Good morning CRE Daily nation. Hope you all had a wonderful Thanksgiving and managed to avoid being scheduled on one of the 4,200 flights that were delayed over the weekend. We’ve got a lot to catch you up on today, so let’s dive right in.

In today’s email: Opportunity zones have received record-breaking investments this year, despite fewer benefits since 2021 and looming recession concerns. Home prices are currently in an unsteady equilibrium as low supply matches low demand, but prices are likely to tumble in the new year. Meanwhile, grocers and restaurants are fighting for consumer confidence—and the little money they’re willing to spend.

🎧 Podcast of the Day: The co-founder of Healey Weatherholtz Properties talks about all the jobs he’s had on his way to the top, from framing laborer, apprentice electrician, leasing agent, property manager, and construction manager to financial analyst and investment manager. (The FORT with Chris Powers)

TAX REFORM

With a little over a month left, 2022 is projected to be a record-breaking year for investment in opportunity zones, despite stalled reform efforts, economic headwinds and its expiration, which is still scheduled for the end of 2026.

Bumper year: OZs attracted nearly $10B in 2022 alone, and have soaked up around $100B since they were first rolled out in 2017. Most of the money went to residential and commercial real estate, with each category claiming a $20B slice of the overall OZ pie. The record-breaking investment came despite OZs presenting fewer investor benefits since the end of 2021.

Storm’s a-brewin’: In the short term, as the economy slides and debt and equity financing become less available, investment in OZs is likely to fall. It also doesn’t help that residential and commercial real estate construction has slowed down. Although plenty of sites are still getting bought up, fewer projects are being developed.

THE TAKEAWAY

Down the line: Just when and how OZ investment recovers depends on whether Congress will pass a reform of the 2017 bill that created the program in the first place. If they extend the program’s end date from 2026 to 2028, the canceled 2021 benefits will be back, reducing OZ tax burden by 15%. And if that happens? Expect investors to make it rain.

HOUSING MARKET

Home Prices Look Like They’re Getting Ready to Drop in the New Year Thanks to Rising Inventory

Over the past 10 months, mortgage rates surged from 3–7%, marking a 20-year high. So far an unusually low supply of homes has matched low demand, keeping the market at equilibrium. But if borrowing costs don’t go down, prices probably will, especially when the market gets its seasonal surge of listings in the new year.

Too soon to tell: Sellers generally put homes on the market in the winter because they believe spring’s the best time to sell. The typical reasoning: homes look best in the spring, and families with kids want to have deals closed by summer before school starts in the fall. Not to mention nobody wants to move when it’s cold outside.

Cold hard truths: All signs point to an upcoming surge in home supply. While some would-be sellers will wait out the winter and hold onto their less than 3% mortgages, many will be forced to put their homes on the market—whether they’re seniors who need to move, families that need bigger houses, or workers relocating due to layoffs or new employment.

THE TAKEAWAY

Fasten your seatbelts: The listings are coming, so what really matters is what mortgage rates will be when they arrive. If inflation levels off and markets make good predictions (like, perfect predictions), Treasury bonds could surge, causing rates to drop. In most cases, however, it looks like home prices will fall over the next six months.

FOOD FIGHT

Restaurants, Grocery Stores Battle Over Consumers’ Stretched Dollars

As rampant inflation continues, restaurants and grocery stores find themselves fighting over smaller pieces of the consumer purchasing power pie.

Top shelf: Inflation has driven up grocery store prices faster than restaurants have hiked their menu items, with grocers seeing 12.4% YoY price growth compared to an 8.6% uptick for restaurants. Some major restaurant chains are trying to win over customers with better deals, like Papa Johns’ offer of two full meals for $6.99 each.

Top dollar: An average restaurant meal is still 3.4 times as expensive as preparing food at home with groceries. Eating out costs so much more than cooking that customers are more ticked off by restaurant price hikes—even though they’re objectively lower than the jacked-up prices we’re all paying for our groceries. Unsurprisingly, transaction volumes at restaurants have plummeted for eight straight months.

THE TAKEAWAY

The bitter pill: Major restaurants expect to raise prices further as labor, food, and ingredient costs are all projected to soar. Since customers are already more money-conscious at restaurants because they think of eating out as a luxury, further price hikes will probably cancel out any gains restaurants hope to make over their grocery store rivals. Just the check, thanks.

📰 Editors’ Picks

• Sayonara, supermarkets: The proposed $24.6B merger between supermarket giants Kroger (KR) and Albertsons could result in hundreds of closures and hit California hard.

• Special servicing: Following three consecutive monthly declines, the CMBS delinquency rate increased four basis points in October to 2.96%.

• Mini Macys: Macy’s (M) turns to e-commerce by converting about 1M sq. ft. of space at 35 stores into miniature distribution centers to stay relevant—for now.

• Cold out here: A looming recession and continued Fed rate hikes have widened the bid-ask spread in the commercial real estate sector, but there are still opportunities.

• Just looking: Thanks to cooling Covid fears, Black Friday foot traffic was higher than it’s been in recent years—but sales, perhaps unsurprisingly, weren’t.

• Bitcoin ballers: As crypto continues to tank in the wake of FTX’s shocking bankruptcy, Miami nightclubs mourn the loss of some of their top customers.

• Carpetbaggers: AllianceBernstein relocated 1,000 jobs from NYC to Nashville in order to save $80M, with mixed results.

🤝 Deals & Dealmakers

• Green for Goldstar: Acres Capital Corp. loaned The Goldstar Group $83.7M to build an apartment complex in Frederick, MD.

• Multifamily moves: Meyer Orbach and Josh Gotlib closed on another $850 million of apartment buildings developed by the late Sheldon Solow.

• Mr. Blatstein’s neighborhood: Bart Blatstein and Post Brothers have proposed a 10,000-unit residential development in Atlantic City that would cost $3B.

• Warehouse windfall: LACERA sold Medley Commerce Center, a 1 MSF warehouse complex in Southern Florida, to TA Realty for $241M.

• Even more Meta: Meta (META) has added to its Henrico County holdings with a 475-acre plot that it hopes to build two data centers for $35.3M.

• Storage secured: Greysteel raised $2.7M in a joint venture with Starr Equity to build Stor 4 Now, a self-storage complex in Longview, TX.

• Crown jewel: Jacob Arabo of Jacob & Co. has partnered with Binghatti to build the tallest residential building in the world, a Dubai “hypertower.”

• Brookfield’s Big Bucks: Brookfield (BAM) just sold a Nashville high-rise to Northwood Investors for $715M, closing the biggest commercial property deal in Nashville’s history.

📈 CHART OF THE DAY

2023 headline: “Blackstone buys [?]”

Blackstone: Most REIT acquisitions in history ($245B in today’s dollars) and $60 billion of dry powder for real estate.

REITs: 22 REITs currently trade at $60B (collectively), about a 50% discount to NAV.

Conclusion: Blackstone could theoretically buy 22 REITs at a 50% discount.

ICYMI

What happened last week…

• Atlanta’s Data Center Market is Booming But Running Out of Room

• Kushner Secures Fortress Loan For Hostile Takeover

• Investor Home Purchases Flop 30% In Q3

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.