Term Sheet: WeWork stranded in further limbo as office headwinds persist; Commercial real estate M&A loses steam in 2023; AEW chair Jeff Furber’s pending retirement

WeWork is casting doubt on its future viability as rent and tenancy costs keep office stability in limbo; Hodes Weill finds commercial real estate M&A lost steam in the first half of 2023; AEW Capital Management lays out succession plans for the upcoming retirement of longtime chair Jeff Furber; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“As the current cycle is evolving, this story has become one of stress in the capital markets versus the fundamentals of most asset classes” 

Bruce Flatt, chief executive at Brookfield Asset Management, speaking on the Toronto-based manager’s second quarter earnings call about how higher interest rates, higher inflation and tightening lender requirements are causing uncertainty in US and global real estate markets.

What’s new

Substantial doubt: The future of WeWork is in limbo as the coworking operator remains beleaguered by a lackluster return to form in the office sector. (Source: Getty)

When WeWork announced in its Q2 earnings last week that “substantial doubt exists about the company’s ability to continue,” office landlords were concerned but not surprised given the flexible office space provider’s financial performance in recent years. Market participants will be watching closely as WeWork, which has reduced its footprint by 27 percent over the past two years, follows through its plans to reduce rent and tenancy costs and negotiate more favorable lease terms over the next 12 months.

Judging by the size of WeWork’s footprint in the US and Canada alone – which data provider KBRA Analytics pegs at 18.3 million square feet as of December 2022 – this could have sizable implications for the office market. The news came against a backdrop of distress for the US office market, with a Q2 2023 report from Cushman & Wakefield tracking 159 million square feet of sublease space on the market, the most the adviser has seen since it began tracking this data in 2000, and a national vacancy rate of 19.2 percent.

Closing and opening
Avila Real Estate Capital is riding a wave of momentum in the commercial real estate private credit markets as bank lenders pull back. This month it closed a $362 million first-lien loan originated alongside Boca Raton, Florida-based manager Encore Capital Management. The Corte Madera, California-based manager and its partner originated the loan for a local land owner to fund the acquisition of more than 5,500 entitled and partially developed lots in San Joaquin County, California. The planned community – dubbed Mountain House – was purchased from California Public Employees’ Retirement System. Avila and Encore have completed more than $600 million in land loans over the last seven months and Avila’s debt capital plans do not stop there. The firm said this week it is planning to launch a second credit fund as well as other co-investment vehicles over the next several quarters.

Mergers and acquisitions in the commercial real estate market fell steeply in the first half of 2023, with just 10 transactions completed through the end of June, per adviser Hodes Weill‘s 2023 Mid-Year M&A Market Review. By comparison, there were 21 M&A deals completed during the first half of 2022, the New York-based firm found. Max LaVictoire, head of GP advisory services at Hodes Weill, said M&A activity dropped in the second half of the year due to the impact of higher interest rates, a lack of consensus over pricing and volatility in the banking sector. Still, if H2 M&A continues at the same pace as H1, 2023 will end the year on a par with 2019 and 2020, and with more activity than 2017.

Office greenery
Larkspur, California-based GreenRock Capital and Cleveland-based KeyBanc Capital Markets originated a $172 million commercial property assessed clean energy financing this week for a landmark office building in Oakland, California. The C-PACE loan marked the largest such financing to date for a US office property and is the second largest C-PACE loan on a single US asset across all sectors. The building at 300 Lakeside Drive is the headquarters of Pacific Gas & Electric Company and owned by San Francisco-based manager TMG Partners. The financing will fund an HVAC system overhaul, envelope sealing for energy efficiency, water conservation measures and a seismic retrofit for the 29-story, 910,000-square-foot building originally constructed in 1961. C-PACE financing has accumulated more interest from lenders and borrowers in recent quarters, even spurring on a bespoke fund launch for the loans last week.


Adding stock
Multifamily construction lending momentum is holding steady despite the market-wide slip in origination activity. Goldman Sachs Asset Management added another notch to New York’s tally of active multifamily projects in the works this week with a $233 million loan for an asset in the Brooklyn neighborhood of Crown Heights. Real Estate Capital USA data ranks GSAM’s construction financing as one of the most sizable US multifamily projects by volume this year. In New York specifically, Real Estate Capital USA’s lending snapshot shows Banco InbursaMadison Realty Capital, TD Bank and Franklin Templeton’s Benefit Street Partners all finalized multifamily construction loans in the city during the last week.

