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LightBox CRE Monthly Commentary: The CRE Push Continues

July 1, 2024 4 mins

Over the years, football coaches have been fond of saying a game that ends in a tie is a lot like kissing your sister.

You might say the month of June had that feeling for many in the CRE market. The CRE game in June ended with a push— to the satisfaction of neither bulls nor bears.

For those waiting for the two-year thaw to end and for the market to break out, June was a lot like March, April, and May. Yes, sales transactions and refinancing continued to take place and the market is functioning, but still at a pace that is unsatisfying.

For bears— those hoping for even bigger discounts and more fear— one could say the month was equally unsatisfying. Loan modifications are up, meaning fewer distressed assets are coming to market. In addition, even the saddest of unloved offices seem to be finding buyers— so it looks like the painful decline in office prices may finally be leveling off.

CPI and PPI Provide Some Hope

Even though the fact that the CRE downturn reached its two-year anniversary this month, there were some hopeful headlines.

The downturn began in June 2022 when CPI topped 9%, and the Fed began its aggressive treatment— in the form of higher rates. This month, investors received some hopeful news as CPI came in slightly cooler than expected and PPI came in considerably lower than expected. Those prints helped push long term interest rates lower month over month. The yield on the 10-year U.S. Treasury bond was down approximately 20 basis points from the end of May— a positive move for CRE borrowers facing the need to refinance.

(The decline in Treasury yields might have been even bigger had the Fed not indicated at the same time that the punchbowl would remain under lock and key until further notice).

Other Hopeful Headlines

We have not been shy about latching on to the positive headlines and we won’t stop now. We have been firm in our belief that—while painful—this most recent CRE downturn will end up seeing fewer credit losses and far fewer bank failures than the CRE depressions of 1990 and 2008. Yes, higher interest rates have been a big drag on valuations and yes, the Fed cavalry is not coming as it did in 2008. But other than office— which is in a true depression— the markets are functioning, most borrowers have access to capital, and buyers are not on strike.

For one, in 1990 and 2008, bank failures were plentiful, and liquidity was completely absent. In each case, there was almost no lending for two years or more and no property type was immune from distress and value destruction.

With that, we will run through some hopeful headlines from the last few weeks:

Big Transactions on the Multifamily Front

KKR will spend $2.1 billion to acquire 18 apartment complexes across the U.S. The Real Deal reported that the portfolio totals more than 5,200 units and is a collection of Class A midrise and high-rise assets.

Additionally, JP Morgan Asset Management sold an Elk Village, IL apartment complex for 12% above its 2018 purchase price, according to Crain’s.  (The story does come with an asterisk as JP Morgan likely put some money into the property, meaning the profit to the firm was likely not 12%).  But in a down market in a Rust Belt location, the headline was a positive one.

Office Conversions in the News

The last two months have seen several firms announce plans to convert older offices into more productive uses.

Over the last few days, Spark GHC revealed it would spend up to $100 million redeveloping an office in Cleveland. The subject property is The Rose Building which was home to Medical Mutual for several decades before the firm relocated to Brooklyn, Ohio.  Spark plans to convert the 380,000 square-foot office into a hotel.  

In NYC, Metro Loft Developers and David Werner Real Estate will embark shortly on converting the former Pfizer headquarters in Midtown Manhattan into apartments. The project will result in 1,500 new residential units near Grand Central Terminal by 2027.

Office Headlines

In Miami, Florida JP Morgan will be doubling its office footprint to 160,000 on Brickell Avenue.

In Orange County, California MGR Real Estate acquired an office space that was only 44% occupied. The sales price topped $53 million for the 275,000 square-foot office.

The Final Word

The takeaway is even with all the negative headlines swirling around CRE, many intrepid investors are moving forward with portfolio acquisitions, redevelopments, and acquisitions of unloved assets. Similarly, adventurous lenders are willing to put out cash despite the negative tone of the market. History has shown in past downturns that that those willing to see through the noise can be rewarded handsomely (Appaloosa Management, we’re looking at you).  Hopefully today’s intrepid buyers and lenders are similarly rewarded.

If you are interested in hearing more about this in context, listen to the recently released CRE Weekly Digest by Lightbox with Manus Clancy, Head of Data Strategy, Dianne Crocker, Research Director and Martha Coacher.

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