Prologis Strikes Year's Largest Industrial Deal for Blackstone Portfolio

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Good morning. Prologis is set to acquire 14 MSF of industrial properties from Blackstone for $3.1B. Rising rates, banking crises, and the remote work shift have pushed property prices to record lows. And SF Mayor London Breed is doubling down efforts to revive the city's downtown.

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Prologis Strikes Year's Largest Industrial Deal for $3.1B Blackstone Portfolio

In a record-setting deal for the year, global industrial real estate giant Prologis is set to buy 14 MSF of US logistics properties from Blackstone (BX) for $3.1B.

Deal details: The all-cash transaction involves 70 properties across key markets in the US and is expected to close by the end of the month, highlighting yet another significant interaction between two industry giants. The deal carries a first-year cap rate of about 4%, rising to 5.75% based on current market rents, as per the companies' statements.

Growth plans: Traditionally, Prologis has expanded through both property development and acquisition. However, due to escalating construction costs and local government approval delays, the company has been placing greater emphasis on acquisitions over new developments.

Maintaining high occupancy: Despite potential industry headwinds, Prologis has upheld high occupancy rates, noting a slight increase to 98% in Q1 this year. This uptick is credited to increased e-commerce spending, which has spurred warehouse leasing.

➥ THE TAKEAWAY

Big picture: Over the past 11 years, Prologis and Blackstone have continued to collaborate, with Prologis expecting accretive returns from this latest acquisition. They plan to fund this purchase via a 5.25% bond offering, showcasing their strategic growth approach and adaptability to market trends. The deal will further expand Prologis' portfolio, boosting its logistics space to 1.2 billion square feet globally.

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Rising Rates and Refinancing Challenges Trigger Stress and Opportunity in CRE

Manhattan's office spaces, including the 529 Fifth Avenue tower, which recently sold for $105M, illustrate a commercial real estate slump. Rising rates, banking crises, and the remote work shift have pushed New York's property prices to a two-decade low.

Handing back the keys: Nationwide distress is clear, with developers in New York returning outdated office buildings to lenders, foreclosures on overburdened apartment buildings in Houston, and defaults on hotels and malls in San Francisco. Now, even profitable property loans are being divested at a loss by banks, under pressure from regulators and investors.

Past booms and present busts: Real estate developers and investors had a good run in the era of low interest rates that followed the 2008 financial crisis, further bolstered by leniency from lenders during the Covid-19 pandemic. However, the current scenario paints a grim picture, with JLL estimating that New York office buildings have lost $76bn in value from their most recent sales prices.

Signs of distress: The downturn in commercial real estate is partly obscured due to decreased deal volume this year. Nevertheless, clues are emerging; Blackstone's recent sale of its stake in One Liberty Plaza fetched a $550m lower valuation than in 2017. Moreover, traditional US offices now constitute less than 2% of Blackstone's global portfolio, compared to 60% in 2007, signaling a strategic shift.

➥ THE TAKEAWAY

Why it matters: The near-term debt maturity of nearly $900bn in US commercial property will likely lead to increased sales as owners face refinancing challenges or the need for substantial capital injections. But pressure is felt beyond the office sector, extending to rental properties previously seen as safe during the pandemic. As rates rise, instances like Applesway Investment Group's foreclosure in Houston could become more frequent. However, this stress creates opportunities for alternative lenders, typically offering higher-rate credit.

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SF Wants to Tear Down City’s Largest Shopping Mall For Something New

San Francisco's mayor London Breed is looking to reimagine the city's struggling downtown by demolishing empty buildings and repurposing the struggling business district.

Reviving a beaten-down city: San Francisco's downtown has struggled more than most U.S. metros recently. Speaking at the Bloomberg Technology Summit, Breed proposed knocking down the Westfield San Francisco Centre, the city's largest mall at 1.2 MSF, and replacing it with something new, perhaps even a sports stadium. Breed's vision includes the option for residential, hospitality, and retail space, creating a new hub of activity in downtown San Francisco.

