Office Valuations Plummet as Maturities Loom

Good morning,

Office valuations plummet as maturities loom, BX shifts focus to data centers as BREIT manages outflows, distress threatens as multifamily lender MF1’s loans mature, and Miami’s surprising population decline. Lets delve into today’s topics.

📈 Market Update

🏢 Office Valuations Plummet as Maturities Loom

A new report by Trepp examines CMBS office loans maturing in 2023, totaling $22.9B across 1,017 properties. It found the age of office buildings is correlated with higher delinquency rates and plummeting property values. Older buildings constructed pre-1950 ($3.7B) and 1950-1980 ($6B) make up a significant portion of maturities but are performing the worst.

Renovations provide little relief: Even renovated older buildings are struggling. Renovated offices built pre-1950 and 1950-1980 that are delinquent have a negative net cash flow per the DSCR, signaling major distress even after capex to update properties.

Values halved or worse: Offices built pre-1950 have seen values drop 60% over the past decade, and 1950-1980 construction is down 55%. 1980-2000 is also down 56%, with newer construction values declining 52%. With over $150B in office maturities beyond 2023, the future looks depressing for office owners.

⚫️ BX Shifts Focus to Data Centers as BREIT Manages Outflows

BX’s flagship REIT, BREIT, saw investor redemption requests decline in July to $3.7B, the lowest level this year. BREIT has limited withdrawals to 2% of NAV per month since November, returning only 34% of July’s requests. In total, BREIT has returned $9.4B to investors. The company has recently sold $10B in assets to boost liquidity for redemptions and fund repurchases.

Despite returning billions of dollars of capital, BREIT has also been stockpiling funds to expand data center holdings. BX is betting on the growing demand for data centers from AI computing. BREIT has committed over $8B to build data centers and acquired land across 5 states. This positions BREIT to benefit from “AI arms race” as data center valuations and leased space have doubled since acquiring data center REIT QTS in 2021.

Focus on steady returns: The shift into data centers reflects BX’s broader push into sectors like logistics, rental housing, and credit. The aim is to diversify beyond risky LBOs into areas with more consistent, albeit lower, returns.

PE fundraising declines: BX just lowered its target for its latest $25B PE fund. However, its credits investments continue growing, now making up $500B of its $598B AUM. Though PE offers high returns, BX’s future increasingly relies on credit assets managed through insurance arm Athene.

⌛️ Distress Threatens as Multifamily Lender MF1’s Loans Mature

Multifamily lender MF1 Capital originated billions in floating-rate, high-leverage loans for fix-and-flip deals in 2020-2021. MF1 securitized over $7B in two years when banks pulled back, as economists warned of impending rate hikes and a downturn. But MF1 kept lending - and now, nearly half of MF1’s $11B loan book is distressed. This includes over $400M of loans to Tides Equities.

Maturing loans and limited exit strategies: Most of MF1’s loans come due within 18 months. With values down 20% borrows face capital calls to inject more equity into these projects. If they cannot, lenders face extending loans, taking back assets, or selling the mortgages at a loss. MF1 is facing lawsuits and defaults; coincidently the company just won an award for a $2B securitization where nearly $750M of the loans are now distressed. Stay tuned to see how this plays out for MF1!

🌅 Miami’s Surprising Population Decline

Miami-Dade County’s population shrank between 2019 - 2022, the first multi-year decline since at least 1970. This loss comes as a surprise as Miami is experiencing strong economic growth, with major construction projects and low unemployment.

Surging housing costs: Home prices are up 53% since 2020, with rents up 27% since 2019. This has made Miami unaffordable for many middle-class renters; 61% of Miami renters are considered “cost-burdened.” As a result, Miami lost ~80,000 residents to net migration between 2020 - 2022. People are heading to other Florida cities like Tampa and Orlando, as well as Georgia. This negative migration trend threatens Miami’s ambitions to be a top business, financial, and cultural hub.

📊 Chart of The Day

✍️ Further Reading

• Fannie Mae Says a Recession is Still Coming at the End of the Year (YF)

• Farallon Capital Management Seals $650M Fund (CPE)

• Are Cap Rates Approaching a ‘Soft Plateau?’ (CPE)

• Foreign Purchases of US Homes Slump to All-Time Low (WSJ)

• Silverstein, Developer That Remade the World Trade Center, Plans its First Office Conversion (CS)

• Bank CRE Loans: More Delinquency, Bigger Risk, Slowdown in Origins (GS)