Correction: The subject line in today’s email was incorrect. Walgreens Boots Alliance is leading the acquisition, not Walmart. 

Good morning. in today’s email: Commercial property prices are taking double-digit hits as the Fed continues to battle 40-year high inflation. Insurers are locked in negotiations with reinsurers who want to raise their rates ahead of climate change concerns and increasing natural disasters across the globe. Meanwhile, the second-largest pharmacy store chain in the country makes a major commercial real estate play with an $8.9B acquisition.

🎧 Podcast of the Day: 

DOWN GOES CRE

According to the Green Street Commercial Property Price Index, commercial property prices tanked 13% from their peak in May, taking a 7.3% hit in October.

Taking hits on the chin: Multiple CRE sectors are suffering double-digit losses, including apartments, offices, healthcare facilities, and strip malls. Industrial properties fell by 17%, second only to shopping malls, which are down 24%.

Still dodging and weaving: A few sectors have proven more resilient than others amid the price declines. Hospitality is staying strong, only experiencing a 6% price drop since the sector’s peak in May 2022. Self-storage is in the same boat, with prices down 6% as well.

THE TAKEAWAY

The ongoing war against inflation: Last week, the Fed hiked the key federal funds rate by 75 basis points to battle 40-year high inflation. It was the sixth rate increase this year, and it raised short-term borrowing rates to their highest levels since the Great Recession. “As large as the decline in pricing has been, I don’t think we’re out of the woods,” said Peter Rothemund, co-head of strategic research at Green Street.

HURRICANE RELIEF

Insurers Could Face Steep Reinsurance Rate Hikes up to 30%

Another storm may be on the horizon before the end of the hurricane season as insurers enter negotiations with reinsurers, who are trying to raise their rates by 10% to 30%.

Why raise the rates? Almost two-thirds of US property-catastrophe coverage renews on January 1st of next year, sparking a new round of negotiations between insurers and reinsurers. Reinsurers want to raise their rates to make up for growing losses from natural disasters like Hurricane Ian, which is estimated to cost insurers upwards of $70B.

Reinsurers to the rescue: Large national insurance carriers, including Florida-specific ones, rely on global reinsurers like Munich Re, Swiss Re (SREN), and Berkshire Hathaway Inc. (BRK.B) to shoulder some of the risks in the policies they sell. For example, home insurer Allstate Corp. (ALL) suffered $671M in gross losses from Hurricane Ian, but reinsurance decreased the loss to $305M.

THE TAKEAWAY

The perfect storm: Allstate CEO Thomas Wilson said that the rate increases being sought by reinsurers stem from recent catastrophe losses, concerns about climate change, and the dollar’s recent strength against foreign currencies. Rising interest rates are also hurting reinsurers, which operate on a global scale. From Hurricane Ian to severe heat waves in Europe, reinsurers have had a tough 2022.

HEALTHCARE M&A

Walgreens’ $8.9B VillageMD Deal for CityMD to Further Shift America’s Healthcare Real Estate

As more pharmacies seek to expand into commercial real estate, Walgreens’ (WBA) VillageMD acquired Summit Health, the parent company of the urgent-care chain CityMD, for $8.9B.

Coast-to-coast: Together, VillageMD and Summit Health would own and operate 680 locations in 26 different regional markets, from Oregon to the Northeast. CityMD currently has 370 urgent care sites in New York, New Jersey, Connecticut, Pennsylvania, and Oregon. Walgreens will have a controlling stake in VillageMD, alongside a subsidiary of the health insurer Cigna (CI).

An old playbook: Walgreens isn’t the only healthcare company interested in expanding its portfolio of services and real estate through M&A. In September, CVS Health (CVS) announced its deal to acquire Signify Healthcare (SGFY) for $8B. And Amazon (AMZN) reported that it was purchasing 1Lifecare Health (ONEM) for $4B earlier this summer.

THE TAKEAWAY

Win-win scenario: Walgreens will remain the largest shareholder of VillageMD with 53% ownership. Neil Saunders, managing director at GlobalData, believes that the deal makes sense for both the buyer and seller. Walgreens helps Summit Health reduce its costs, while Summit Health helps VillageMD expand into the East Coast.

📰 Editors’ Picks

• REITs break losing streak: After three straight months of losses, with total returns down more than 25%, publicly-traded REITs reported gains in October.

• Cost of living skyrockets: Rent-to-income ratios are rising to 40%, squeezing renters’ paychecks and raising serious concerns over housing affordability.

• Zelle’s tax loophole: Small business owners are using Zelle as a tax loophole since Zelle says it doesn’t have to disclose transactions to the IRS, but its users are still liable.

• Back to normal: The “frenzied pace” of logistics leasing that has taken place over recent years is set to normalize in 2023 according to Prologis’ (PLD) research reports.

• Amazon’s EV fleet: Amazon has released 1,000 electric delivery vans onto the streets across 100 cities in the U.S. and plans to grow the fleet to 100K electric vehicles by 2030.

• Fortune eviscerated: Just weeks ago, FTX co-founder Sam Bankman-Fried was considered crypto’s version of John Pierpont Morgan. Now, the future of his wealth is in jeopardy.

🤝 Deals & Dealmakers

• Gramercy Park for sale: A 38-unit, co-op building at 38 Gramercy Park North has hit the market for $50M amid a legal dispute over air rights.

• Moving down South: Air Communities (AIRC), a Denver-based REIT, is acquiring two South Florida rentals for $471M despite rising interest rates.

• Greystone joins forces: Greystone’s affiliate, Greystone Mortgage Capital, has formed a joint venture with Inlet Real Estate Capital to provide short-term rate capital solutions for CRE owners.

• Selling Santa Monica: J.P. Morgan Asset Management is hoping to sell one of its prime office campuses in Santa Monica, currently leased to tenants like Amazon and Sony (SONY).

• Self-storage strikes again: Angelo Gordon and Andover Properties secured $360M in financing to acquire a massive 50-asset, 3.9 MSF national self-storage portfolio.

📈 CHART OF THE DAY

💼 JOB BOARD

The CRE Daily Hiring Block

Looking for a new role? Or need to find top talent? The CRE Daily Hiring Block is a unique alliance of real estate professionals that connects talent and employers.

• Real Estate and Development Director (Slingshot Partners)

• Daily Writer (CRE Daily)

• Investment Associate (Greysteel)

• Principal Real Property Agent (Asset Manager) (County of Riverside)

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.