Smaller pie, same slices
Market uncertainty dampened commercial real estate lending in the second quarter of this year, but the composition of market participants has been left relatively intact, according to an August 14 CBRE report. Banks accounted for the largest share of CBRE’s non-agency loan closings for the fifth consecutive quarter, with 43.4 percent of the total in the second quarter, up from 41 percent in the first quarter this year. CBRE data showed private credit lenders including debt funds and mortgage real estate investment trusts accounted for 26 percent of second quarter loan closings, up from 20.1 percent in the first quarter. Life insurance companies accounted for 26.8 percent of non-agency loans compared with 23 percent in the prior quarter.

Minimal CMBS exposure
The recent wildfires that devastated parts of Maui, particularly the town of Lahaina, are not expected to have a significant impact on commercial mortgage-backed securities deals with exposure to properties in the region. New York-based agency KBRA identified nine loans in 11 commercial real estate securitizations, with one asset – the Shops at 505 – destroyed in the fires. The $15.6 million loan on the property was securitized in COMM 2015-LC12 and made up about 1.7 percent of the balance. The agency continues to monitor the situation, with a report published on Monday noting there is still news coming through.

Data snapshot

The drought continues
Global investment in commercial real estate has fallen meaningfully for the sixth consecutive quarter. According to broker CBRE’s Q2 global investment briefing, $142 billion was invested in commercial real estate globally in the second quarter of 2023, representing a decline of 57 percent year-on-year, and down 13 percent from the first quarter.


Life after Jeff
Jeff Furber, the longtime chairman of Boston-based AEW Capital Management, is calling time on his 38-year career. After overseeing the firm’s growth in assets under management from $8 billion in 1997 to $90 billion today, Furber announced last week that he will retire at the end of the year, handing over the reins to Jon Martin, AEW’s North America CEO, Rob Wilkinson, who holds the same position in Europe, and David Schaefer, chairman of its Asia business. When asked to reflect on his career, Furber, in a statement to affiliate title PERE, described it as “extremely gratifying.”

Newmark’s digital play
Newmark Group on Wednesday announced the launch of its data center and digital infrastructure capital markets practice. The New York-based adviser has also brought on Brent Mayo as an executive managing director from Providence, Rhode Island-based Citizens Bank’s data center-focused group DH Capital to oversee the initiative. The creation of the group is part of the firm’s push to expand its platform in alternative real estate assets, said Chad Lavender, president of capital markets for North America.

Launch pad

CrossHarbor’s fund close
CrossHarbor Capital Partners last week held the final close for its 10th opportunistic vehicle, CrossHarbor Institutional Partners Fund 2021. The firm raised $865 million in total commitments from limited partners, with an additional $55 million in co-investment capital already deployed, for a total of more than $850 million. The closed-end fund targets high-yield debt and equity investment opportunities in growth markets of the US, across all property sectors.

More to develop
Dallas-based manager CRE Development Capital this week launched its CRE Capital Credit Fund and is targeting a $500 million fundraise for the strategy. The firm has development and investment capabilities and has typically focused its work on mixed-use, multifamily, industrial and storage opportunities on a global basis. In the US, the firm also invests in opportunity zones and uses capital for acquisition, ground up and value-add development projects.

Loan in focus

Sartorial absence: A $215 million loan linked to New York’s 681 Fifth Avenue fell delinquent this month after the exit of clothier Tommy Hilfiger from the ground floor retail space. (Source: Getty)

Fashion giant shoes to fill
A $215 million loan on New York’s 681 Fifth Avenue – a prime retail property between 52nd and 53rd Streets – fell delinquent this month, an event that could have an impact on five commercial mortgage-backed securities deals with exposure to the mortgage. The delinquency came after the property’s ground-floor retail tenant, clothier Tommy Hilfiger, in May 2023 executed a long-anticipated plan to exit the space. The loan, originated in 2016, was split into five pari passu pieces and securitized in deals completed later that year and in 2017, according to data from New York-based data provider Trepp. While there are work permit signs on the windows of the ground floor, the space has not yet been filled. Still, Trepp noted the loan had a 49 percent LTV at a 2016 appraisal and has substantial runway ahead of a 2026 maturity.

Today’s Term Sheet was prepared by Randy Plavajka, with Anna-Marie Beal and Samantha Rowan contributing