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Private Equity and Their $300B Warchest Eye Opportunities in a Recovering Economy

2023 marked a pivotal year for private equity firms in real estate, as they amassed a staggering $300 billion in 'dry powder.'’ With 2024 arriving, PE giants like Blackstone (BX) are well-positioned to capitalize on a recovering economy.

The state of PE: Due to a 45% drop in property transactions compared to 2022, private equity firms are now sitting on a record amount of capital for real estate investments in the New Year. Blackstone, the king of dry powder with a $66 billion stash, epitomized this trend. Jon Gray, Blackstone's president, hinted at a potential spending spree in the company's third-quarter earnings call.

More capital on the sidelines: Erin Patterson from Manulife Investment Management highlighted that, apart from the known 'dry powder' in private equity, there's substantial capital on the sidelines due to investors' reluctance to inject new funds into firms that are not buying assets right now. However, Patterson sees a favorable investment environment in 2024 led by a clearer picture of interest rates, easing recession worries, and robust fundamentals in the commercial real estate market, with the office sector being the exception.

Investment strategies: CoStar data reveals that the largest amount of dry powder is earmarked for opportunistic investments ($139 billion), followed by value-added ($84 billion) and debt funds ($40 billion). Despite this, value-added strategies could be more promising in 2024, as higher interest rates decrease new real estate supply, particularly in U.S. apartments, warehouses, and hotels. Additionally, about 40% of floating rate loans are due to expire in the first half of 2024, presenting value-add prospects.

➥ THE TAKEAWAY

Looking ahead: The real estate market in 2024 will require time for buyers and sellers to reach a pricing consensus, with transaction volumes expected to rise in the latter half of the year. Certain sectors like multifamily and industrial properties may see quicker deals due to narrower bid-ask spreads. However, the office market remains uncertain. The higher interest rates and stringent refinancing conditions may lead to more property turnovers, creating opportunities for private equity and opportunistic investors to capitalize on distressed assets and provide rescue capital.

• Housing crisis: Cities globally, including New York, are facing a severe housing affordability crisis, pushing away skilled workers and exacerbating political divides.

• Amazon funds housing: Amazon provided a $16M loan for Housing Diversity Corporation's 271-unit affordable housing project in Seattle.

• Can’t covert: Charles Cohen plans to surrender Midtown's Tower 57 after defaulting on the lease, owing $9 million in rent and $4.2 million in taxes, due to high vacancies and low office demand.

• Wealth migration: Latin America's richest investors are moving their fortunes to Miami at an unprecedented rate, driven by regional instability and the allure of higher yields than available domestically.

• Construction financing: Pebb Capital secured a $173M loan from Monroe Capital and JPMorgan Chase for the Sundy Village mixed-use project in Delray Beach, featuring retail and office space.

• Compass compensation: Compass CEO Robert Reffkin is forgoing $25 million in stock awards for a $7 million cash bonus, as per an SEC filing. His 2024 base salary will increase to $900,000 from $400,000 in 2022.

• More legal trouble: Elie Schwartz and Nightingale Properties face a lawsuit over withholding records for a Midtown East building, with foreclosure and receiver appointment looming for 20 East 46th Street.

• Cooling down: Both multifamily and industrial sectors face challenges with decreased deal volumes and rising cap rates, despite being favored during the pandemic, as per MSCI's observations.

• Conversion projects: To tackle its housing shortage, New York City is converting commercial spaces into 5,812 residential units across 63 projects, mainly in Manhattan but also in Brooklyn, Queens, and the Bronx.

• The big unknown: As the Federal Reserve considers its 2024 interest rate policy, it faces the challenge of fostering economic recovery while managing decreasing inflationary pressures post-pandemic.

• Logistics insights: CBRE's new report emphasizes that local market conditions, rather than high interest rates or tight lending, are key indicators of real estate logistics health.

Hochul Signs Rent Bill Addressing the "Frankensteining" Loophole in New York

New York legislators are closing a loophole in state housing laws that permitted landlords to merge vacant rent-stabilized apartments and significantly increase rents, a move that has sparked anger among property owners.

What happened: The new law expands the definition of fraud in rent overcharge cases, posing a significant challenge for landlords. It especially affects combined rent-regulated units, known as "Frankenstein" apartments, leading to concerns about more overcharge claims and proving compliance without historical renovation records. Landlords fear this could financially harm the rent-stabilized market and tenants due to potential reduced revenue for building maintenance.

All in favor: Tenant advocates and the bill’s sponsors argue that this legislation clarifies the 2019 Housing Stability Tenant Protection Act. It aims to close loopholes that landlords have historically exploited to deregulate housing. The law sets strict guidelines for calculating rents for combined units, ensuring that they remain rent-stabilized and do not exceed the total of the previous individual apartments' rents. This move is seen as a critical step in preserving affordable housing and addressing the homelessness crisis.

Landlord concerns: Alongside these changes, the bill restricts landlords' ability to raise rents through substantial building renovations. A key provision gives owners a six-month window from the bill’s enactment to apply retroactively for deregulated status achieved through rehabilitation. Landlords are concerned about their ability to document past renovations, especially in cases where buildings have changed hands, arguing that this could inadvertently re-stabilize previously deregulated units.

➥ THE TAKEAWAY

A balancing act: The drive to restrict Frankensteining is part of a broader effort to reinforce rent regulation in New York. This comes amidst debates on the maximum allowable rent increase for over one million stabilized apartments. While tenant advocates view this legislation as a critical step to protect affordable housing, landlords see it as overly punitive and detrimental to the real estate market. This legislative action underlines a growing emphasis on tenant rights in New York, balancing renters' needs with property owners' interests.