Credit Market Cracks Widen, Distressed Debt Near $650B

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In today’s email: After years of favorable interest rates and easy money, a series of unfortunate economic events has led to $650B of distressed bonds and loans. Well-capitalized investors should still have plenty of multifamily opportunities to choose from this year. Meanwhile, US automakers quietly pledged $33B to new EV auto factories and battery plants last year.

Read: Wealth Management Real Estate’s 2023 Market Outlook covers the latest CRE insights across the country and arrives at a single conclusion: “Nobody knows what’s going to happen in 2023.”

Listen: The CEO and co-founder of Arch, a solution used by 180 private investment firms for their alternative assets, talks about his life, education, and career.

Cheap Money Long Gone, Replaced By $650B in Distressed Debt

After years of favorable interest rates and easy money, a series of unfortunate economic events has led to a $650B pileup of distressed bonds and loans, according to Bloomberg.

All’s fair in war: The Fed’s rate hiking campaign against inflation is the main culprit here, leading to 300% more distressed debt in the US alone over the past 12 months. Over 75% of US issuers only have loans in their debt capital structure, compared to 50% in 2013. Not to mention central banks worldwide have followed suit. The UK’s pension fiasco and the real estate bubbles in Asia haven’t helped the situation, either. In fact, all signs are pointing to a repayment meltdown in Southeast Asia and India.

Stress test for the ages: Loan-loss provisions at central and ‘systematically important’ banks shot up 75% in Q3 2022 compared to a year prior, and the cracks are widening fastest with leveraged loans (like lower-tier CLOs). The real estate industry shows the greatest signs of distress. “It is very difficult to see how the default cycle will not run its course, given the level of interest rates,” said Will Nicoll, CIO of Private & Alternative Assets at M&G.

➥ THE TAKEAWAY

Fingers crossed: While some asset managers seem to be holding out hope for a soft landing at some point in 2023, the Fed has already promised more rate hikes to come. And more economists are starting to agree that ‘rolling recessions’ are likely to ravage the globe this year. When central banks already have $40B of buyout debt on their balance sheets, all those outstanding loans are looking uglier by the second.

2023 OUTLOOK

Multifamily Leaders And Lenders Are Bracing For Impact

The Year of The Rabbit is shaping up to be a mixed bag for multifamily investors. While inflation and rate increases are obviously a big concern, well-capitalized investors should still have plenty of opportunities to choose from, according to a CoStar survey.

“We anticipate a rent deceleration”: Several multifamily firms believe that last year’s outsized rent growth, combined with ongoing economic volatility and a surge in new apartment construction, will all conspire to flatten rents in 2023. But a lot depends on the labor market outlook.

“Compelling investment opportunities”: According to Adam Kaufman, co-founder and COO of NY-based ArborCrowd, multifamily investors will dry powder on the sidelines should have a smorgasborg of opportunities, especially if they have experience operating and underwriting in previous downturns.

“Still remains the darling asset class”: Alex Horn of Miami-based BridgeInvest thinks that despite eroding profits, multifamily properties are still the cream of the crop when it comes to CRE product. And while underwriting will be tighter this year, the world has always been divided between the haves and have-nots.

➥ THE TAKEAWAY

Bye-bye, business center: An underlying theme nearly all interviewees touched on was that high-quality residences aren’t enough to attract renters anymore. Modern amenities—that feature wellness spaces, coworking connectivity, and a sense of community—matter to today’s renters. Mixed-use developments that feature these amenities will have every advantage and should retain their value for years to come.

ELECTRIC DREAMS

Welcome to The New South, Home of The US EV Boom

While all of us were busy paying attention to Virginia’s data center bonanza, the US auto industry quietly pledged $33B in new EV auto factories across the South—particularly Georgia, Tennessee, and Kentucky.

EV nation: From January ‘21 to the end of November ‘22, $70B was earmarked for new EV assembly plants and battery factories mostly in the Southern US, according to the Center for Automative Research. And on an annual basis, 2022’s EV investment is up $9B from 2017’s total—and 8x higher than what was spent two decades ago in the early 2000’s.

The new lay of the land: Since its inception, the US auto industry has been based in the Great Lakes region for over a century. All that’s changing with these recent EV investments, two-thirds of which have gone to Southern states. Rivian’s (RIVN) second factory is set to open in Georgia by 2026, while Hyundai is planning a $5.5B factory in the Peach State, too.

➥ THE TAKEAWAY

All part of the bigger picture: The influx of recent EV investments isn’t unique to the US. Globally, automakers and governments are betting $526B on EVs into 2026, according to AlixPartners. Unsurprisingly, the South is looking better by the day due to its cheaper electricity costs compared to the rest of the country. For example, the average cost per kilowatt-hour in Tennessee stands at 6.89 cents, compared to 8.38 cents in Michigan.

• Get off our lawns, eh? As nice as Canadians can be, a new law effectively bans foreigners from buying homes there so that hardworking citizens can have a chance at homeownership.

• Good, old-fashioned fraud: Bloomberg covers the ongoing odyssey of Sam Bankman-Fried’s epic crypto fraud and the collapse of FTX. Magic beans are involved.

• RIP, Reichmann: Albert Reichmann, an OG of landmark real estate who helped build the World Financial Center in NYC and Canary Wharf in London, has passed away at the age of 93.

• White powder stories: Want to know what the ultra-rich do at ski resorts? These insiders share stories of private ski lifts, helicopter rides, and six-figure lunches.

• Good luck, Hochul: NY Governor Kathy Hochul narrowly won her second term in November. Now she plans to build 800K new housing units, including 500K in NYC alone, over 10 years.

• Taking no prisoners: China hasn’t been messing around with its housing crackdown. The problem is that $1.3T in defaults and delayed projects later, the prices are still too high.

• Seeing the forest and the trees: As investors swarm to corner the carbon capture market and look better to shareholders, forests have never been a hotter investment class.

• Waiting for a better deal: Yieldstreet slashes its homebuying by 90% while waiting for a ‘sharper’ price correction in homes—and its by no means alone.

• Deal of The Day: Realty Income (O) is all set to buy 185 single-tenant retail and industrial properties from CIM Real Estate Finance Trust (CMFT) for $894M.

• Streaming solutions: National Resources’ iPark arm snaps up a 28-acre Yonkers, NY campus to build production studios for a cool $53M.

• Paying it forward: Amazon (AMZN) lent out $100M across six apartment complexes in December to improve housing affordability in Nashville, TN, where it has a new ops center.

• Hard work is a virtue: Workspace Property Trust (WSPT) isn’t backing down on office spaces one bit, shelling out $170M for 1 MSF of suburban office space across six assets in five markets.

• New wine, old wineskins: A trio of savvy investors have turned an abandoned high school they bought for $100K into 31 apartments that were fully occupied in 6 months.

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It seems that many folks in the US are trading in their snowy, crowded, and pricey cities for warm and wallet-friendly states with ample opportunities for beach-going and golfing year-round.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.