Re: Inflation/Real Estate-Train Wreck In Progress.
Today, I participated in a 2nd private panel for Real Estate investors/operators as the "macro guy." This thread focuses on US CRE sectors in both public and private markets. Chatham House Rules apply. (THREAD)
Today, I participated in a 2nd private panel for Real Estate investors/operators as the "macro guy." This thread focuses on US CRE sectors in both public and private markets. Chatham House Rules apply. (THREAD)
First, we heard from a REIT operator for some public market perspectives.
A couple of choice quotes that summarize the current zeitgeist:
“The era of cheap capital is over.”
“Cost of capital has become very expensive with tremendous velocity.”
A couple of choice quotes that summarize the current zeitgeist:
“The era of cheap capital is over.”
“Cost of capital has become very expensive with tremendous velocity.”
“Playing offense is no longer an option.”
“Focus is on capital preservation/organic growth.”
“Focus is on capital preservation/organic growth.”
A couple sobering data points:
YE’21: Avg REIT cap rate 3.7% / Avg multiple 25.1x
YE’22: Avg REIT cap rate 6.5% / Avg multiple 17.5x
YE’21: Avg REIT cap rate 3.7% / Avg multiple 25.1x
YE’22: Avg REIT cap rate 6.5% / Avg multiple 17.5x
Equity fund flows are down significantly -- $80B yoy. This is causing the Real Estate equivalent of the “Sell What You Can” Effect I described here:
Fixed-income fund flows are even worse:
“Bond markets are effectively closed.”
Bank debt markets are still open but at significantly elevated costs.
Advice from a REIT operator:
“DO NOT WAIT TO ADDRESS YOUR 2023/2024 MATURITES."
“Bond markets are effectively closed.”
Bank debt markets are still open but at significantly elevated costs.
Advice from a REIT operator:
“DO NOT WAIT TO ADDRESS YOUR 2023/2024 MATURITES."
The consumer still appears strong for now and is still holding up Retail/Industrial rents, but can this hold up into 2023 as consumer balance sheets become increasingly stressed?
This is NOT a picture of financial health but rather of desperation, imho:
This is NOT a picture of financial health but rather of desperation, imho:
The next panelist, a specialist in Retail Real Estate, corroborated the cracks in consumer spending by pointing out that October Retail revenues were generically up 1% despite the significantly higher inflation-adjusted prices, suggesting collapsing sales volumes.
Within Retail, Home Improvement & Open-Air Shopping Centers w/Grocery Anchors seem to be holding up best, while Apparel and Movie Theaters are doing the worst. Even Discount Apparel is not holding up well. Class A Malls are doing fine, but B/C Malls “may need to be repurposed.”
One notable trend in Shopping Centers is that Hospital Urgent Care/Rehab/Therapy Centers are pushing out to be closer to the consumer and may become more important tenants.
Next we heard from a Real Estate/Lodging Analyst who first covered the impact of the recent Midterm Elections.
Congressional gridlock at the federal level means no major legislative impact for Real Estate for now, 1031 Exchanges being the key worry for many investors.
Congressional gridlock at the federal level means no major legislative impact for Real Estate for now, 1031 Exchanges being the key worry for many investors.
That said, State/City level tax measures need to be watched like the recently passed LA City Mansion Tax which will be highly negative for transaction volumes.
Spreads have widened SIGNIFICANTLY even in the world of Investment Grade REITs.
Last year, IG REITS could borrow at 125-150 bps. As a recent comp, a large publicly traded Class A Office REIT recently had to borrow at 250 bps.
That's on top of a rapidly rising Risk-Free Rate.
Last year, IG REITS could borrow at 125-150 bps. As a recent comp, a large publicly traded Class A Office REIT recently had to borrow at 250 bps.
That's on top of a rapidly rising Risk-Free Rate.
Here is a smattering of Cap Rates across different RE sectors:
Shopping Centers: 6.6%
Malls: 7.7%
Triple Net: 6%
Multi-family: 5.7%
Storage: 6%
Suburban Office: 8.9%
Industrial: 4.6%
This analyst thinks Cap Rates are still headed higher.
