Good morning. All eyes turn to the massive September CPI inflation report on tap this morning. The focus of today’s report will be on core inflation, which excludes food and energy prices, and includes staples such as rent and housing, medical care, and car prices. Economists surveyed by Bloomberg project core CPI rose to 6.5% from 6.3% over the year but moderated to 0.4% monthly from 0.6% in August.

The release is a big deal for real estate investment trusts (REITs) because of how interest-rate-sensitive most of them are. To state it plainly, if the number is higher than expected (more inflationary), then REITs are likely to continue to decline. If the number is lower than expected (less inflationary), buyers may show up again with bargain hunting in mind.

In today’s email:

😑 A Massachusetts mall shows why regional operators are in a bind

🎯 Ares Management closes its 10th U.S. CRE fund with $1.8B

🏢 Brooklyn office rents rise, and tenants dump space on market

WRITING ON THE WALL

One-Third Empty MA Mall Sells at 83% Discount

Emerald Square Mall, the only mall in North Attleborough, MA, just sold for 17% of its valuation in 2012 after defaulting on $94.5M of debt back in 2020. The deal is another sign that regional malls are sitting out a broader recovery in retail real estate.

Deal details: Kohan Retail Investment Group, which owns more than 60 malls across the country, snatched up the 1MSF, 65%-occupied Emerald Square for just $29M after anchor tenant Sears left last year. Ten years ago, the mall was valued at $167M. This explains the size of the default, which could mark the biggest loss on a CMBS loan since 2008.

Exploring options: Kohan announced it will look into significant overhauls ranging from renovations and updates, to building affordable housing, to even renting out the top floor as an industrial space for nonretail uses. However, legal hurdles can make it difficult to redevelop failing malls.

THE TAKEAWAY

Mallpocalypse: While sectors of brick-and-mortar retail have been recovering steadily since 2020, other retail sectors struggle to stay afloat due to shifting work trends. Malls were dealt a major blow by the pandemic, with only 700 left nationwide today. Back in the 1980s, over 2,500 U.S. malls dominated American social life.

DRY POWDER

Ares Management Closes $1.8B U.S. CRE Fund

NY-based global alternative asset manager Ares Management just closed its 10th U.S. real estate fund, raising nearly $2B from enthusiastic investors.

New record: With $1.8B raised towards its goal of $1.5B, Ares U.S. Real Estate Fund X LP was significantly oversubscribed, especially considering it’s 75% bigger than the last Ares RE fund. The predecessor fund raised $1.04B back in Q4 2018.

Strategic war chest: With $1.8B in dry powder, Ares is well-prepared to capitalize on value-add CRE opportunities. According to Howard Huang, CIO of Diversified U.S. Equity at Ares, Fund X will focus on buying and improving institutional-quality multifamily and industrial properties.

THE TAKEAWAY

A pattern emerges: Ares has raised a lot of money for its U.S. CRE funds. Including Fund X, three of the funds Ares closed since 2018 were oversubscribed, pointing to consistent investor appetite for value-add CRE assets before and during the pandemic. Ares also just secured $367.8M in financing for a 3MSF mid-Atlantic logistics portfolio.

GREED IS GOOD?

Brooklyn Office Rents Rise, Tenants Say “No Thanks”

After a profitable Q2, office landlords in Brooklyn raised their rents in Q3. But their tenants didn’t like that very much, so they’re dumping office space back on the market.

Signs of a slowdown: BK’s office leasing activity plummeted 30% in Q3, according to Colliers. Around 265,100 SF has been leased this quarter, down from 380,500 SF leased last quarter. Most telling, an extra 473,000 SF of office space was available by the end of Q3. And availability in Williamsburg, Greenpoint, and Dumbo is at nearly 31%.

But it’s not all bad news: Still, office landlords have plenty to be thankful about this Thanksgiving. Nearly 1M SF of office space has been leased in BK since the start of the year. Compared to the same three quarters in 2021, that’s over 40% higher. Office rents are also 7% higher than in Q3 2021, and 8% higher than the lowest point of the pandemic.

THE TAKEAWAY

As old as human civilization: Gambling, in one form or another, has been around for thousands of years. So it’s not surprising that tourists and old-timers are coming back to Vegas again. In June 2022, visitor traffic was only 7.8% below pre-pandemic levels, but up 12% compared to 2021. All signs indicate that the recovery is likely to continue.

• Follow the lawyers: Cushman & Wakefield sued two of its former star brokers who left for JLL (and took five other brokers with them) over an alleged breach of contract.

• Water World (the sequel): Two NY entrepreneurs have partnered up with a designer of well-known floating houseboats in Miami to make four new vessels for a “floating social club.”

• Future of Chicago: In case you hadn’t heard, data centers are booming in Chicago, especially near O’Hare. In fact, Chi-Town is currently the 4th largest U.S. data center market.

• Can’t live without ‘em: As political tensions drop China’s share of U.S. goods to its lowest level in 14 years, U.S. retailers looking at other countries are facing 30% price jumps.

• Decriminalized? NYC cannabis entrepreneurs are in a strange position. While marijuana and cannabis are now for sale on every corner, these “weed stores” (and trucks) are still illegal.

Deals & Dealmakers

• Proptech potential: Real estate tech startup Flueid, which uses title data and insights to help move transactions along, secured $20M in Series B funding.

• Deal of the day: One of NYC’s most famous Plaza District office towers may sell for over $2,000 per SF. It was appraised at $3.4B in 2016. Soloviev could sell it for a record-breaking price.

• Multifamily moves: Klein Enterprises bought a Largo, MD opportunity zone development site for a planned 379 Class A apartment unit project with all the modern amenities and retail.

• Don’t see it everyday: Novelis Inc., the world’s largest aluminum recycler, has broken ground on a $2.5B low-carbon recycling and rolling plant in Bay Minette, AL.

• Grand opening: After 16 years in development, Hoffman & Associates The Wharf—a $3.6B, mile-long waterfront mixed-use project in D.C.—is finally ready for its big reveal.

Leading Index for Commercial Real Estate “Rises” in September

This graph shows the Dodge Momentum Index since 2002. The index was at 183.2 in September, up from 173.4 in August.

According to Dodge, this index leads “construction spending for nonresidential buildings by a full year”. This index suggests a solid pickup in commercial real estate construction at the end of this year and into 2023.

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.