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In today’s email: The Fed’s nonstop rate hikes are making even the hungriest multifamily buyers queasy, but fixed-rate assumable debt helps some properties look more appetizing. There’s 232M SF of unused office space nationwide available for sublease, but it’s harder than ever to find tenants who care. Meanwhile, CRE firms are cutting jobs in anticipation of an upcoming recession, but top talent is still in high demand.

🎧 Podcast of the Day: On this episode of The FORT with Chris Powers, Barrett Linburg, Founder of Savoy Equity Partners, and Chris deep dive into how opportunity zones work for LPs & GPs, the Tax implications of opportunity zones, and chat about different types of opportunity zone structures.

DEBT DEALS

The Fed raised its key rate by another 0.75 points last week, hiking short-term interest to a target range of 3.75–4.00, its highest level since January 2008. Multifamily buyers were already salivating over properties with assumable debt, but now they’re straight-up begging to sink their teeth in.

Slim pickings: Sales are hard to come by right now. Rising rates and economic uncertainty both raise the cost of capital, which drives prices up and sales down. As if that didn’t make things hard enough, banks and other lenders have gotten stingier with their financing, so investors have to get creative if they want to close a deal at all (meaning loan assumptions).

The “win” in assume: Investors like loan assumptions because their fixed-rate debt was locked in months or years ago, when interest rates were lower and better for buyers. Plus, loan assumptions let sellers avoid prepayment penalties, lockout periods, and general adult responsibilities, which makes them set the purchase price lower. In other words, it’s a win-win.

THE TAKEAWAY

Only the best: Track record matters. Since lenders prefer to originate loans with higher rates, they’re likely to force a payoff on lower-rate assumable debt unless the new buyer is an upgrade over the old borrower (read: stronger credit). And because loan assumption typically leads to lower leverage than originating a new loan, buyers need longer time horizons because they’re likely to receive lower returns and incur losses in the short term.

OFFICE MARKET

Companies Still Have Way too Much Office Space, and They Can’t Sell It

The surplus of available CRE for sublease has doubled since the beginning of the pandemic to 232M SF. But that doesn’t mean a damn thing when office market conditions are so gloomy that they can’t find any tenants willing to sign long-term leases.

No place like home: Thanks to the transition to remote and hybrid work models, analysts believe that the demand for corporate office real estate may never return to pre-pandemic levels. Not to mention that the element of uncertainty introduced by the vast employee preference for remote work makes it very hard for even the savviest buyers and sellers to figure out reasonable rates for office sales.

The next best thing: Firms with renewable leases are also opting not to renew them, as the current office bear market is in essence a tenant market. At the end of the day, most tenants don’t really need office spaces and know they don’t, which means they can always wait for a better deal. And if market conditions keep getting worse for office owners, tenants can just ditch their leases for even cheaper ones.

THE TAKEAWAY

Darkest before the dawn: Experts believe that the worst is yet to come. Once office deals made in Q2 and Q3 (before the most recent rate hikes) are completed, investment activity is likely to slow down even more. At the office market’s lowest point, we can expect to see depressed office owners and a wave of distressed property sales like the ones that lagged behind the 2008 recession by 2–3 years.

COST CUTS

CRE Brokerages are Slashing Earnings Forecasts & Jobs as Inflation Persists and Interest Rates Rise

The largest CRE brokerages are slashing earnings projections and reducing their headcounts only about three months after boasting 2022 as another record-setting year for profits and deal activity.

The bigger they are: CBRE Group (CBRE), the world’s largest CRE broker by revenue, is planning $400M in cutbacks, including layoffs. Meanwhile, JLL (JLL), the industry runner-up, reported a 20% drop in adjusted Q3 revenue alongside a 10x increase in severance payments (ouch). Other big-name players like Cushman & Wakefield (CWK) and Newmark and Colliers (NWMK) had similarly bleak outlooks.

Major shock: “What the major brokerages are experiencing is a huge shock to a major part of their businesses,” Tod Lickerman, CEO of tenant representative brokerage Cresa, told CoStar News. “These businesses have very big capital markets and leasing operations that are grinding to a halt. That forces them to go to cost cutting to be seen by the investment community as having reacted to the revenue declines.”

All eyes on inflation: These brokerages unanimously cite inflation and the Fed’s rate hiking spree as a major reason for their cost-cutting measures. Higher interest rates have rapidly cooled the housing & leasing markets and led many CRE brokerages to slash their earnings forecasts. While a recession may still come, the biggest thing driving the uncertainty in the market is the lack of clarity on what the Fed will do.

THE TAKEAWAY

The bottom line: During earnings calls last week, several brokerage executives voiced the need to balance spending cuts with the desire to keep investing in organic growth and compensation, training and support for the brokers and other producers that generate the most significant share of the company’s revenue. In short, top talent will be in high demand even in a recession because one thing no company can survive without is sales.

📰 Editors’ Picks

• What’s the White House worth? D.C.’s Office of Tax and Revenue tries to put a price on the President’s place and every other federally owned property.

• Scramble for server space: Data center demand is higher than ever. But with interest rates and construction costs on the rise, developers are struggling to supply it.

• Exxon is empty: To cut costs, the oil giant is considering leasing unused office space at its Houston campus, which is slated to become the company’s headquarters next year.

• Rolex raises rates: Citing currency inflation, the luxury watchmaker hiked the prices of its European watches for the second time this year.

• Zell’s crystal ball: Billionaire Sam Zell believes the Fed’s prior spending has produced a liquidity crisis that will lead to a recession.

• Supporting entrepreneurs: Macy’s has partnered with Momentus Capital for a $30 million loan fund that will provide capital to fuel growth at underrepresented businesses in the retail industry over the next five years.

• Expect the worst: In addition to high energy costs and inflation, an Austrian economist blames erroneous expectations of interest rates for the coming recession.

🤝 Deals & Dealmakers

• Bay Area buy: BioMed Realty, a subsidiary of Blackstone (BX) that specializes in managing life sciences properties, just purchased an 87,991 SF industrial building in San Francisco for $80 million.

• Eyeing Coney Island: The iStar REIT (STAR) has just filed plans to build a 23-story, 282-unit apartment tower next to the Coney Island Amphitheater.

• Going green for good: The Carlyle Group (CG) announced that it just invested $350M to acquire a majority stake in the renewable energy developer, Aspen Power Partners.

• Deal of the day: Virginia-based multifamily investment firm Croatan Investments bought a 291-unit apartment complex in the DC area for $81 million.

• A very welcome profit: Empire State Realty Trust (ESRT) is in talks to sell a pair of its Westchester County office buildings for 15% more than it paid nearly a decade ago.

• Bet on tech: A San Francisco investment firm is gambling on a tech rebound with its more than $193 million purchase of a Silicon Valley office building leased to Uber.

• Making a desert mall: SimonCRE has announced plans to build a new 350,000 SF shopping center in suburban Phoenix for $100M.

📈 CHART OF THE DAY

💼 JOB BOARD

The CRE Daily Hiring Block

Looking for a new role? Or need to find top talent? The CRE Daily Hiring Block is a unique alliance of real estate professionals that connects talent and employers.

• Real Estate and Development Director (Slingshot Partners)

• Daily Writer (CRE Daily)

• Investment Associate (Greysteel)

• Principal Real Property Agent (Asset Manager) (County of Riverside)

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.