April 2024

North America

·Largest delinquent CMBS of $308m loan sold at $186m. Yellowstone Real Estate Investments acquires $308m loan on 1740 Broadway office building (640,000 sq ft) in New York previously owned by Blackstone. The loan went into special servicing in March 2022 and Blackstone had acquired the building in Dec 2014 for $605m. CBRE was instructed to sell the property in Sep 2023 at which Blackstone had stopped making CMBS loan payments. This provides some certainty around other delinquent loan sales. Santa Monica Place Mall (523,139 sq ft) in California was transferred into servicing in Dec 2022. The retail mall currently generates enough cash to service 69% of its debt obligations on a $300m CMBS loan. (Source: Morningstar, Commercial Observer, CoStar, Kevin Chu + Jessica Paul Photography, 2024)

·US apartment supply outstrips demand for the 10th consecutive quarter, with the South recording the strongest rental declines. 495,000 additional apartment units are projected to be delivered in 2024 on top of the 40-year high of 565,000 units opened in 2023. With the majority of apartment delivery concentrated in the South, rent growth has been negative in Austin and San Antonio (Texas), Jacksonville (Florida), Raleigh (North Carolina), and Atlanta (Georgia). Autin, Texas led the rental drop by 5.7% in the last 12 months. Mid-priced apartments in the Midwest and Northeastern markets including Kentucky and Cleveland have shown the strongest rental growth with these metropolitan markets avoiding oversupply issues. (Source: CoStar, 2024)

·Blackstone acquires private rental housing firm, Apartment Income REIT (AIRC), for c. $10b, 25% above AIRC’s stock price prior to announcement, equating to a c. 4.85% cap rate. BREP X (Blackstone’s most recent closed-end opportunistic fund) shows a vote of confidence as they view interest rates stabilising and access to capital significantly improving. This is seen as a thematic sector bet on the supply of apartments in the US expected to decline due to a slowdown in construction activity. Portfolio consists of 76 high-quality rental housing communities totalling 27,010 apartments homes across 10 states. Largest metropolitan market concentration in the AIRC portfolio has been as follows: Southern California (20% of NOI), Miami (16%), Washington D.C. and Virginia (14%). Blackstone’s business plan includes $400m in additional investments to improve the existing portfolio offering. (Source: Blackstone, Reuters, CoStar, CRE Analyst, Business Insider, 2024)

Implied NOI	$485m
Equity Cap	$4,848m
Outstanding Debt	$3,306m
Outstanding Preferred	$79m
Total Market Cap	$8,233m
Implied Cap Rate	5.89%
Blackstone Purchase Price	$10,000m
Blackstone Entry Cap Rate	4.85%

·Blackstone Mortgage Trust records $123.8m net loss in Q1 2024, from $2.8m in Q4 2023. Blackstone Mortgage Trust reports wider net loss with significant exposure to office real estate coupled with borrowers facing pressure from a heightened interest rate environment. This compares to Q1 2023 net income recorded at $118.6m. The commercial mortgage REIT sponsored by Blackstone, has 36% of its existing $21.1b loan portfolio exposed to the office sector. Fitch Ratings have revised its outlook for the REIT to negative. Blackstone has stressed that 92% of its loan portfolio is currently performing and 95% of all performing loans, which have reached maturity or have an extension test in Q1 2024, have been repaid or extended.    (Source: Blackstone, Reuters, CoStar, CRE Analyst, Business Insider, 2024)

·WeWork to keep around 300 locations worldwide with plans to emerge from bankruptcy protection by May 31. Of the 300 sites, WeWork plans to renegotiate rents on about half of them, whilst the remaining half is not expected to undergo any changes on lease terms. This is approximately half the wholly owned locations WeWork had (610 locations as of June 30, 2023). There are a remaining 10% of locations where WeWork is in active negotiations with landlords to reduce its lease commitments worth more than c. $8b. According to its latest quarterly earnings report, leasing costs still take up around three-quarters of the company’s total revenue, implying the significant burden leasing costs have on its sustainable pathway to profitability. Earlier, former CEO, Adam Neumann, through his new real estate company, Flow, alongside other capital partners have recently made an initial offer to acquire WeWork. (Source: CoStar, 2024)

