CRE Analyst

Global RE capital is pulling back. Distress is more complicated than "office". Learn more in this week's Quick Hits!

FYI – our friends at CRE Daily are pulling together what looks to be a great networking opportunity. It’s a free event, but we checked yesterday and they’re almost at capacity. Link to register is in the comments. See you there!

More distress: office or apartments? It's complicated... Office vacancy rates are 20%+, values are down 50%+, and delinquency rates are higher than the GFC. Apartments have been more of a slower burn, but total estimated distress in apartments exceeds total office distress. Key question: will 'potential' distress turn into actual distress? [Consistently impressed with MSCI's real estate insights.]

Syndications, core funds, and manufacturing 10% returns in a 4% world. Check out this week's Quick Hits!

Canary in the coal mine: an early indicator of potential danger or failure. Real estate example… Property: Apartments built in early 1980s Purchase price: $111M Acquisition: 2022 Leverage: 75% Syndicated equity: $21.5M Equity placement fee: $1.9M Sponsor acquisition fee: $2.2M Going-in cap rate: 3% Assumed exit cap rate: 4.4% Sponsor promote: 50% over a 10% Underwritten investor returns: 18.5% IRR, 1.7x multiple One-off deal? Not at all. This syndicator put out $1.2B near the peak of the market 3-4 years ago. Look out below.

"Clearly too high. Let's just say it." 'The ODCE overall is marked to a 4.6% cap rate as of last quarter. Industrial is at a 3.9%, apartments are at a 4.5%, office is at a 6%. [To invest in core funds today] you have to be comfortable allocating into those valuations...' -- Non-core investment manager '...which are clearly too high. Let's just say it.' -- Leading real estate fundraiser ...but we are consistently selling properties above their carrying marks. -- Leading core fund Core funds, which make up a relatively small share of the real estate capital markets but serve a critical role by defining pricing for the highest quality assets, remain on the sidelines thanks to redemption queues. The three-year culprit: many investors don't believe those funds' carrying values. But there are three different perspectives on this key tension: 1. Managers of more opportunistic funds are wisely pointing out their competitive advantages. i.e., investors in their funds don't have to buy in at low cap rates. 2. Fundraisers are conveying how difficult it continues to be to raise core capital in the face of redemption queues, lower REIT values, and lower secondary values. 3. Core fund managers are saying they're regularly selling above their marks, suggesting they aren't actually overvalued at all. [This slide is from one of the largest fund's recent pitch deck to a large investor.] Where do you land? PS -- Kudos to Nancy Lashine for continuing to bring the tensions that define real estate capital trends to light by having engaging conversations with guests like Tom Gilbane on Park Madison's Real Estate Capital podcast.

How to manufacture 10% returns from debt investing in a 4% market... 1. Take some credit risk: Risk-free bonds are around 4%. Corporate bonds generate an incremental 100 bps over risk-free rates, and real estate lending generates, say, 150-300 bps. 2. Take some floating rate risk: Generate a little extra spread by financing shorter-term business plans. 3. Borrow: Magnify returns by giving the safest portion of the investment to a lower cost of capital provider. "At current SOFR Levels, portfolio all-in payment is 9.80%+" Lots of ways this industry darling approach could evolve in the coming months and years. What's your guess?

This week in Quick Hits - Remembering Sam Zell: From Survival to the American Dream

Reminder: Everyone gets a moment in the sun and a turn in the barrel. Ten years ago, Houston and life science were industry darlings. Today it’s all about the sunbelt and data centers. Who’s next in the barrel?

Our business follows the capital (in good times and bad). 5 observations on the state of LP real estate equity… 1. First-ever decline. For the first time on record, the top 100 global investors cut their aggregate allocations to private real estate. Total capital shrank 3.6% in 2024. 2. Growth collapse. What was 13.5% growth in 2022 slowed to just 2.8% in 2024 before turning negative. Rising rates hit valuations, fundraising, and deal flow. 3. Wide pain, uneven impact. European, Canadian, and Australian investors took the hardest hit. Asia-Pacific bucked the trend, posting a 0.7% gain in allocations. 4. More losers than winners. 59 investors saw their portfolios shrink, up sharply from 48 in 2023, 35 in 2022, and 18 in 2021. 5. Allocations rolled back. Average portfolio allocation to real estate fell from 11.5% in 2023 to 9.3% in 2025. That’s a full two percentage points erased in just two years. Ps - we invest a lot of time, money, and energy trying to find the best and most actionable real estate information. And in a world of abundant information, it’s increasingly difficult to spot insight. …which is why we share this summary from PERE’s recent release on the largest 100 real estate LPs. This isn’t a coordinated or paid endorsement (PERE doesn’t know we’re saying this), but we find PERE to be a refreshingly consistent source of real estate insight. To Jonathan Brasse and the rest of the PERE team: thanks for putting as much as you do into your content engine.