Smaller Sales Shine Amidst Larger Deal Declines

Smaller Sales Shine Amidst Larger Deal Declines

In the evolving CRE landscape, smaller sales are making a surprising comeback over their larger counterparts, defying conventional wisdom.

Trend reversal: Historically, CMBS loans below $50 million were considered more vulnerable to delinquency than their larger counterparts. However, recent data from Trepp’s CMBS Delinquency Report reveals a break from this norm, marking only the third time this has occurred in 13 years. Such counter-trends often indicate unique investment opportunities, hinting at a chance to capitalize on undervalued assets.

Comparative analysis of sale volumes: A report by Green Street highlighted that property sales totaling $38.89 billion were recorded in the first half of 2023, a sharp decrease from the $55.12 billion of the prior year. When segmented by sale volume, sales in the $25 million-plus range witnessed a staggering 61% YoY drop, while the $5 million-to-$25 million bracket experienced a milder 29% fall.

Changing dynamics: The current trend is attributed to a change in buyer demographics. Private buyers, which include family offices, wealthy individuals, and small syndicates, are more active during economic hardships. These investors, unaffected by institutional constraints, can adapt to high volatility, making strategic purchases while waiting for market recoveries. Larger institutions and corporations often overlook smaller deals due to comparable resource investments required, giving private capital buyers a competitive edge.

➥ THE TAKEAWAY

Big picture: Private capital buyers are now in a favorable position, often aided by robust banking relationships and a potential preference from banks for smaller, more manageable deals. As the market dynamics evolve, these smaller transactions not only prove their resilience but also highlight the strategic value they can offer to discerning investors.

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Kimco & KSL Lead the Week with Two Monumental CRE Deals

The CRE Market starts the week with two blockbuster deals: Kimco Realty announces its $2B acquisition of RPT Realty, adding 13M SF to the retail operator’s portfolio, while KSL Capital Partners sets its sights on Hersha Hospitality Trust. and its portfolio of luxury and lifestyle hotels.

Kimco's acquisition: Kimco Realty is acquiring RPT Realty for $2B, boosting its market capitalization to $13B and enterprise value to $22B. The deal adds 56 open-air shopping centers to Kimco's assets, totaling 13.3 million square feet, plus a 6% stake in a 49-property venture.

KSL's Bid for Hersha: KSL Capital Partners is set to acquire Hersha Hospitality Trust in a $1.4B all-cash deal, offering a hefty 60% premium on Hersha's recent closing share price. The hotel market has cooled this year with decreased transactions and prices. Yet, the sector remains attractive to investors due to its comparatively high cap rate.

➥ THE TAKEAWAY

Why it matters: The week's acquisitions underscore a robust appetite for strategic acquisitions. With Kimco Realty fortifying its dominance in the retail space and KSL Capital Partners recognizing the enduring allure of luxury hotels despite a cooler market, it's evident that firms are capitalizing on opportunities to diversify and strengthen their portfolios, reflecting a bullish outlook for deal flow.

📖 Read: The urban doom loop threatening downtowns and office spaces all across the country continues to loom large as remote work and CRE struggles pose economic risks for midsize cities.

▶️ Watch: Jeff Sica of Circle Squared Alternative Investments delves into the implications of China's economic deceleration for the worldwide economy on 'Varney & Co.

🎧 Listen: David Sacks offers a succinct analysis of the CRE credit crunch, highlighting the emerging prominence of distressed funds.

Converting CRE to Multifamily: NYC's Ambitious Office-to-Resi Plan

NYC Mayor Eric Adams announced an initiative to convert 136MSF of vacant offices into 20,000 new homes over the next decade. Aimed at expanding inventory and finding new life for obsolete properties, the plan targets Manhattan's Midtown South area. However, industry experts and advocates have identified potential hurdles.

The Big Apple's bold plan: It’s well-established by now that NYC faces a severe shortage of rental housing. Studies show that the city could use at least 655,940 more affordable rental homes, while there are 66,424 rental units under construction and 20,991 deliveries in the pipeline, according to data from Matthews Real Estate Investment Services and the National Low Income Housing Coalition.

1 + 1 = 3, right? It’s nice to see that Eric Adams is trying to continue what Governor Kathy Hochul started—although we doubt it will happen quickly (if at all). Some simple napkin math shows that turning 136MSF into 20,000 new apartments works out to around 6.8KSF per apartment unit, which doesn’t exactly add up. We assume a lot of that square footage will be converted into ground-floor retail.

Long road ahead: Converting office buildings to residential use faces challenges such as stringent regulations, high costs of land, and sheer redevelopment costs, not to mention the need for proper incentives to offset all these expenses. Experts suggest strategies like low-interest loans, operating subsidies, tax incentives, and the creation of a land bank to facilitate conversions.

➥ THE TAKEAWAY

Will it work? Assuming this bold new initiative gets off the ground, NYC’s Midtown conversion project could serve as a model for other cities grappling with a shortage of affordable housing. While the plan may not solve the city's housing crisis, it could showcase the potential for public-private collaborations and incentivize similar conversions. Ultimately, success would be defined by housing that’s accessible to the city’s everyday residents, not just the wealthy few.

This year, the U.S. data center real estate has seen strong growth, largely fueled by the surge in artificial intelligence, leading to limited supply.

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