🏦 Distressed Debt Update

Good morning,

Distressed debt update, BTR, industrial construction boom in the South, and signs of life in San Francisco office market. Let’s delve into today’s topics.

📈 Market Update

🏦 Distressed Debt Update

A battle is unfolding over $2.3B in distressed debt tied to office landlord Columbia Property Trust. The loans are held by major Wall Street firms like Goldman Sachs and CitiBank. Howard Marks' Oaktree Capital is believed to hold the riskiest tranche and was positioned to oversee a loan workout. But after Columbia's portfolio was revalued 40% lower to $1.6B, Oaktree stood to lose control. It challenged that valuation and put forth its own, which may let it retain authority in the power struggle. As distress spreads in CRE, complex rules determine who controls loan workouts. With property sales scarce, parties are asserting valuation changes to gain control.

Subordinated Positions Lead to Disputes:
The Columbia situation shows how subordinate positions can spark disputes. Oaktree's mezzanine loan outside the trust may give it conflicting motivations in negotiations. Investors who bought distressed debt at a discount may accept lower payoffs than those who paid full price. Similar clashes are unfolding, like at the Century Plaza hotel project where a fund claims a secret deal cost it control. With the market moving fast, today's controlling lender may quickly lose that power over key decisions.

Tides Equities Secures Loan Workouts:
After facing loan distress earlier this summer, multifamily firm Tides Equities has now secured maturity extensions and interest rate reductions on dozens of loans across its portfolio. Tides says the workouts will push back loan maturity dates by 2-4 years, buying time for interest rates to hopefully fall and allow refinancing. The firm also negotiated discounted long-term rate caps to fix some loan rates. The modifications provide short-term relief, but questions remain if lower rates will materialize and if Tides can achieve the large rent increases underwritten. Amid the workouts, Tides continues selective capital calls to shore up struggling properties.

🚧 BTR, Industrial Construction Booms in the South

Build-to-rent (BTR) construction is surging, especially across the South where over 61,000 units are underway - more than all other regions combined. Developers remain keen on BTR as high rates and limited resale inventory steer potential homebuyers toward rentals. Several prolific developers like Cavan Cos., Redwood Living and Taylor Morrison have thousands of BTR units rising, primarily in the South. Massive projects include Pradera Oaks (812 units) in Texas, Brandon Town Center (660 units) in Florida, and Orchard Farms (643 units) in Fort Worth. Rents for new BTR often exceed averages for conventional apartments, catering to higher-income renters. Beyond units already being built, another 15,000 BTR units are in early planning stages, though timelines could shift with the economy.

Industrial Sector Powers Through Challenges in H123:
Despite economic headwinds, the industrial sector saw significant growth in the first half of 2023 driven by e-commerce and nearshoring trends. Nationally, 262M SF of industrial space was completed, up 28.6% YoY. The top 5 markets accounted for over one-quarter of total deliveries. Dallas-Fort Worth led with 29M SF added, followed by Houston with 11M SF. Chicago and Indianapolis also saw major expansions of over 10M SF each. Greenville, SC rounded out the top 5 with nearly 10M SF delivered. Construction starts also surged across these markets. The sector's success highlights industrial's resilience and the ongoing demand for distribution centers and warehouses.

🏢 Signs of Life in San Francisco Office Market

Bottom reached? After being pummeled since 2020, San Francisco's office market shows early signs of stabilizing. Vacancy rates stand at record highs but office searches are up 40% this year, led by AI companies. Sales activity is the most since 2019 as some owners capitulate, selling towers for 20-60% of pre-pandemic value. While painful for sellers, low sale prices are starting to reset office valuations. This helps landlords set realistic asking rents to attract tenants priced out of the city. More discount sales are expected from distressed owners. But investors are eager to buy at today's low prices, signalling belief the market has bottomed. Though vacancy will rise further, benchmark building trades could mark a turning point.

✍️ Further Reading

• Near- and Long-Term Outlook for New York Office Sector Is Bearish, Poll Finds (CS)

• Marathon Is Bidding on Signature’s Commercial Real Estate Portfolio, CEO Says (BBG)

• An Even Bigger Housing Crisis Threatens China’s Economy (WSJ)

• Americans Can Barely Afford Homes — and That’s a Problem for Biden (BBG)

• US Homebuilder Sentiment Drops to Five-Month Low on Higher Rates (BBG)

• Citi Sees Homebuilding Investors Tuning Out Through Year-End (BBG)

• Second Quarter CRE Activity Down 50% Year Over Year (GS)

• Vegas’ Newest Resort Is a $3.7 Billion Palace, 23 Years in the Making (BBG)

📊 Chart of The Day