Good morning. In today’s email: Experts explore the varying paths ahead for the CRE industry and where to look for opportunities. Barnes & Noble (BNED) is opening more stores than closing, indicating that large big-box retailers are back on offense. Meanwhile, Miami’s office boom continues to explode, with law firm Kirkland & Ellis inking one of the largest leases of the year in the city.

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• 📖 Read: From Ryan Serhant to Rich Barton, 2022 was a brutal year for residential brokerages. Learn how industry titans fared amidst surging interest rates, tanking stock prices, and the FTX meltdown.

• 💻 Watch:  Despite the pullback in rates, local home-builders are feeling the pain of an overextended housing market. Unfortunately, a full recovery is not expected until 2024.

• 🎧 Listen: The host of Deconstruct chats with Moody’s Senior Economist Thomas LaSalvia to figure out how much longer dry powder might sit on the sidelines.

ROLLER COASTER

Industry Leaders Share Their Predictions for CRE in 2023

CRE professionals have varying opinions about where we’re headed, but they all agree on one thing—it won’t be pleasant. Here’s what’s in store for each asset class next year.

Staying strong: Expect to see turnover in apartments as COVID-era discounts expire. As rent growth cools, the massive shortage in housing will keep rents from coming down. Industrial should remain resilient with companies adopting the “China Plus One” strategy, relying less on China by bringing other nations into their supply chain. And with brick-and-mortar sales rebounding despite a lack of new supply, expect the retail resurgence to continue.

Mixed bag: Talking heads aren’t in agreement when it comes to offices. Marx Realty CEO Craig Deitelzweig thinks office occupancy will “jump by 10%” as employees who fear layoffs show up to make a good impression. Victor Calanog, head of CRE Economics at Moody’s (MCO), thinks employees won’t feel so great about employers using the threat of layoffs to lure them back into offices. The current economic slowdown may also rein in the life sciences sector.

➥ THE TAKEAWAY

Set a timer: Following 2021’s epic bull run, a lot of deals were made at peak prices. Most of the debt financing for those blockbuster deals will come due in 2023 and 2024, when the correction is almost certainly coming. When it comes to figuring out the best timing to re-enter the market? Your guess is as good as ours.

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BIG-BOX IS BACK

Barnes & Noble Books More Stores Amid Expansion Wave

When businesses closed during the pandemic, Barnes & Noble (BNED) overhauled its inventory. And after cutting back on its square footage for years, the company is now entirely focused on expansion.

Stiff competition: In 2008, Barnes & Noble peaked at 726 locations across the country. But thanks to Amazon (AMZN) and other retailers, it’s down to just 600 locations today. Probably still better than you expected, right? BNED’s current expansion plan will focus on opening smaller bookstores in the same markets where larger locations had closed.

Getting smarter: Big-box retailers are leveraging sales- and location-tracking data to research new retail locations before signing leases. As COVID showed all of us, brick-and-mortar retail is much more resilient than we thought. Burlington (BURL), TJX (TJX), and Ross (ROST) have also announced more store openings than closings over the next few years.

➥ THE TAKEAWAY

For the vibes: According to Barnes & Noble’s CEO, James Daunt, the company will make each location “a place where shoppers will linger.” Instead of relying on their old, library-style playbook, the bookseller will start showcasing books in a maze-like orientation, creating a unique browsing experience that can’t be replicated online. And given how effective Costco’s layouts are, it might just be a great idea.

FOLLOWING SUIT

Kirkland & Ellis Latest to Join Miami’s Office Renaissance

Law firm Kirkland & Ellis just signed a lease for 115 KSF at 830 Brickell, a 640,000-square-foot Class A+ office project in Miami’s Brickell neighborhood, making it the largest new-to-market office lease that closed in Miami this year.

What slowdown? 830 Brickell is the first stand-alone office property to go vertical in Miami in over a decade. The 55-story building, developed by OKO Group and Cain International, is now fully leased, making it the first Class A+ office building in the city to be pre-leased ahead of its delivery. Notable tenants include Citadel, Microsoft (MSFT), and Thoma Bravo.

From the horse’s mouth: “This is the largest, most valuable lease, when you look at square footage coupled with the rent that we’re getting on the building,” said Brian Gale, a vice chairman at Cushman and Wakefield. “It really just shows higher demand.”

➥ THE TAKEAWAY

Greener pastures: Over the past two years, major finance & tech firms have relocated to Miami in droves for the warmer climate, lack of state income tax, business-friendly legislation, and growing tech and finance talent pool. Naturally, legal & accounting companies are also relocating to Miami Beach to serve their clients better.

📰 Editors’ Picks

• What’s next for tech: Following the closing of Fifth Wall’s $866M fund, co-founder Brendan Wallace breaks down what looks hot in proptech in 2023.

• If you insist: After months of back-and-forth, Land & Buildings Investment Management placed one of its candidates on the board of directors of Aimco (AIRC).

• Ugly numbers: According to NYC’s Independent Budget Office (IBO) the value of real estate sales could drop 15.9% from 2022 to 2023.

• Once in a lifetime: British brokerage Savills (SVLPF) predicts that 2023 could present a massive buying opportunity as income becomes the main driver of investment performance.

• Milder symptoms: Fannie Mae (FNMA) research predicts that a “moderate” recession will take place as the Fed begins interest rate cuts in mid-2023.

• Wynner winner: Casino tycoon Steve Wynn is selling $300M of personal real estate in Palm Beach, NY, and Sun Valley, ID.

• For the masses: PIMCO’s (ALIZY) newest real estate interval fund is yet another example of the continued democratization of investment opportunities. And thank goodness for that.

• Chill pill: After an unprecedented run-up over the last two years, Sun Belt apartment rents are finally starting to cool down.

🤝 Deals & Dealmakers

• Transit-oriented: A JV between CP Capital and The NRP Group will be developing White Oak Townhomes in Silver Spring, MD.

• Larger than life: Gattuso Development Partners and Vigilant Holdings landed $290M in construction financing to build Philly’s largest life science project, totaling 520 KSF.

• If you build it… A JV between Asset Management Group and Bluestem Partners landed $34M in construction financing to build a 966 KSF distribution center in Little Rock, AR.

• Money-back guarantee: RXR Acquisition Corp. (RXRA) will return $345M to shareholders after failing to meet a two-year deadline to merge with a proptech company.

• Office titan: JBG Smith (JBGS) sold an affordable housing complex in Washington, DC, for $215M to focus on development in Northern Virginia around Amazon’s second HQ.

• Tri-Star tornado: Vornado Realty Trust (VNO) sold two SoHo retail buildings for $23.5M to Tri-Star Equities.

• Working together: Alta Verde neighborhood in Breckenridge, Colorado is providing 250+ units of affordable and sustainable workforce housing on a former mine site

📈 Chart of the Day

The BLS and Cleveland Fed released a new & improved way of tracking housing inflation: the New Tenant Repeat Rent Index (NTRR). The data suggest that the worst of housing inflation is behind us and price decelerations should pass through to CPI soon.

😎 Offering-MEME-Orandum

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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.