5 Out of 6 Largest CRE Brokerages Report Q1 Losses

Good morning. The nation’s top real estate brokers brace for tough times ahead as economic challenges loom. The Federal Highway Administration has tentatively approved a plan to reduce traffic and fund public transit by charging drivers to enter Manhattan. Meanwhile, in LA, the luxury market was hyperactive in the lead-up to the “mansion tax” implementation. On April 1, the market froze.

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5 of the 6 Largest CRE Brokerages Post Losses in Q1: Executives Brace for More Tough Months Ahead

During Q1 earnings calls of the nation’s top commercial real estate brokerages, “challenging” was the buzzword. 5 out of 6 firms reported net losses due to steep declines in transactions and leasing, as well as economic uncertainty.

Slower sales transactions: In 1Q123, firms reported an average YoY revenue decline of 40–50% due to concerns regarding the stability of the banking system and other economic challenges. The volume of transactions across all property types has declined by 56%, and the leasing activity decreases as the first quarter of the year progresses. The market has observed a 56% decline in transaction volumes across all property types.

Lower transaction volumes: Lower transaction volumes are expected for the rest of the year due to higher interest rates and difficult debt markets. Colliers, based in Toronto, cut its earnings expectations for the year due to the slow recovery of capital markets transactions and real estate sales. CBRE noted a more than 43% decline in combined capital markets, property sales, and loan origination. CBRE also expects property sales to fall by almost 20% and leasing activity to decrease by “high-single digits.”

Better long-term forecast: Despite the slow pace of recovery, by the end of 2023, some brokerages, including JLL, expect to see income gains compared with 2022 via higher property management, consulting, and other fees from services not directly related to real estate sales and leasing. Cushman & Wakefield, for example, forecast a 9–10% increase in adjusted income for 2023.

➥ THE TAKEAWAY

Batten down the hatches: Brace yourself for a bumpy ride as the real estate industry faces an uncertain future after a challenging Q1. Executives are anticipating a persistently adverse market, as economic uncertainty fueled by interest rate hikes and banking crises continue to affect the industry. Despite CBRE’s optimistic outlook for market recovery, executives caution that the path to recovery may take longer than anticipated.

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🌐 Around the Web

📖 Read how transit-integrated development such as RUS Bus in Raleigh can boost the longevity of our cities.

🖥️ Watch Stanley Druckenmiller’s USC Marshall Keynote speech as he shares his thoughts on the possibility of a major economic depression in 2023.

🎧 Listen as Fannie Mae’s Chief Economist, Douglas Duncan, explains the potential pause in interest rate hikes due to bank collapses and the impact of a mild recession on the mortgage market.

📝 Download ‘The Case for U.S. Core Real Estate’, CBRE Investment Management’s latest report, which argues that U.S. core real estate remains robust as ever.

NYC ‘Congestion’ Pricing Gets OK From DC

Congestion pricing in NYC is one step closer to reality as the Federal Highway Administration tentatively approved an updated draft of a report commissioned by the Metropolitan Transportation Authority (MTA). If everything goes as planned, the tolling program could begin as soon as spring 2024.

Purpose for the pricing: Advocates, urban planners, and public officials in New York have long pushed for congestion pricing as a way to reduce traffic, combat pollution, and provide new funds for public transit. The plan would charge drivers a fee to enter the busy commercial districts of Lower Manhattan, which officials hope will help with traffic. The funds would help pay for the MTA’s infrastructure upgrades, like building subway platform barriers or more elevators.

Who doesn’t have to pay? Not everyone will have to pay for congestion pricing. Vehicles carrying people with disabilities and authorized emergency vehicles would be exempt from the tolls. And people whose primary residence is inside the district and whose annual income is less than $60,000 would be eligible for a state tax credit equal to their tolls.

Not the biggest fans: Many experts say that the plan would make getting around New York more equitable, helping those with less by levying a convenience fee on those who, at least in theory, can afford it. The tolling program’s critics include suburbanites, taxi drivers, and Lyft and Uber drivers, who worry that it could place an unfair burden on those who travel to Manhattan for work.

➥ THE TAKEAWAY

Follow the lawyers: The Federal Highway Administration’s tentative approval of the congestion pricing plan is a significant step forward for advocates, urban planners, and public officials who have long pushed for this plan. The upcoming 30-day public review will determine the fate of the plan and will be crucial to the MTA’s recommendations for toll rates, including any discounts, exemptions, and other allowances. Legal action by opponents remains a possibility.