Empty buildings = unhappy residents: One area of focus is demolishing empty buildings and repurposing unused spaces. With the Westfield San Francisco Centre being the largest mall in the city, and a popular destination for shoppers pre-pandemic, it has attracted increasing attention due to the concerning number of empty storefronts. These empty spaces are an eyesore and have contributed to the street-level blight in the area.

➥ THE TAKEAWAY

One tear-down at a time: The project proposed by Mayor Breed to reimagine San Francisco’s downtown area could be the key to breathing new life into the city. Reimagining the space and demolishing empty buildings could lead to more investment, improved street-level aesthetics, and potentially catalyze new developments in the future. Despite the project's many unknowns, the prospect of tearing down and replacing empty buildings to create new spaces could increase the value of the area, revitalize downtown, and perhaps even act as a catalyst for new developments in the future.

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• Industrial boom: The sale of a 116.8 KSF Inland Empire warehouse was completed earlier this year for $57.3M, which equals $490 PSF, or $10.4M per acre.

• Roaming in style: Marriott Intl. has signed an agreement with Delaware Investment Ltd. to open its first JW Marriott luxury safari lodge (you read that right) in Serengeti, Tanzania, scheduled to open in 2026.

• Rest in peace: Jim Crown, Chairman and CEO of Henry Crown and managing partner of Aspen Skiing Company, died on his 70th birthday in a single-vehicle accident at the Aspen Motorsports Park.

• Office vacancies: A JLL report highlights that 60% of office vacancy is concentrated in 10% of buildings, with 40% of U.S. office buildings having no vacant space.

• Multistory fall: U.S. apartment sales volume has declined 60% YoY for seven months due to interest rate hikes, reaching lows not seen since 2008–2009.

• Public vs. Private: Armada ETF Advisors predicts that public real estate will outperform private real estate due to a gap in valuations, historical indicators of mean reversion, and currently cheaper prices.

• Miles ahead: Tom Stuker, a car dealership consultant from NJ, has flown 3M miles, more than anyone in history, after snagging a lifetime pass for $290K from United Airlines in 1990.

• Non-traded investments: Alternative fundraising reached $24.6B YTD through May, led by non-traded REITs at $7.3B, interval funds at $6.1B, BDCs at $5B, private placements at 2.5B, and Delaware statutory trusts at $2.1B.

• Break rooms: A report by KSS Architects reveals the importance of designing break rooms for the warehousing and storage subsector, with 1.94M workers employed this year.

• A REIT for all occasions: Inland Private Capital plans to launch a non-traded REIT focused on medical offices, self-storage, and student housing that can potentially raise up to $1.25B.

• Japanese firm buys big: Japanese firm Mori Trust purchases 50% of Midtown 245 Park Avenue at a $2B valuation, marking a major breakthrough for the city's office market.

• Joey Logano's speed: NASCAR champion Joey Logano's $5M mixed-use development in North Carolina has gained approval for rezoning and will feature 747 multi-family homes over 70.5 acres.

• Mortgage delinquencies rise: Commercial and multifamily mortgage delinquencies went up across all major capital sources in Q1, following ongoing stress from higher rates and uncertainty around market values.

• Zoning reform: Local government zoning policies requiring large-lot homes and limiting multifamily constructions are inflating U.S. housing costs. Here’s why.

• Logistics playbook: A potential strike at the Ports of Los Angeles and Long Beach, echoing past disruptions, was averted by a last-minute deal.

• Cloudy outlook: Yardi Matrix released its June 2023 report on the debt market, revealing a decline in industry transactions, a sharp increase in debt costs, and a rise in delinquencies for CMBS.

• Russian assets: After Russia's invasion of Ukraine, the US government froze assets of wealthy Russians, but actual forfeiture has been limited. Only two people have had trophy properties targeted or seized.

Fort Lauderdale, FL, leads the country in retail rent growth, followed by Phoenix, AZ; Cincinnati, OH; Las Vegas, NV; and Tampa, FL.

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