August 2024

North America

·Federal government to significantly reduce DC office space amid remote work shift. The federal government plans to cut its office space in Washington, D.C., by allowing several leases to expire and consolidating its workforce. The General Services Administration (GSA) will shrink real estate holdings for multiple agencies, including the Department of State, Housing and Urban Development, and Treasury, aiming to save hundreds of millions in property expenses. This includes letting go of 771,550 square feet from the Department of State and reducing the Department of Housing and Urban Development’s footprint by up to 60% by 2038. The GSA’s strategy is part of a decade-long effort to offload excess space and adjust to increased remote work. The reduction reflects broader trends in both government and corporate sectors, with tenants collectively returning over 180 million square feet of office space since 2020, which includes the federal government shedding more than 30 million square feet. (Source: GSA, CoStar, 2024)

GSA, landlord for the federal government, owns the Ronald Reagan Building in DC

·TPG poised for real estate expansion with $14 billion cash reserve. TPG, a major alternative asset management firm, is preparing to invest its $14 billion cash reserve in real estate as it anticipates a future decrease in interest rates. In the second quarter, the company invested $1.2 billion, focusing on opportunistic deals like office-to-residential conversions in New York City. TPG's real estate strategy includes significant acquisitions through TPG Real Estate and smaller, value-add investments via TPG AG. The firm, which recently acquired Angelo Gordon to form TPG AG, is positioning itself to capitalize on anticipated market stress and emerging opportunities. With a patient approach to capital deployment, TPG plans to increase its investments in the latter half of the year, targeting both defensive real estate sectors and high-value assets. CEO Jon Winkelried highlighted the firm's cautious optimism and strategic focus as it navigates the evolving market landscape.

·Office leasing booms despite smaller deal sizes and vacancy pressure. The U.S. office leasing market is highly active in 2024, with a significant rise in the number of transactions, particularly for smaller spaces in new buildings. Total office leasing volume hit nearly 109 million square feet in Q2, the highest in over two years, driven by a surge in deals exceeding the 2015-2019 quarterly average by 15%. However, average lease sizes remain 17% below pre-2020 levels, causing leasing volume to stagnate around 10% below historical norms. Miami and Houston stand out, with Miami seeing a unique 14% increase in deal size and Houston experiencing a 20% rise in leasing volume. Nationally, the trend towards smaller leases is leading landlords to focus on quicker renewals and alternative occupiers, amid growing economic uncertainties. This shift is also putting additional financial pressure on building owners due to the capital investment required for turnkey spaces that smaller tenants prefer. (Source: CoStar, CBRE, Newmark, 2024)

·UBS to liquidate $2 Billion Credit Suisse Real Estate Fund amid investor pullout. UBS Group is set to liquidate a $2 billion real estate fund, which includes 12 office properties in the U.S. and Canada, as investor redemption requests surge amid declining property valuations. The fund, acquired during UBS's takeover of Credit Suisse in 2023, is part of the Credit Suisse Real Estate Fund International, which holds 53 properties globally, 80% of which are office spaces. The decision to liquidate comes as property values have dropped 12% from December 2023 to June 2024, exacerbated by high interest rates and reduced demand for corporate office space. UBS opted for an "orderly liquidation" to avoid selling assets at an inopportune time, which could harm existing investors. This move reflects broader trends, as other real estate giants like Blackstone and Starwood Capital have also restricted investor withdrawals to maintain liquidity. The liquidation process is expected to take several years due to the limited liquidity in current real estate markets. (Source: UBS, CoStar, 2024)

Third + Shoal, 29 story office tower in Austin, Texas, is also one of the US properties in the Credit Suisse Real Estate Fund International

·Trimont set to dominate U.S. Commercial Mortgage Servicing Market with Wells Fargo deal. Wells Fargo has agreed to sell its third-party commercial loan servicing business to Trimont, a move that will make the Atlanta-based firm the largest commercial mortgage servicer in the U.S. This acquisition will boost Trimont's portfolio to approximately $640 billion in loans, representing 11% of the market. Wells Fargo, facing challenges in its commercial real estate portfolio, reported a decline in net mortgage servicing income from $113 million at the end of 2023 to $89 million as of June 30, 2024. The bank has also seen rising losses tied to nonperforming office property loans, with nonaccrual loans in this sector contributing to a $410 million increase in nonperforming assets during the second quarter. The deal includes the transfer of 710 Wells Fargo employees. This strategic move aligns with Wells Fargo’s shift away from loan servicing towards originating and securitizing commercial real estate debt. (Source: CoStar, Varde, Wells Fargo, Trimont, 2024)

