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Together with
Good morning. Nashville remains a hotspot for property investors. Brokers gear up for a sluggish Q4, with a rebound not in sight until late 2024. Capital One seeks to shed more New York real estate debt as values dip. Meanwhile, travel trends shift as Americans resume international trips, moving away from pandemic-era domestic hotels.
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Market Snapshot
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*Data as of 11/03/2023 market close.
INVESTMENT STRATEGY
Nashville Tops ULI Investment Ranking Again, Beats Phoenix
(Getty Images)
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Nashville, Tennessee, stands out as a favored city for real estate investors, claiming the top spot in the Urban Land Institute’s investment rankings for the third consecutive year.
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Rising and falling markets: The 2024 ULI report paints a complex picture of investor sentiment across the US. Cities like Nashville and Austin, while grappling with infrastructure and living cost issues, remain investor favorites due to their robust economic growth. However, even as Nashville enjoys the limelight, its mention in the ULI report has notably decreased, signaling a tempered enthusiasm. In contrast, Western markets such as Phoenix and Las Vegas are climbing the ranks, undeterred by the climatic adversities they face.
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Market shifts: The tides are turning for Florida’s real estate markets, with cities like Miami, Orlando, and Tampa-St. Petersburg slipping down the rankings, primarily affected by soaring insurance costs. On a broader scale, the industry is contending with rising interest rates and a transformative shift in office demand, leading to a cautious outlook on the future of property values and the resilience of different real estate sectors.
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The office space conundrum: The decline in demand for office spaces is reshaping urban landscapes, prompting a reevaluation of the traditional office. The evolution of technology and the adoption of remote work are diminishing the need for physical office environments. Although demand for physical offices has fallen, the ULI report indicates potential for revival through innovation. With the economic and recruitment perks of remote work, future office spaces must evolve to stay pertinent.
➥ THE TAKEAWAY
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Big picture: Nashville’s triple crown in real estate desirability speaks volumes about its economic vitality, yet it also highlights the nuanced complexities of urban growth and infrastructure pressures. The report from ULI underscores a clear message: adaptability to change and foresight in addressing emerging challenges are the keys to sustaining investment attractiveness in an era where traditional business models are being upended by technological advancement and a redefined global workforce.
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WINTER IS COMING
Top Real Estate Firms Gear Up for Prolonged Market Slump in Deal-Making
Source: CRE Analyst
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The commercial real estate sector is bracing for a “long winter” as deal-making dips, with top brokerages not expecting a thaw in activity until late 2024.
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Writing on the wall: The latest quarterly earnings reports from the top five brokerages paint a grim picture of the real estate market’s current state. While initial hopes were pinned on the second half of 2023 for a turnaround, recent assessments by JLL and others indicate a postponement to at least the second half of 2024, with their midterm financial targets pushed beyond 2025.
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State of the market: As capital markets lag, a notable trend of corporate downsizing continues, says Robert Shibuya of Mohr Partners. He predicts more pronounced declines to surface by the fourth quarter as transaction data lags, mirroring a broader contraction among Fortune 500 company spaces.
➥ THE TAKEAWAY
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Surviving the cold: Despite the current downturn, there’s cautious optimism for eventual recovery. The consensus is that while property values may drop further, mirroring a major recession scenario, this period also sets the stage for a potential increase in activity post-2024. Industry experts recognize the ongoing struggle but remain hopeful for a market spring after the winter chill subsides.
DEBT PORTFOLIO DISPOSITION
Capital One Intensifies Sale of NYC Commercial Property Loans Amid Market Downturn
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Capital One Financial Corp. is looking to offload more of its commercial real estate debt in New York amid declining property values.
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Debt on sale: Capital One is selling off close to $200 million in real estate debt, with JLL leading the sales. The package includes a $120 million defaulted loan on NoMad district office buildings and a $71 million bundle of performing loans associated with mixed-use buildings in Manhattan. These loans, backed by properties with strong occupancy, are being marketed to investors at an attractive discount.
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Between the lines: With commercial property values sagging and the cost of capital on the rise, Capital One is not alone in its bid to recalibrate its portfolio. The banking sector, by and large, is taking a more circumspect stance given the post-pandemic maturation of loans—a trend underscored by leading firms like Blackstone and Brookfield, which have been strategically divesting some assets.
➥ THE TAKEAWAY
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Why it matters: The commercial real estate market is under pressure, with a significant downturn in property values, including a 16% price decline reported by Green Street. As Covid-19-related loan extensions expire, the risk of defaults is rising. In response to these risks, Capital One is selling off real estate loans, mirroring its previous sale to Fortress Investment Group and reflecting a broader trend among lenders who are shedding property debt at discounted rates to navigate the market’s instability.
QUICK HITS
📖 READ: The CRE sector faces a harsh reality check as interest rates soar and over-leveraged syndicators struggle to refinance, signaling a period of distress and a reshuffling of capital sources in the industry.
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TRAVEL + LEISURE
Americans’ Summer Trips Abroad Reshaped Demand For Hotel Giants
Source: Unsplash/Illiya Vjestica
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This past summer marked a notable pivot in American travel habits, with a resurgence in overseas trips after a period dominated by domestic getaways due to the pandemic. This shift has sent waves through the hospitality sector, impacting the earnings of leading hotel chains and REITs.
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Growth going global: Hotel chains like Marriott and Hilton enjoyed significant revenue growth as their international properties benefited from increased travel by Americans to global destinations. Their earnings reflected a positive turnaround with strong occupancy rates and revenue growth in regions that were once quiet during the pandemic.
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Struggle for domestic-focused REITs: In contrast, real estate investment trusts (REITs) focused on domestic U.S. properties faced challenges, as evident from declining revenues in resort locations. This decline reflects a recalibration of travel interests and highlights the competitive disadvantage for U.S.-only portfolios amidst a broader global travel recovery.
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Pockets of resilience: While U.S. resorts have seen softer demand, urban hotels have enjoyed a resurgence thanks to major events and concerts. For instance, RLJ Lodging Trust’s city-based hotels saw revenue per available room (RevPAR) rise by 3.4%, peaking at 6.9% in September.
➥ THE TAKEAWAY
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Zoom out: The shift towards international travel marks a critical juncture for the hospitality sector. Global hotel brands are thriving due to this rise in overseas adventure among Americans, while domestic real estate investment trusts must pivot to meet new consumer tastes. The travel industry’s inherent appeal hints at a bright future for those who can adeptly adjust to these changes.
📈 CHART OF THE DAY
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