Ackman-Ziff 2023 YE Market Update

It’s no surprise that in a cyclical business like real estate there will be periods of volatility, and over the past year, rapid changes in interest rates, high credit spreads, instability in real estate valuations and bank regulation have all contributed to less liquid markets and suppressed activity within CRE debt and equity.

Ten-year Treasury yields were moving drastically. Operating expenses, particularly insurance, for all property types climbed steadily. A host of significant geopolitical events continued to flow. All of these factors and many others required constant monitoring and loan underwriting adjustments.

We are coming off of a 15-plus-year run of inexpensive and abundant capital and substantial rent/revenue growth. While it is likely that the cost and availability of capital will improve from what we are experiencing today, we are unlikely to get back to what we have experienced for over a decade and half prior to this dislocation. 

I believe we are in a higher-for-longer cycle, but the yield curve will revert to its historical trend. Rates will stay in a narrower band in the next 12 months than we have seen in the prior 12, which should lead to increased transaction volume as this reality materializes. Once confidence returns, transaction volume should begin to recover as borrowers begin to see more transparency in property values.  

We may see a calmer market in 2024 because we have a better directional sense of where the U.S. economy is headed compared to the beginning of the year.  While there are definitely challenges that real estate markets and the global economy have yet to fully address, we have strong indications that the Fed will likely start cutting rates in the coming year.

• All retail owners are enjoying significant leasing spreads on renewals or replacement tenants, reflecting a national retail vacancy rate of approx. 4.0% (excluding malls).

• Rental rates have not grown enough to warrant new development because of hard cost increases and higher borrowing costs.

• Institutional capital is still not fully committed to broadly pursue retail investment opportunities, especially if the asset is: mixed-use, theater anchored, in secondary markets, or lacking a grocer.  In Las Vegas last May there was “conversation” about being ready to rotate back to retail. In the past several months, Pension Fund advisors have been supporting the thesis of strong retailer fundamentals and positive leverage to establish some level of “conviction”.

• 2023 saw very little trading velocity – more assets pulled from the market than closed.  Naturally, this renders appraisals and BOV’s to be quite un-scientific and less useful.   

• An increased number of sale offerings are expected in 2024, based on broker conversations last week about Q1 pipeline.  

• Moreover, if lower T-rates result in slightly lower cap rates, Owners can trade properties and feel smart that they withdrew them when cap rates were higher in 2022-23.

With current construction down 40%+ this year, there is going to be a shortage of new multifamily and built to rent supply in 2025/2026.  Hard to believe it today with the record number of deliveries, but experts believe the oversupply in the market will be short-lived as census data shows city populations continue to grow and housing production lags behind. New supply is largely focused on a handful of major cities, and while this will potentially result in lower rents and eat into returns in the short term, the bigger-picture population trends suggest demand will remain strong.

While the higher interest rates will probably offset the higher potential returns on these deals (via stronger rental growth and/or faster lease up), it will provide long-term investors with an attractive basis going into the next growth phase of our economy. Additionally, with interest rates expected to moderate by the time these new development are stabilized, we expect developers to refinance out of construction debt into perm financing at more attractive rates.

• $21.0M (62.5% LTV) Acquisition Financing for a 319K sf industrial building located in Philadelphia, PA

• $26.3M JV Equity for the forward acquisition of a 172-BTR project located in Raleigh, NC

• $52.5M (73% LTV) Refinance of a 170-unit multifamily property located in Fremont, CA.

• $67.2M (70% LTV, 65% LTC) C-of-O SFR Facility for the first 246 homes in a 1,000 unit for-rent program located in Fort Meyers, FL

• $38.7M (75% LTC) Construction Loan for a 150-unit BTR project located in Austin, TX

• $312 (75% LTV) Refinance of a 695-unit multifamily project located in Philadelphia, PA

• $27.6 million (70% LTV) Refinance of a Class-A office tower located in Knoxville, TN

Wishing everyone a wonderful holiday season and a happy & healthy New Year.

Author: Jordan Brustein

Email: [email protected]

Mobile: (516) 996-7722