Europe

·Office fit-out costs in London is the most expensive amongst all European cities. UK and German cities top the list of European cities in terms of average costs of fit-outs.  London has the highest fit-out cost of €2,629 psm followed by Hamburg at €2,463 psm. The main driving force behind the costly fit-out costs in these cities is the higher expectations around design sophistication, tech solutions and quality standard. Office fit-outs have become more important in creating the right environment to foster employee productivity, innovation, and collaboration whilst delivering strong ESG credentials. Average EMEA fit-out costs have increased by c. 4% over the last year. However, the significant upward pressure on construction prices has relatively subdued.  (Source: CoStar, Cushman & Wakefield, Eurostat, 2024)

Top 10 Most Expensive European Cities for Office Fit-Out Costs

·Macquarie Capital appoints receivers on London office to recover £100m debt, with highest bid in last year’s sales process at around £93m. Macquarie provided a 3-year stretched senior facility at a 70% LTV in March 2021 on Herbal House, 115,000 sq ft Clerkenwell office, which houses Adidas, Open Society Foundations, PhotoBox and IDEO. Property has a WAULB of c. 6 years. Knight Frank was originally appointed to sell the property last June targeting a sales price of £140m, with the highest bid from JP Morgan Asset Management offering £93m. Recent valuation is at c. £115m; however, based on weakened investor sentiment, market sources say bids will come in well below this valuation figure, shedding light on valuers needing to play catch-up.  (Source: React News, CoStar, Knight Frank, Teneo, 2024)

·In Q1 2024, commercial real estate transaction volume in France fell to €1.4b, with average acquisition value below €15m. France’s quarterly transaction volume was well below its 10 year average of €4.6b, and can be compared to volumes in Q1 2010, according to Knight Frank. Large transactions above €100m are still very limited with only three deals signed in Q1 2024 compared to 14 in Q1 2022. Average deal size was under €15m implying the lack of core institutional investors who are normally active in the large deal size acquisitions alongside the general fall in pricings across all assets. Private investors with value add strategies have been the most active, accounting for a quarter of investment volume in Q1 2024. Investors have become very selective with centrally located offices in the Paris CBD becoming the clear preference. (Source: Business Immo, Knight Frank, 2024)

·German open-ended funds had the highest net outflow in six years. In February alone, retail investors exited €680m from German open-ended property funds, with only €250m of new money coming into the market. This is the highest net outflow in the last six years. Investors have withdrawn a cumulative net amount of €1.2b since August 2023. Januarys which are considered the strongest months as retail investors rebalance their portfolios and allocate money for the year, also showed a net outflow of €19m. According to Barkow Consulting, fund redemption pressure and net outflow trends remain evident, highlighting the limited appetite towards German property funds. (Source: Barkow Consulting, Bundesbank, CoStar, 2024)

·Morgan Stanley commits to Canary Wharf for another 14 years. Morgan Stanley has confirmed their commitment to their 547,000 sq ft EMEA HQ at 20 Bank Street in Canary Wharf with a lease that runs until 2038. Canary Wharf Group is to provide contributions to the property’s sustainability credentials. Chief executive of Canary Wharf Group, Shobi Khan, has emphasised the mixed-use nature of the Canary Wharf neighbourhood coupled with the excellent transport connectivity, leisure and retail amenity offerings in the micro-location. This does mean four of the top six global investment banks including Barclays, Morgan Stanley, JP Morgan Chase and Citibank are still committed to Canary Wharf in the medium term. This refreshed commitment defies recent trends of traditional Canary Wharf anchors relocating to the City including HSBC, Clifford Chance, and Moody’s. (Source: CoStar, Canary Wharf Group, Morgan Stanley, 2024)