CRE Could Bottom Out Within a Year

Good morning,

CRE could bottom out within a year, CRE allocations rose across institutional investors in H1, and Country Garden's record losses highlight severity of China's real estate slump. Let’s delve into today’s topics.

📈 Market Update

⚠️ CRE Could Bottom Out Within a Year

US commercial property values have fallen 16% on average from peaks in early 2022, with offices down 31% and warehouses only 8%. Sellers are still asking too much, with bid-ask spreads around 10% for apartments and offices. Distressed sales are still rare at under 3% of transactions, but $71 billion of property is now in trouble. This points to further price declines of 10-15% to bring yields back in line with corporate bonds.

🔍️ What to Watch For:
Focus on listed property stocks, which lead price changes in private markets. After falling for most of 2022, REITs have risen for three straight quarters, suggesting private real estate could bottom within 6-12 months. The discount of property stocks to net asset value hints at another 10% price drop still expected. More forced selling as loans mature will be the clearest signal.

📈 CRE Allocations Rose Across Institutional Investors in H1

RE allocations rose 76 bps on average across institutional investors in H1 2023. Sovereign wealth funds had the largest percentage increase, followed by private pension funds.

🌏️ Country Garden's Record Losses Highlight Severity of China's Real Estate Slump

China's major property developer Country Garden Holdings posted a record first-half loss of nearly $7B and warned it may default on its debt, reflecting how China's deepening real estate slump has severely impacted the formerly top-selling developer. Country Garden cited declining property sales, rising impairments, and tightening financing conditions for the huge losses and liquidity crisis it faces, with over $100B in debt due in the next year. The company acknowledged being caught off guard by the extent of the housing market downturn. The mounting losses and default risks at Country Garden underscore the financial contagion stemming from China's property slump, even as the government implements new measures to try to revive the critical housing sector.

✍️ Further Reading

• Billionaire Investor Jeff Greene: We’re in the First Inning of the Commercial Real Estate Correction (CNBC)

• The Hostile Takeover of Blue Cities by Red States (BBG)

• Climbing 10-Year Treasury Yields Are a Warning Sign (GS)

• Blackstone Sidesteps Foreclosure with Manhattan Multifamily Sale (RD)

• Rich, Young and Restless: Hello Florida and Texas. Goodbye Michigan and Maine (GS)

• Are CRE Prices Too High? It Depends on Your Mindset (GS)

• Record Gap Forms Between Home Affordability and the Cost of Renting (GS)

• Six Anxious Months Later, Signature Loan Sale at Hand (RD)

• CMBS Remittance Comments Show Some Signs of Optimism for Malls (Trepp)

• Developers Pull Back Sharply on Multifamily Construction as Financing Costs Skyrocket (Trepp)

📊 Chart of The Day