They said it
“It has clearly so far been an earnings issue, not a solvency issue”
Willy Walker, chief executive at Walker & Dunlop, talking this week on CNBC’s The Exchange about the volatility in the banking sector dampening lending activity by those institutions
San Francisco-based bank Wells Fargo made waves this week with reports it is preparing to buy the three floors of 20 Hudson Yards – which formerly served as a Neiman Marcus retail store – from the building’s owners, New York-based manager Related Companies and Canadian investor Oxford Properties Group, and convert the roughly 400,000 square feet of space into offices. The bank is reportedly paying about $550 million for floors five through seven at the 11-story property, with Related and Oxford retaining the remainder of the asset, per a Bloomberg report. The planned retail conversion deal comes at a time when the bank has been focused on the multifamily sector, with data from Real Estate Capital USA’s lending snapshot showing originations that include a $287 million construction loan for 1057 Atlantic Avenue as part of a group financing deal in June. The bank already owns about 500,000 square feet of space at 30 Hudson Yards, which houses its investment banking and other groups.
US bank exposure to high-volatility commercial real estate (HVCRE) loans is ticking upward, according to a report this week from S&P Global. The rating agency sees the shift as a sign that acquisition, development and construction activity could be on the upswing. The firm logged the aggregate high-volatility commercial real estate loan balance of US banks at $36.85 billion at the end of the second quarter this year, a 13.8 percent jump from the previous quarter. Though that total represents a 10.4 percent drop from the second quarter of 2022, it is notable that HVCRE loans typically used for acquisition, development and construction loans as credit facilities are on the rise. Amid the lift, the top lender in the category – New York-based Goldman Sachs – reduced its exposure to such loans by a sector-leading 36.4 percent.
Newark, New Jersey-based PGIM Real Estate has been one of the more active private credit lenders looking to fill the debt void left by bank pullbacks, and this week the firm extended its financing streak with another Southern California industrial deal. The lender, which sits near the top of the rankings in Real Estate Capital USA’s Debt Fund 40, originated a $333 million floating-rate financing package for Santa Monica, California-based logistics manager GLP Capital Partners to fund the acquisition of three Inland Empire properties. The package included a $175 million and $158 million floating-rate loan and followed a similarly themed $455 million financing package that PGIM originated two weeks prior for Newport Beach, California-based developer Alere Property Group. “We think the air is thinner on these larger deals and we get better returns overall and better lending terms on some of those transactions,” Melissa Farrell, head of US debt originations at PGIM Real Estate, told Real Estate Capital USA previously.
WP Carey, a New York-based real estate investment trust focused on the net-lease market, this week mapped out a significant reduction in its exposure to the office sector. The firm will spin out 59 high-quality properties totaling about 9.2 million square feet into Net Lease Office Properties, a roughly $350 million net-lease focused office REIT, and hopes to separately sell another 87 assets by January 2024. Jason Fox, chief executive, said the plans will help the firm to monetize its legacy office portfolio, achieve a lower cost of capital, and improve the stability of its earnings and cash flow. The planned REIT, Net Lease Office Properties, is expected to assume $169 million of mortgage debt and has lined up a new $455 million facility from New York-based bank JPMorgan Chase. WP Carey will be the REIT’s manager, with a goal of disposing of the portfolio in the coming years.
Fannie Mae and Freddie Mac saw their commercial real estate lending market share jump in the first half of 2023 as the government-sponsored enterprises stepped in as regional and national banks scaled back their lending in the wake of volatility, according to an MSCI report released this week. The GSEs originated 26 percent of all loans through June 2023, compared to 19 percent during the same period in 2022. Within the multifamily market, this increase was more marked, as Fannie Mae and Freddie Mac’s market share rose to 58 percent during the first half of 2023, a sharp increase from 28 percent during the same period in 2022. “The turmoil in the banking sector early in 2023 has made the market more dependent on stable financing from the GSEs,” the report stated.
More to insure
Insurance costs for commercial real estate have seen a 20 percent increase year-on-year and are becoming an area of concern for lenders and borrowers, according to a report published by BlackRock this week. Inflation and increasing climate risks are among the top factors that are driving up costs, Alex Symes, head of US real estate research and product strategy at the New York-based mega-manager, told Real Estate Capital USA. While insurance typically only accounts for a smaller portion of overall costs, the increase could put more pressure on returns. “A one-time increase will not affect the total return of a property very much. It’s whether [the costs] will continue to rise at a very accelerated rate,” Symes noted. Look for the full story later this week on our website.
New York-based manager Goldman Sachs Asset Management found in its 2023 Alternatives Survey published this week that institutional investors are showing more concern around public and private real estate valuations amid current market volatility. Of the 200 respondents, 72 percent perceive private real estate to be an overvalued asset class, only trailing private equity for the top spot of over-valuation concern by a percentage point.
Beating the fundraising odds
Harrison Street is beating the odds in a tough market for fundraising with its latest offering, the targeted $3 billion Harrison Street Real Estate Partners IX. The Chicago-based manager has made substantial progress in capital raising for the fund, which was launched in June 2022 and held an initial close of $1.08 billion one year later. While the 10 largest US funds in market have an aggregate capital raising target of more than $33 billion and individual equity goals ranging from $2.5 billion to $5 billion for debt and equity strategies, only five of these vehicles – including Harrison Street’s latest offering – have benefited from capital raises to date, according to affiliate title PERE. For more analysis on the fundraising environment, check out PERE’s story here [trial or subscription required].
Brookfield’s value-add successor
Toronto-based mega-manager Brookfield this week filed to launch the next iteration of its residential value-add fund series, Brookfield Fairfield US Multifamily Value Add Fund IV. According to a September 26 filing by iCapital, the Toronto-based mega-manager is back out to fundraise for the successor to Brookfield Fairfield US Multifamily Value Add III which had its final close in September 2018 at $1 billion, according to affiliate PERE’s fund database. The strategy means more transactions to come in the still-strong multifamily sector, which has remained a steadier area for lending opportunities despite broad bank lender retreats.
Loan in focus
Chicago-based manager Pearlmark this week closed a rare mezzanine debt investment though which it is financing unsold Delaware Statutory Trust units on a pair of student housing properties near the University of Mississippi. The firm originated a $22.4 million loan on behalf of sponsor Kingsbarn Properties, which created a DST for the 340-bed Arbors at the Park and the 280-bed Cottages at Hooper Hollow after acquiring the high-quality properties in 2022. Mark Witt, a managing director at Pearlmark, notes that while financing unsold DST units is rare, the strength of the sponsor and the location of the properties made the firm comfortable with the investment. The firm made the investment out of the $210 million Pearlmark Mezzanine Realty Partners V, which closed in December 2022.