Europe

·Abrdn and L&G restructure UK Property Funds to improve liquidity. Abrdn plans to restructure its £768.8 million UK real estate fund into a hybrid model, combining direct UK property investments with global indirect real estate to enhance liquidity and ensure daily dealing for investors. This shift mirrors a similar move by L&G, which restructured its £1.2 billion UK Property Fund to allocate 45% to global real estate investment trusts (REITs) and 45% to UK property. These changes address long-standing concerns over the liquidity mismatch in open-ended property funds, particularly in a high-interest-rate environment. Both funds aim to offer more flexible and resilient investment options amidst fluctuating investor sentiment. Shareholders of Abrdn will vote on the proposed changes in September 2024, with the company expecting these adjustments to strengthen their real estate product offerings. The restructuring aligns with broader industry trends influenced by regulatory guidance on fund liquidity. (Source: CoStar, Abrdn, L&G, 2024)

Abrdn sells its largest asset ,291-bed Motel One Group hotel, near Tower Hill for £56m (5.7% NIY) to LaSalle IM

·BNP Paribas to acquire Axa IM forming €1.5 Trillion asset giant. BNP Paribas has entered exclusive negotiations to acquire Axa Investment Managers, which manages €850 billion in assets, for €5.1 billion. The deal includes a strategic partnership to manage a significant portion of BNP Paribas's insurance and savings assets, potentially up to €160 billion. This acquisition would create a new entity managing €1,500 billion in assets, making it a top European leader in long-term asset management. The combined expertise of both firms would enhance their ability to serve insurance companies, pension funds, and other clients, particularly in responsible investment. Axa's CEO highlighted the success of Axa IM and the benefits of merging with BNP Paribas to create a world-class asset manager. The transaction is expected to close by summer 2025, positioning BNP Paribas as a leading player in the European asset management sector. (Source: CoStar, 2024)

·TPG Acquires Ireland's Largest Private Home Developer. TPG Real Estate has acquired Quintain Developments Ireland (QDI), the country's largest privately owned residential developer, from Lone Star in a deal expected to exceed €200 million. QDI, which has a land bank capable of supporting 7,700 residential units in the greater Dublin area, has successfully delivered over 2,300 homes since 2015. The acquisition is expected to provide QDI with additional capital and resources to expand its housing projects, including significant developments in Adamstown, Clonburris, and Portmarnock. This move marks another strategic acquisition for TPG, following its takeover of Intervest in Benelux and a UK housing joint venture. TPG believes that Ireland's robust economy and growing population will continue to drive demand for quality housing, and QDI is well-positioned to meet this need. (Source: CoStar, TPG, Quintain, 2024)

Quintain’s €500m 279 apartment- urban village development (The Crossings) in Adamstown, Dublin

·LEG Immobilien (German housing group) raises 2024 earnings forecast after strong first half performance. LEG Immobilien has raised its full-year earnings forecast to €190m-€210m, up from €180m-€200m, following stronger-than-expected first-half results. The German housing group reported adjusted funds from operations (AFFO) of €109.7m for H1 2024, despite a year-on-year decrease due to a previous one-off green electricity sale. The company experienced a slight dip in its portfolio value but sees signs that asset devaluations are stabilising. LEG also sold 2,900 homes for around €285m, slightly above book value, and decided to continue developing a large commercial complex instead of selling it. The company is increasing its portfolio investments, focusing on sustainability improvements, as it anticipates continued market recovery to support its full-year results. (Source: Green Street, LEG Immobilien, 2024)

·French investors return to UK regional office market. French investment managers have secured £110m in UK regional office acquisitions, driven by investments from retail funds. Remake Asset Management purchased two Scottish offices for £36.6m, including properties leased to BT and STV, with yields of 7% and 1.5% annual rent reviews. Iroko Zen is set to acquire Morgan Stanley’s Glasgow HQ for around £50m from Mirae Asset Global Investments, offering an 8.25% yield. Additionally, Columbia Threadneedle sold PwC’s Watford office to Corum for £19.5m with a yield close to 8.5%. These deals highlight French investors’ active role in the UK regional office market, particularly through Société Civile de Placement Immobilier (SCPI) funds. Iroko Zen also made its UK debut recently by buying a London office building for £14m, expanding its European portfolio. (Source: Green Street News, CBRE, 2024)

Morgan Stanley Glasgow hub sold by Mirae Asset Global Investments