🏢 Global Real Estate Fundraising Hits a Low Amid Interest Rate Hikes

Good morning,

Global real estate fundraising hits new lows as interest rates climb; historic maturities face a shaky refinancing future'; Brookfield severs ties with Cushman & Wakefield; and We(Don’t)Work: WeWork's imminent bankruptcy amid office market downturn. Let’s delve into today’s topics.

📈 Market Update

🏢 Global Real Estate Fundraising Hits a Low Amid Interest Rate Hikes

Sharp Decline in Investor Appetite as Borrowing Costs Rise:
The landscape of private real estate investment has dramatically shifted in the third quarter of 2023, with a stark 71% decline in fundraising compared to the previous quarter. A mere $18.2 billion was raised by 61 funds, a significant fall from the $63.4 billion amassed by 117 funds in the second quarter, indicating a widespread cooling of investor interest due to surging interest rates. Preqin’s latest report highlights the slowest pace of fund closures in this current cycle of interest-rate increases, as rising borrowing costs and falling property valuations, particularly in the office sector affected by remote work trends, lead to a reduction in expected investment returns.

Transactional Slowdown Reflects Market Caution:
Transactional activity in the global property markets mirrors the fundraising slump, with the dollar value of property deals dropping to $26.9 billion in the third quarter from $31.9 billion in the prior period. Office property sales have seen a 20% downturn, while industrial and residential sales show resilience with only slight decreases. Amidst the prevailing uncertainty over interest rate movements, Preqin anticipates continued subdued investment sentiment in real estate for the upcoming quarters, with fundraising and deal-making likely to maintain a low profile. However, there remains a focused interest in geographical regions like Japan and sectors that offer more stable and predictable returns.

🫠 Historic Maturities Face a Shaky Refinancing Future

CRE is staring down a daunting challenge with an "historic volume of mortgage maturities.” Over the next four years, commercial loans worth $2.78 trillion are due. The surge in the 10-year Treasury yields toward a 16-year high complicates refinancing, especially as higher yields draw investors towards safer, respectable returns, overshadowing the riskier CRE sector. Valuations in the sector have also taken a hit, with the Fed indicating they’re still above where they should be after recent declines. Amid these turbulent conditions, CRE lending has dwindled to historically low levels, raising concerns about the industry’s ability to work through these problems without significant capital for new financing.

Office Sector Adopts Innovative Financing in Response:
As traditional lending sources tighten their grips, owner financing is emerging as a beacon of possibility, particularly in the troubled office market. Amidst post-pandemic devaluation and a “wall of maturities” of $1.4 trillion in looming loan renewals, owner financing is gaining traction. This creative financing mechanism is not only facilitating transactions in a time of restricted commercial loan availability but is also endorsed by major financial institutions. It presents an attractive alternative for buyers with seller financing rates around 5%, significantly lower than current market rates for commercial loans. Despite potential trade-offs, such as possibly higher property prices and terms heavily reliant on the owner's discretion, this method promises quicker closures and beneficial terms for both parties, highlighting the adaptability and innovation within the sector in the face of adversity.

✂️ Brookfield Severs Ties with Cushman & Wakefield

Brookfield has terminated its relationship with Cushman & Wakefield, pulling its U.S. office and logistics property listings from the brokerage. This significant shift comes after Cushman withdrew from a leasing deal at Brookfield’s 660 Fifth Avenue, sparking the decision. Cushman, amid a commercial real estate downturn and high borrowing costs, has been pursuing cost reductions as deal-making activity slows, leading to a 9% drop in their third-quarter revenue. This move reflects a broader trend of reevaluation and reorganization within the commercial real estate market as entities adapt to the changing economic landscape and evolving remote-work dynamics.

☠️ We(Don’t)Work: WeWork's Imminent Bankruptcy Amid Office Market Downturn

WeWork is reportedly on the brink of filing for Chapter 11 bankruptcy, culminating a tumultuous period that began with the controversial leadership of its co-founder Adam Neumann and has since been exacerbated by a historic downturn in the office rental market. Once valued at $47 billion and seen as a major disruptor in the commercial real estate space, WeWork's aggressive expansion was undercut by deepening losses and an over-leveraged business model. Despite management changes and cost-cutting efforts, the company has struggled against a backdrop of shifting work trends accelerated by the pandemic, with remote work contributing to plummeting tenant demand, especially in key markets like New York and San Francisco. With WeWork's financials in disarray, showcasing liabilities including billions in rent payments that far exceed its revenues, the anticipated bankruptcy filing could see the company renegotiate or cancel a significant portion of its lease commitments, sending shockwaves across the already-strained office sector.

✍️ Further Reading

• Q3 2023 Quarterly Data Review: Historic Volumes of Maturities as Office Troubles Persist (Trepp)

• JLL, Colliers Report Lower Earnings as Real Estate Deal Activity Slides Further (CS)

• San Francisco Apartment Rents Resume Their Downward Path (CS)

• European Market Update: Eurozone Lending Slowdown; CLO Reset; CRE Investment Decline (Trepp)

• The US Housing Market Has Become an Impossible Mess (BBG)

• State Farm-Anchored Campus in Texas Sold in What May Be Year's Priciest US Suburban Office Deal (CS)

• Why Experts Say Now Is the Time to Buy Medical Office Buildings (GS)

📊 Chart of The Day