KKR’s Optimistic Forecast for CRE Transactions in 2024
Regional banks scale back lending, private investors are filling the gaps.
Jordan B. & Han-Gwon Lung
February 23, 2024
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Good morning. Private equity giant KKR expects an uptick in real estate transactions from cash-flush investors. Meanwhile, Related Companies proposes a massive casino project at Hudson Yards in NYC.
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Market Snapshot
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*Data as of 2/22/2024 market close.
CRE FINANCING
KKR’s CRE Deal Pipeline Heats Up Amid ‘Year of Transactions’
A photo illustration of KKR’s Matt Salem
Private equity behemoth KKR & Co. Inc. (KKR) anticipates a significant uptick in CRE financing this year, driven by cash-abundant investors looking to capitalize on a growing pipeline of opportunities.
Trending: The PE firm projects a nearly 30% increase in commercial mortgage-backed securities (CMBS) issuance this year compared to 2023. This uptick coincides as regional banks scale back lending, and private investors like KKR and Brookfield (BN) are stepping in to fill the void. Matt Salem, KKR’s head of real estate credit, noted the firm’s real estate credit pipeline has expanded significantly, reaching $15 billion, up from the previous $10-12 billion.
Filling the gap: Despite a slow start in the first half of last year, KKR is now actively pursuing deals, with multiple transactions being presented to their equity investment committee weekly. This change in pace is driven by the drop in CRE valuations, which fell by an average of 42% last year, presenting attractive investment opportunities.
➥ THE TAKEAWAY
Filling the gap: Despite KKR-led private investment, the decline in regional bank lending in CRE could create a $500B+ gap. This shortfall may not be fully covered by private capital or traditional institutions, potentially leaving CMBS and debt funds to bridge the deficit.
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✍️ Editor’s Picks
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Sky-high gambit: Related Companies doubles down again on Hudson Yards with a $12B Hudson Yards project that includes a 2.7MSF casino, three towers, and 1.5K apartments.
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7-Day Multifamily: Skip the costly mistakes and develop the fundamental skills you need to start, build, and scale your multifamily business…without spending thousands on coaching or conferences. (sponsored)
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Mapping reality: Restrictive zoning codes nationwide choke housing supply and contribute to segregation, but a new study by Princeton aims to illuminate an opaque system.
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Powering up: Sandbrook Capital invested $460M in rPlus Energies, accelerating renewable energy projects and expanding capacity across the country.
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Tax-free T-bill: BOXX ETF (BZX) cleverly avoids income taxes on US Treasuries, saving investors up to 37% by exploiting a new loophole.
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Fallen from grace: Former HFZ exec Nir Meir’s bail is set at $5M in cash. He currently faces charges of diverting $60M from HFZ projects.
🏘️ MULTIFAMILY
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Student housing soars: Student housing pre-leasing surged 7.1% in January, with buildings under construction hitting a record high of 54.5%.
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Protections fading: The end of pandemic eviction protections in Southern California is reducing bad debt for apartment landlords.
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Vouchers denied: Boston landlords and brokers were sued for denying vouchers and perpetuating discrimination in the largest fair housing lawsuit in Massachusetts.
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Urban oasis: Tishbees was recently approved to build an 11-story hotel and apartment complex near the LA Convention Center that will also include a 100-room inn and 48 market-rate units.
🏭 Industrial
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Data center dream: Aligned Data Centers is replacing four office buildings with two data centers in Elk Grove Village, costing $285M.
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Developer ventures: Chicago-based CA Ventures relinquishes its stake in Centris to NY firms after raising $350M, impacting management and future development.
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Sustainable revolution: Ascend Elements raised $162M, totaling $704M in funding for a $1B Kentucky facility producing EV battery materials.
🏬 RETAIL
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Discount domination: Several discount grocery chains race to expand in the Southeast, while Grocery Outlet (GO) buys United Grocery Outlet for $62M.
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Rising up: Sand Hill Property Co.’s 6.5MSF Rise project in Cupertino includes 2MSF of offices, 226.4KSF of retail, and 2.67KSF of residential units.
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Retail rebirth: DRA Advisors and KPR Centers secure $55M financing for Quartermaster Plaza, a 456.2KSF shopping center in Philadelphia.
🏢 OFFICE
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Googling in style: Google (GOOGL) opened a 1.3MSF office at St. John’s Terminal, designed by CookFox Architects & Gensler.
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Santander soars: Approval for Banco Santander’s 40-story 1.5MSF office tower in Brickell has been received, replacing the existing building.
BLUE CHIP
Related Cos.’ Ambitious $12B Casino Project in Hudson Yards
A photo illustration of Related Companies’ Jeff Blau along with a rendering of Western Rail Yards at Hudson Yards (Getty, NYC Planning)
Related Companies unveiled ambitious plans for a $12B casino project in Hudson Yards, filing proposals with the NYC City Planning Department for a three-tower development. The project is one of the final contenders for a downstate gaming license in New York State.
The Three Towers: Related’s project would feature three skyscrapers built on a platform over the Western Rail Yards and spanning a 13-acre stretch between West 30th and West 33rd Street along the Hudson River. The development includes a residential component with over 1.5K apartments, a resort hotel, 2MSF of office space, a public school, daycare, and the crown jewel.
A rendering of Western Rail Yards at Hudson Yards (NYC Planning)
The Eye of Wynn: The ‘main’ tower will be a 2.7MSF casino tower developed in partnership with Wynn Resorts (WYNN). The proposed casino will soar 80 stories and reach a height of 1.2K feet, accommodating a 1.75K-key hotel, ballroom, conference space, retail outlets, and restaurants across five floors at the bottom.
Community design: Within the three-tower ensemble, six acres of public space are planned, enhancing the community-friendly aspect of the project. The proposal includes a 750-seat school within the 1.4K-foot-tall tower on the southeast corner, alongside 1,507 housing units (with 324 designated as affordable). This design ensures a blend of commercial, residential, and public-use facilities.
Approval challenges: Related faces obstacles to city approval due to the project’s density surpassing the parameters set by the 2009 rezoning. The proposal’s fate hinges on securing a downstate gaming license. State representatives have expressed skepticism about introducing a casino to the region, complicating the approval process.
➥ THE TAKEAWAY
Local concerns: Related intends to submit a community benefits agreement as part of the full application, emphasizing collaboration with the local community. State Sen. Brad Hoylman-Sigal and Assembly member Tony Simone remain wary of the development, urging caution and a thoughtful approach to the potential impact on Hudson Yards and its residents.
📈 CHART OF THE DAY
In 12 U.S. markets, Class C rents are experiencing a notable decline, dropping by at least 6% year-over-year. The underlying factor driving this trend across all these markets? An excess of supply. Each of these regions is witnessing a supply expansion rate that surpasses the U.S. average, creating a market environment where the availability of rental units outstrips demand.
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