Q1 Sees 56% Drop in CRE Loan Originations

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Good morning. Commercial/multifamily mortgage originations plummeted by 56% YoY in Q1 2023. A&G is preparing to auction off hundreds of leases for bankrupt Bed Bath & Beyond. Meanwhile, Terra's $1.2B acquisition in Miami is expected to boost investor confidence in South Florida, despite prevailing economic challenges.

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MBA Reports 56% YoY Drop in CRE Mortgage Originations in Q1 2023

Commercial and multifamily property borrowing and lending hit a 7-year low in Q1, per a recent MBA quarterly survey. Rising rates had a significant impact, especially on industrial sector lending, which had thrived during the pandemic.

Factors affecting originations: In 1Q23, investment sales fell by 56% YoY to $85B, with office and multifamily sectors seeing over 60% declines. The decline is attributed to factors affecting both supply and demand, according to Jamie Woodwell, VP of MBA's research and economics group. On one hand, lenders have tightened criteria in response to the banking crisis, concerns about CRE fundamentals, and an uncertain economic outlook. On the other hand, investors are less active due to rising rates and the bid/ask gap.

Loan volumes by lenders: Looking at the YoY decrease in lending by different lenders, life insurers withdrew the most volume at 73%, followed by investor-driven lenders (67%), CMBS shops (59%), and depositories (54%). The volume of lending by government-sponsored agencies fell the least, by ‘just’ 14% YoY, according to MBA data. Origination volumes also decreased by 56% and 48% QoQ for life insurers and depositories, respectively.

Decline by property sector: MBA data shows that the industrial sector saw the greatest decline in loan volume by 72% YoY, followed by healthcare (69%), multifamily (50%), office properties (67%), hotel properties (8%), and retail properties (8%).

➥ THE TAKEAWAY

Still waiting for a better deal: The decline in CRE mortgage originations is expected to continue in the upcoming months. As the year progresses, more CRE loans will reach maturity, with $331.2B in commercial and multifamily mortgages held by non-bank lenders expected to mature in 2023, according to MBA estimates. Betting on sound properties in sectors undergoing temporary uncertainty might present upside opportunities, but waiting the market out seems to be the standard choice for investors and lenders right now.

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A&G to Auction Off Bed Bath & Beyond Leases in Bankruptcy

A&G Real Estate Partners is planning to auction off several leases for Bed Bath & Beyond's (BBBYQ) stores across the country. This comes after the once-popular retailer filed for Chapter 11 bankruptcy protection in April.

Leases being listed: The auction includes hundreds of leases for store locations all over the country. To be specific, Bed Bath & Beyond still has 360 stores in 48 states and Washington D.C., while buybuy BABY has 120 stores in 37 states. The locations range in size from 18–92 KSF.

Throw in a data center: Although A&G will auction Bed Bath & Beyond's leases, it will also market several other assets owned by the company. This includes a data center in North Carolina and leases for warehouses and distribution centers in California, Georgia, Pennsylvania, Nevada, New Jersey, and Texas. The sizes of these facilities range from 189 KSF to over 1 MSF.

Potential bidders: According to Mike Matlat, senior managing director at A&G, landlords are expected to show interest in acquiring these leases. He also stated there is a chance for junior anchor tenants to backfill second-generation space. National, regional, and local players are expected to show up to auction for mostly below-market, fixed-rate leases with renewal options.

➥ THE TAKEAWAY

The retail food chain: Although Bed Bath & Beyond's bankruptcy and auction of its leases may seem like a negative for the retail market, it presents an opportunity for other national chains to acquire prime store locations. TJ Maxx (TJX) and Ross Dress for Less (ROST) have already taken over former Bed Bath & Beyond locations and could potentially be contenders for these leases. After all, the auction is a rare opportunity to acquire below-market leases at auction.

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$1.2B Downtown Miami Acquisition Boosts Investor Confidence Despite Challenges

David Martin's acquisition of a downtown Miami ‘assemblage’ for $1.2B is set to create a tidal wave of interest in urban land sales in South Florida despite market headwinds.

Site overview: The 15.5-acre assemblage, located in Miami's Arts and Entertainment District, was the priciest urban land sale in Florida and one of the most expensive in the nation. The vacant and prime bayfront location boasts 800 feet of frontage along the bay and includes the former Miami Herald HQ. The site has the potential to accommodate roughly 8K units.

