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Property Fundraising Slumped 71% in Q3 With Rate Risk On the Rise

Property markets globally are facing challenges as increased interest rates deter investor risk appetites, causing a significant slump in real estate fundraising.

Insufficient funds: In the third quarter, private real estate fundraising experienced a sharp decline, with only $18.2 billion raised by 61 funds, marking a 71% drop from the second quarter’s $63.4 billion from 117 funds. This slowdown, as reported by Preqin, is attributed to the ongoing cycle of interest rate hikes, leading to the least number of fund closures.

Global market trends: Property valuations, especially for office spaces influenced by the remote work trend, have decreased due to these interest rate hikes by central banks. There’s a notable shift in investment patterns too. While North America-focused funds dominated global fundraising, their share dropped from 81% to 70% within a quarter. Meanwhile, the Asia-Pacific region, especially Japan with its lower borrowing costs, saw its share rise to 24%. Europe and other regions collectively contributed to a mere 6% of total capital in Q3.

➥ THE TAKEAWAY

Zoom out: The uncertainty surrounding interest rates casts a shadow on the real estate fundraising landscape. As Preqin suggests, while there may be an exploration of properties or markets offering surer returns, the overall sentiment for real estate investment in the upcoming quarters is expected to remain muted. The global landscape, at least in the near future, is anticipated to be characterized by caution and limited deal-making.

• Watch wars: Rolex stirs up a rivalry by purchasing Omega’s flagship store, ensuring the competitor pays them rent.

• Billionaire’s debt: Charles Cohen is struggling with over $635M in delinquent debt on multiple properties, including Crystal Pavilion at 805 Third Avenue.

• Yankee Doodle Dandy: A collectibles company is selling ownership shares of Mickey Mantle’s childhood home for $7, attracting Yankee fans seeking a piece of history.

• Default disaster: TA Partners defaults on $200M in loans for Irvine apartment projects, just two years after financing was secured.

• China ascendant: HSBC’s CEO declares China’s real estate crisis a thing of the past, citing successful government interventions and a bottomed-out sector ready for recovery.

• Rejected acquisition: Whitestone REIT (WSR), which owns open-air shopping centers, declined an acquisition attempt by Fortress Investment Group, which manages $44.7B in assets.

• Legal setback: CEO Nate Paul’s lawsuit against Karlin Real Estate and Pennybacker Capital over foreclosure sales of World Class Holdings’ properties has been dismissed by a judge.

• Indoor air revolution: Neglected until COVID, indoor air quality is vital for public health. Proper ventilation and filtration can prevent the spread of respiratory infections and improve well-being.

• Trade war impact: Moody’s examines the impact of the ongoing, international trade war on the US industrial sector.

• Dallas dominates: Dallas has an edge over Phoenix in office performance, with a stronger population and job growth, more Fortune 100 HQs, and higher market value, according to JLL.

• Peaks and troughs: Apartment construction is peaking, with some metros enjoying blistering growth (Austin and Raleigh) while others face challenges (Huntsville, Colorado Springs).

RXR Modifies $1.2B Loan With $200M Equity Injection

Scott Rechler’s RXR Realty has successfully renegotiated terms on its largest loan, which could offer a roadmap for other borrowers navigating the tricky office refinancing landscape.

By the numbers: RXR has modified its $1.2 billion loan for the 1285 Sixth Avenue property, a 1.8 million-square-foot tower near Rockefeller Center, in agreement with lenders Morgan Stanley and AIG. To facilitate the deal, RXR added $220 million in equity to reduce the loan balance to $980 million. The initial interest rate of roughly 4% was raised to 6%, while the debt’s tenure was extended by five years.

Shifting tone: Rechler had earlier alarmed the industry with hints of RXR parting from office assets that couldn’t be refinanced. However, Michael Maturo, RXR’s president, highlighted that fully leased assets like 1285 Sixth Avenue exemplify the kind of properties RXR is committed to maintaining. The company’s trust in the building’s strong cash flow played a pivotal role in the lenders’ decision to modify the loan.

Historical context: In 2016, RXR, David Werner and China Life Insurance Company, secured the original loan when they acquired the 42-story tower for $1.7 billion. The loan reached its maturity in March, after which a brief extension was granted for continued discussions. The primary tenant of the building is UBS, which recently acquired Credit Suisse. UBS’s future space requirements in the RXR building remain uncertain, though its current lease extends until 2032.

➥ THE TAKEAWAY

Refinancing challenges: In a proactive move to navigate the refinancing landscape, RXR Realty has successfully renegotiated its $1.2B loan for the 1285 Sixth Ave. property. By injecting substantial cash and securing extended terms, this move highlights the strategic flexibility required of property owners navigating expiring debts, especially as a significant percentage of office CMBS loans remain unpaid upon maturity. RXR’s approach may serve as a benchmark for other real estate entities in similar predicaments.

Healthpeak and Realty Income Ink Mega Deals Totaling $7.9 Billion to Acquire Rival REITs

On Monday, the struggling REIT sector was abuzz with the revelation of two multi-billion dollar merger deals totaling $7.9B.

Healthpeak’s acquisition: Healthpeak, which focuses on labs and outpatient medical facilities, will purchase Physicians Realty Trust (DOC) for about $2.6B in stock. The deal will allow Healthpeak to broaden its relationships and establish a larger presence in the medical property space.

Realty Income’s acquisition: Realty Income, a retail property owner, will acquire Spirit Realty Capital Inc. (SRC) for roughly $5.3B. This move will help Realty Income reduce its reliance on specific rent sources and expand its portfolio in industries with proven cash flows. As they say, the bigger the better.

Market reactions: Amidst challenges in the real estate sector caused by increased borrowing costs impacting property values, both Healthpeak and Realty Income’s stocks have not performed well, falling over 20% against the S&P 500 Index this year. After the announcement, Healthpeak’s share price dipped to $16.02, whereas Physicians Realty Trust enjoyed an uptick to $11.45. Conversely, Realty Income decreased to $47, and Spirit’s stock rose to $35.43.

➥ THE TAKEAWAY

Growth strategies: The billion-dollar deals made by Healthpeak and Realty Income reflect their ambitions to expand and diversify their real estate investments. These acquisitions will allow both companies to create transformative scale, establish competitive advantages, and better serve the needs of their tenants.

The single-family rental market is thriving due to high home prices and mortgage rates. The top 10 markets for single-family rentals offer high gross yields (up to 11.71% in Rochester, NY) and limited institutional presence.