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L.A.’s High-End Housing Market Stalls as ‘Mansion Tax’ Takes Effect

Los Angeles’ luxury real estate market is giving the cold shoulder to the new “mansion tax,” causing the funds it was supposed to generate to be left out in the cold.

Rush to sell: Prior to the implementation of Measure ULA, a recent transfer tax levied on real estate transactions ranging from $5M to $10M in Los Angeles, the high-end real estate market was experiencing a frenzy. Property sellers were enticing potential buyers with attractive incentives, such as luxury cars and other lucrative bonuses, in order to close deals before the end of March. Buyers, in turn, were rushing to finalize discounted purchases. The market was gripped by panic, as sellers sought to avoid paying the tax.

Bye bye, Bentley: On April 1, everything froze. Prices, which were discounted only until the end of March, shot back up, and luxury incentives, such as exotic cars, were no longer on the table. As a result, the market slowed down significantly, with only two sales above $5M in April.

Uncertain revenue measures: Proponents of Measure ULA estimated that it would generate approximately $900M a year in revenue for the city. However, a March report from the City Administrative Office lowered that projection significantly to $672M for July 2023 to June 2024. The mayor’s budget proposal projected an even lower revenue of $150M from Measure ULA.

➥ THE TAKEAWAY

The future of ULA: The city is walking a tightrope, needing to spend as much as possible to address housing and homelessness but avoiding having to pay back all the money generated from the tax if the courts rule it unconstitutional. In the meantime, sellers are considering creative ways to avoid the tax, like selling only stakes in the property entity; the city is creating a volunteer oversight committee to supervise spending, and the measure’s future depends on court rulings and revenue generation.

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• No, it ain’t Christmas: Christmas Tree Shops filed for Chapter 11 bankruptcy protection, looking to close about 10 stores. The company plans to restructure and continue operations despite reduced revenue.

• Signs of a strong start: Multifamily rental growth slowed to 2.1% YoY as of April, compared to 2.6% in March, with vacancy rates remaining steady and 34K units absorbed, indicating a strong start to Q2.

• Unveiling the truth: A recent study from the University of Wisconsin-Madison explains the persistently poor performance of private equity real estate.

• Thiel or no Thiel? Multi-billionaire tech investor Peter Thiel says he’ll back Florida Gov. Ron DeSantis for president, but isn’t so keen on moving from Silicon Valley to Miami.

• Bankruptcy blues: First Republic Bank was seized by the FDIC and sold to JPMorgan Chase for likely $103B in residential mortgages, $23B in multifamily loans, and $11B in other CRE obligations.

• Arts District growth: An affiliate of Jonas Woods’ real estate arm secured a loan of nearly $66.7M with the help of a MetLife entity, to purchase the 273.2 KSF, 22-floor Saint Paul Place tower in the Dallas Arts District.

• The Grain Guru: Real estate scion Stefan Soloviev talks about his grain industry passion and plans to keep his Manhattan assets, including a prestigious office building at 9 West 57th Street.

• Buckle up: CMBS issuance plunged 83% this year to $9B due to rising rates and falling property values. About $2T of debt will come due through 2024, leaving borrowers struggling to secure financing.

• From Vancouver to Sawtelle: Canadian Onni Group plans a six-story, 265 KSF residential building in Sawtelle, LA, adding 278 units to the neighborhood.

• Tale of two locations: The recent drop in the value of the dollar and rise in inflation may lead to foreign demand increasing in prime locations while higher interest rates could decrease demand and slow growth depending on the local market conditions.

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• Goldman goes to Dallas: As Goldman Sachs (GS) opens its latest offices in Dallas, Wall Street is expanding in Texas at its fastest rate since the 1980s.

• Wanda Vision: Once China’s richest man, Wang Jianlin, owner of China’s Dalian Wanda mall operator, is suffering after a string of failed IPOs and crushing real estate blunders.

• 90% discount: The 95-unit building at 234 East 46th Street, previously owned by crowdfunding firm Prodigy, traded for $69M in 2014 and was valued at $125M in 2016, but was just sold for $13M.

• Dream team: Eastdil Secured brokered over $1B in Manhattan deals last year, bolstered by its emphasis on communication across operations, according to MDs Will Silverman and Gary Phillips.

US REITs raised $14.4 billion in Q1 through secondary debt and equity offerings, a 71% increase from the preceding quarter.

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