Ripple effect: Martin's acquisition has created momentum for other land sales in the immediate area and across South Florida, marking it a "real coup," said a broker familiar with the matter. Helpfully, upcoming plans and construction costs could be lower by the time Martin and his partners finalize their plans and begin developing.

Many pieces to the puzzle: Multi-block projects such as Swire's Brickell City Centre and Craig Robins-led Miami Design District have been successful, with the market still having room to grow even if there is a correction. But whatever development takes place will require significant infrastructure investment to accommodate rapid transit, and the I-395 signature bridge still under construction.

➥ THE TAKEAWAY

Market optimism: Despite the prevailing challenges in the real estate market, including interest rates, insurance, and construction costs, Martin's acquisition acts as a catalyst for land sales and construction projects. Commercial broker Mika Mattingly of Colliers South Florida confirms that developers and investors are moving forward, albeit more cautiously, with new projects, sparking optimism in the industry.

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• Denver and Dallas: Nationwide vacancy across U.S. industrial real estate rose 0.4% to 3.8% in 1Q23, with logistics networks seeing the most opportunities to acquire space. Denver is tops for space availability, while the DFW region currently leads for industrial supply.

• Inflation rate eases: In April, a widely monitored inflation gauge showed an increase, but the annual growth rate offered a glimmer of hope that living costs may decrease later this year.

• From across the ocean: NY-based Tishman Speyer partners with Raffles Family Office, an Asian multi-family office investor, to form a new Asian-Pacific real estate fund.

• JBG Smith sells stake: JBG Smith has sold an 80% stake in its Bethesda, MD HQ for $196M, valuing the property at $245M.

• Not-so-great milestone: U.S. home prices fell in nearly ⅓ of the country in 1Q23, according to the National Association of Realtors. It was the biggest price drop in over a decade for a single quarter.

• The Undertaker from Omaha: Warren Buffett isn’t sympathetic towards CRE owners and investors who lost big due to rising rates. “They should lose money…That’s part of borrowing on 100% margin.”

• Old offices, new homes: ⅓ of older office buildings in large U.S. and Canadian cities have the potential for apartment conversion, with 6,206 buildings across 10 U.S. cities identified for possible conversion.

• Houston, we have a deal: 3 of the 5 largest new delinquent loans in March were for Houston properties, including the TC Energy Center, which has an outstanding balance of $133M on loans and was one of the five largest newly delinquent CMBS loans nationally.

• Foreign investment falters: Foreign investment in U.S. CRE plummeted by 53% YoY to just $34.8B, the lowest mark in 10 years.

• Another one bites the dust: Workspace Property Trust's (WSPT) $1.3B CMBS loan, backed by over half of their properties, has entered special servicing ahead of its July maturity.

• Distressed CRE cities: In April, 84% of the 50 largest U.S. metros saw an uptick in distressed CRE loans, with the average increase pegged at 80 bps, according to CRED iQ. Among the markets with the most distress were Minneapolis, Jacksonville, and San Antonio.

• Deal of the day: Tempur Sealy International (TPX) purchased Mattress Firm for $4B, creating a retail bedding giant with roughly 3,000 stores worldwide amid the pandemic-induced decline in bedding sales.

• Affordable Chinatown: Construction is set to begin on a 51-unit senior affordable housing project in Philadelphia’s Chinatown. The project includes a mix of studio, one- and two-bedroom apartments.

• Chillin’ in Chile: Real estate giants Ivanhoé Cambridge and Greystar have invested $100M in 1,400 rental units in Santiago, Chile, targeting rising demand in the fast-growing city of 8 million people.

• From offices to homes: DC Mayor Bowser proposes expanding property tax breaks to boost economic growth by incentivizing CRE-to-RRE transformations amidst high office vacancy rates.

• Got milk? Coca-Cola (KO) will build a $650M facility in Upstate NY to produce Fairlife's ultra-filtered milk, which could generate up to 250 jobs and use approximately 5 million pounds of locally sourced milk daily.

The top 10 construction markets in the U.S. right now include some obvious contenders, like Dallas and Miami, and some surprises, like NYC’s five boroughs (which top the list with 43% more construction YoY), which continue to struggle with affordable housing supply.

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