CBRE: 2023 Investment Activity Outlook

Good morning. The insurance industry is struggling to adapt to a new reality in which losses fueled by climate change are now regularly exceeding $100 billion a year. Apartment owners in Los Angeles are eager to sell their properties, but the offers they are receiving are not meeting their expectations.

Meanwhile, more than half of investors in a new CBRE survey expect to buy fewer assets in 2023 due to rising interest rates, potential recession, and limited credit. Let’s dive in!

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Extreme Weather Caused Insured Losses of $120B in 2022

As climate-related disasters rise in frequency, insurers are scrambling to adjust to a reality where yearly losses can be more than $100B, with insured losses exceeding $120B in 2022 alone, according to Bloomberg.

Rising tides don’t lift all boats: According to climate scientists at Munich Re, prior to Hurricane Katrina’s devastation of New Orleans in 2005, insured losses never surpassed a yearly $50B when adjusted for inflation. With $120B in 2022 losses, insurers face growing challenges due to inflation and high market volatility. Naturally, investors in the $35B market for catastrophe bonds want higher premiums to cover issuers against climate chaos.

It’s a small, dangerous world: The disaster insurance blowup has been felt the world over, with nearly every region of the globe experiencing some sort of disaster. The report from Munich Re emphasizes that uninsured losses are significantly higher than those covered by insurers. And since insurance typically covers the developed world, regions in Africa and Asia face the toughest climate disaster challenges. Overall, worldwide climate disasters cost up to $270B in 2022, when counting uninsured incidents.

➥ THE TAKEAWAY

We’re in this together: It’s clear that insurers cannot carry the weight of climate catastrophe on their own, so the world’s governments are stepping in. At the COP27 climate summit, participating countries agreed to create a global fund to help developing nations secure commitment from developed countries. This initiative could help relieve pressure on insurers while acting as an investment in an increasingly international future.

THE BIG CHILL

LA Multifamily Owners Aren’t Getting The Offers They Want

While rents rise and vacancies drop in LA, high interest rates and a looming tax on real estate transactions have chilled the multifamily market. The freeze might persist well into 2023, too.

Death and taxes: In November 2022, California voters approved Measure ULA, which added a 4% tax on real estate transfers over $5M and 5.5% on transfers over $10M. The measure went into effect on January 1st this year but will not apply to transactions until April 1st. This window has led many sellers to rush into the market in an effort to beat the clock. Many CA properties earmarked for 2023 will likely be pushed to market in Q1.

Agree to disagree: The problem is that with rates the way they are, buyers are expecting great deals despite knowing that owners are in a compromising position. All the while, sellers expect to get what their properties are worth, resulting in an impasse. Multifamily sales volume was down 12.2% YoY in Q3 (falling 33% from Q2), and it’s unclear how the Measure ULA tax will affect these numbers.

➥ THE TAKEAWAY

Common ground: Some owners have found a way to navigate the taxing situation by selling to nonprofits. Under the new law, sales to nonprofits, government entities, and housing organizations are exempt. Meanwhile, noninstitutional buyers have become far pickier, skewing towards relationship-based debt.

TRENDS

CBRE Predicts a Decline in Investment Activity for 2023

After years of easy money and low interest rates greasing the wheels of the property market, a recent survey conducted by CBRE suggests that investors will have no choice but to make fewer deals this year.

The numbers: Investors who participated in the CBRE’s 2023 Investor Intentions Survey said they plan to buy fewer assets than in 2023. Close to 50% of participants said they would decrease their spending by more than 10%, with only 15% planning to purchase more than last year. MSCI Real Assets reported that investment sales dropped to $42.8B in October 2022, marking the third straight month of YoY declines.

Deal or no deal? High interest rates and the widening bid-ask disparity between buyers and sellers are the two major culprits behind the market slowdown. Many buyers expect to see pricing discounts of up to 30%, with the deepest discounts probably going to malls and offices. All the while, multifamily and industrial/logistics facilities are expected to be the most sought-after CRE in 2023.

Investment strategy: 70% of surveyed investors don’t plan to change their fund allocations this year, and mostly anticipate investing in high-performing markets such as Dallas-Fort Worth, Austin, Miami, Los Angeles and Nashville.

➥ THE TAKEAWAY

Light at the end of the tunnel: The first half of 2023 may see a decline in investment volume, according to CBRE, but the outlook for the second half of the year is more positive. There is an expectation of increased activity, as interest rates are expected to decrease and economic conditions stabilize. Investors also plan to adopt opportunistic debt strategies despite tighter lending conditions.

• Getting back to work: The Dodge Momentum Index (DMI) improved by +6.6% in December, buoyed by increases in office, warehouse, retail, and hotel planning.

• Survival of the fittest: While Silicon Valley experiences its latest series of shakeups, leaders from proptech firms that have weathered the storm share insights into their success.

• Locals only, please: Seeing Justin Trudeau’s decision to ban foreign investment in Canadian real estate, Florida Governor Ron DeSantis moves to follow suit (of course he would).

• Out of the dog house: A potential FTC ban on noncompete clauses could have a snowball effect in CRE, where the clauses are used to corral top earners.

• Caffeine withdrawal: Once a Big Apple success story, the city’s various coffee chains have been hit hard since the pandemic began. A drop in commuters and workers could be to blame.

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• Moving house: The LA Chargers are putting their headquarters up for sublease while they start moving into El Segundo, CA.

• Added to the collection: A JV between Fairstead and InverVest Capital Partners just purchased a 210-townhome community for $90M.

• Room with a view: The 16-story Oil & Gas building in Dallas-Fort Worth has been purchased by Bluelofts Inc. with the intention of converting it into apartments and retail.

• Wheeling and dealing: Billionaires Vlad Doronin and Len Blavatnik secured a $242.4M loan to develop the oceanfront Aman Miami Beach, putting total financing over $277M.

• Changing hands: CDC Houston has purchased 2 Houston-area office assets from Patrinely Group and USAA Real Estate and plans to develop them as part of the 2,000-acre City Place project.

• Refinance acquired: Metropolitan Realty Associates, along with Angelo Gordon, obtained a $31.9M refi loan for three industrial properties in Suffolk County, Long Island.

Natural-gas prices have dropped around the world. But in California, the cost of heating and energy remains sky-high, threatening big bills for households and businesses.

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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.