that institutions would be the last to give the keys back, it may be the other way around. Heavyweights should be able to get another loan at a good price even after defaulting. And if a property is no longer hitting the return hurdle that Brookfield needs to satisfy its limited partners, it may decide to cut its losses. In many cases, powerful owners may become far less willing to support a property through a rough patch than a smaller landlord who can’t afford to quit.

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• Modern Administration solutions that are more than just the traditional production of financial statements

• An investor portal used by 500,000+ LPs

• Automated investor reporting that meets industry standards and exceeds investor expectations

• A purpose-build CRM to connect with investors with ease

• Business intelligence dashboards that turn data into actionable insights

If you’re ready to build stronger relationships and outpace market expectations, learn more about Juniper Square today.

• Industrial impact: Higher debt costs and tighter credit conditions may impact industrial demand as a record amount of mortgage debt matures between 2023–2024, warns Newmark.

• Broker confidence: New York commercial brokers are less optimistic about their prospects now than in the past six years, given the multitude of market challenges they currently face.

• Triple threat: The US CRE industry faces triple threats of remote work, higher interest rates, and tighter regulation, with a projected $500B decrease in the overall value of CRE buildings.

• The replacement: David Helfand, president and CEO of Equity Commonwealth, succeeds Sam Zell as chairman after his recent passing.

• Twitter terror: San Fran opens an investigation into Elon Musk's plan to turn Twitter HQ into a "Twitter hotel" amid accusations of fraud, contract breaches, and labor-rights violations.

• Big-money BDCs: Big-name sponsors are moving into the BDC market, which provides retail investors with access to institutional products, with Blackstone dominating capital raising.

• Office hauntings: The return-to-work movement is slowing down, and office operators’ share prices are feeling the pain. As an example, SL Green (SLG) is below its 1997 IPO price right now.

• Downward slide: US single-family rent growth continues to decline, falling to 4.3% YoY in March as annual rental prices in all tracked markets fell as well.

• New initiatives: JPMorgan intends to embark on an unparalleled spending spree exceeding $15B this year, showcasing its ambition to expand and become an even larger entity within the US banking sector.

• Trophy office life: The iconic Flatiron Building in NYC will be auctioned off for a second time, and any potential bidder will have to spend an estimated $100M in upgrades.

• CEO shuffle: CEO turnover soared to a 5-year peak in 2022, with 175 CEOs leaving their posts (up 30% YoY), driven by a need for new strategies to compete and navigate rapid market changes.

• The quirky court: Pickleball is the fastest-growing sport in the US, with players growing from 4.8M in 2022 to 8.9M in 2023. Landlords and real estate brokers are taking notes.

• Close, but no deal: Investor interest in CRE is increasing, but unresolved price gaps between buyers and sellers is prolonging deal completion, according to Q1 data from CREXi.

• Soho House in Miami: Walker & Dunlop (WD) arranged a $140M refi for Miami's Soho Beach House, with favorable a 10-year fixed-rate loan from JPMorgan and Citi Real Estate Funding.

• Sun setting on the Belt: North Texas CRE sales fell 70% YoY, totaling $3.5B in 1Q23, highlighting the impact of rising rates and tighter lending standards.

US distressed property sales vary greatly by asset type, with Office contributing the bulk of foreclosures in 1Q23, and Industrial on the far end of the spectrum with barely any foreclosures at all. Meanwhile, Hotel and Multifamily distressed sales are down to half what they were in 2021.

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