Shopping Centers: 6.6%
Malls: 7.7%
Triple Net: 6%
Multi-family: 5.7%
Storage: 6%
Suburban Office: 8.9%
Industrial: 4.6%
This analyst thinks Cap Rates are still headed higher.
New DEVELOPMENT has ground to a halt. A large developer recently announced that it would halt all new projects until it saw a 150 bp spread to its cost of capital (which has obviously spiked).
That ain’t happening soon into a severely weakening economy.
That ain’t happening soon into a severely weakening economy.
Multi-Family still holding up relatively well, but he expects “doubling/tripling up” in a recession, which will start to impact vacancies/rents.
Office is "extremely challenged," especially in tech centers like San Francisco, where "sublease supply has exploded."
Trophy buildings will still be ok, and layoffs + “Return To Office” mandates may mitigate.
Trophy buildings will still be ok, and layoffs + “Return To Office” mandates may mitigate.
Finally, I closed out the session by zooming back out to a 30,000-ft MACRO level and gave my view that we may be plagued by an Asynchronous Tag-Team of Core/Energy Inflation for the next several years:
I reminded folks to ZOOM OUT past the last several decades to avoid the RECENCY BIAS of conflating negative/slowing GDP growth with low Inflation.
STRUCTURAL INFLATION makes this regime much more like the STAGFLATION of the 70’s, imho.
STRUCTURAL INFLATION makes this regime much more like the STAGFLATION of the 70’s, imho.
Bridgewater paints a visual portrait of how they think major economies look in the next 12 months.
This is what they think GDP will be:
This is what they think GDP will be:
This what they think Inflation will be:
A STAGFLATIONARY environment presages a "HIGHER FOR LONGER" interest rate regime, which Bullard just reiterated again TODAY:
Both public Equity and Bond markets have shrugged off this likelihood in recent days at the first whiff of a softer CPI.
But remember that a true STAGFLATIONARY regime shatters many consensus views. Witness this year's trashing of the "traditional" 60/40 Portfolio:
RECENCY BIAS -> LACK OF IMAGINATION -> POTENTIALLY SIGNIFICANT WEALTH DESTRUCTION.
On that cheery note, I invite you to read the Thread I wrote 2 months ago from the 1st RE Panel I participated in, ICYMI:
Thanks for reading. (END THREAD)
Thanks for reading. (END THREAD)
Some interesting highlights from a Resi RE Fund I am invested in:
-US has "3-5 mm unit deficit of housing stock available for sale"
-US homeowners collectively have a "conservative ~30% LTV"
-"Generic RPL AAA spreads are trading in the 100th %ile relative to historic averages"
-US has "3-5 mm unit deficit of housing stock available for sale"
-US homeowners collectively have a "conservative ~30% LTV"
-"Generic RPL AAA spreads are trading in the 100th %ile relative to historic averages"
From another Opportunistic RE Fund I’m in:
-Industrial landlords “are seeking and getting more and higher annual rent escalation”
-“2022’s total net absorption of almost 359 MSD is already better than any other year on record”
-Industrial landlords “are seeking and getting more and higher annual rent escalation”
-“2022’s total net absorption of almost 359 MSD is already better than any other year on record”
-“Office sector continues to struggle”
-“It is unclear what will happen to the excess inventory of Class B/C office space, but a lot of space will need to be repurposed.”
-“It is unclear what will happen to the excess inventory of Class B/C office space, but a lot of space will need to be repurposed.”
-“Travel and hospitality continue to rebound”
-“Airfares, especially around Christmas, are expected to reach their highest level in 5 years.”
-“Airfares, especially around Christmas, are expected to reach their highest level in 5 years.”
-To give an idea of Floating-Rate pain I’ve been talking about, here are some data points on Non-traditional CRE financing spreads:
1. Hotels - SOFR+750, L+675
2. Industrial/Land Dev - L+795
1. Hotels - SOFR+750, L+675
2. Industrial/Land Dev - L+795
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