January 2024

North America

·Blackstone buys Tricon for US$3.5 billion, taking the Canadian rental company private. This signifies Blackstone's growing focus on single-family rentals and investment in the surging Canadian housing market. Deal includes plans to expand Tricon's development projects, completing existing pipelines for new homes in the U.S. and Canada, plus additional capital projects for existing U.S. properties. Blackstone sees an "outsized growth potential" in single-family rentals, particularly in the U.S. Sun Belt. This optimism stems from factors like rising homeownership costs, migration trends towards warmer regions, and strong demand for spacious living options. The company aims to capitalize on the growing demand for rental housing in major Canadian cities and contribute to addressing the supply gap. (Source: CoStar, Reuters, Blackstone, 2024)

·Hotels in gateway US markets prepare for international tourist return. International visitor numbers to the US are recovering, with gateway cities like NYC, Miami, LA, and DC expecting full rebound by 2024/25. Hotels are crafting unique experiences like wellness offerings (yoga, breathwork) and creative enticements, local collaborations (cultural events), and bookable tours to attract travelers seeking more than just a bed experience. Hotels are tailoring promotions and pricing to specific countries, offering longer stay discounts and culturally sensitive amenities like multilingual staff and specialty food items. Working with tourism organizations and attending international missions helps hotels stay informed about travel trends and build relationships in key markets. (Source: CoStar, Hotel News Now, 2024)

·US commercial real estate transaction volume disappoint. For two years running, the usual fourth-quarter boom in property sales failed to materialize, suggesting potential industry slowdown. Overall transaction volume significantly down with 2023 seeing a 50% decline in total commercial property sales compared to 2022 and a 26% drop from the pre-pandemic average. Industrial and multifamily led the downturn with both sectors experiencing substantial contraction, with industrial plummeting 43% and multifamily 60% year-over-year. Office and hospitality rebounded in Q4. Despite annual declines, both sectors saw a surprising uptick in sales activity during the final quarter. (Source: CoStar, 2024)

·Top-tier buildings reach $100 per square foot rent in a sluggish US office market. While the overall US office market remains tepid, some top-tier buildings in New York, Miami, San Francisco, and Washington D.C. are achieving record rents exceeding $100 per square foot. Financial services and other well-resourced tenants prioritize new, renovated, or transit-connected properties, favoring amenities and premium locations over lower-priced alternatives, highlighting the flight to quality trend. Manhattan saw the highest concentration of $100+ deals, with buildings like the General Motors Building, Seagram Building, and One Vanderbilt commanding top rents. Continued demand for high-quality space bodes well for new premium developments. (Source: JLL, CoStar, 2024)

·Prologis, the world’s largest industrial developer and landlord, expects to boost property sales and acquisitions in 2024 as market stability encourages more deals. The company anticipates raising $800 million to $1.2 billion through property sales, and adding $1.75 billion to $2.25 billion to its investment funds. Prologis will also ramp up land and building acquisitions, aiming to capitalize on an anticipated increase in market activity. Despite economic uncertainty, Prologis remains optimistic about warehouse leasing and rent growth, projecting average occupancy around 97% and continued rent increases in 2024. (Source: Prologis, 2024)

 Europe

·Germany's commercial real estate faces difficulty refinancing €77 billion in loans due between 2024 and 2027, due to current valuations and interest rates. Europe-wide challenge, German hit hardest: Across Europe, €176 billion out of €640 billion in loans require refinancing, but Germany's €77 billion gap is the worst of any nation. Potential solutions exist, but challenges remain: Bringing in additional equity or specialized debt could bridge the gap, but limited lending appetite from banks and high expectations from alternative lenders complicate matters. (Source: CBRE, CoStar, 2024)

·UK needs over 112 million sq ft of new industrial & logistics space in 5 years due to e-commerce & manufacturing shifts. Growing urban populations & reliance on online shopping put pressure on land in towns & cities, requiring more urban fulfilment hubs. Increasing manufacturing output (projected 4.3% increase by 2028) will drive demand for an additional 33.8 million sq ft of space. Local authorities lack understanding of demand and use outdated methods to allocate space, hindering development. Retailers prioritise urban locations close to populations for faster deliveries, despite higher rents. Near-shoring and re-shoring of supply chains have the potential to "spur manufacturing output" and increase demand for space. (Source: Knight Frank, CoStar, 2024)

·Major office requirements in London's City have spiked. This includes Nomura seeking 250,000-300,000 sq ft, Gallagher looking for 250,000 sq ft, and Accenture wanting 250,000-300,000 sq ft. This momentum suggests a continued rebound in City's office activity in 2024, following strong leasing in the latter half of 2023. Prime UK rents could see a 10% increase this year due to tightening availability and high demand for quality space. The emphasis on prime space with high sustainability features highlights the growing importance of these factors for major occupiers. This trend is likely to continue shaping development and pricing in the City's office market. (Source: CoStar, JLL, Newmark, 2024)

·Landlord Challenges WeWork's Lease at London Flagship. Almacantar, owner of WeWork's biggest London location (10 York Road), is seeking court approval to evict the company due to its Chapter 11 filing in the US. The key issue is whether US or UK law applies to the lease, impacting WeWork's ability to retain the space. WeWork vigorously opposes the eviction, arguing its UK operations are separate from the US bankruptcy. They claim Almacantar's motive is to re-let the space to a competitor at a higher rent, benefiting from WeWork's substantial fit-out investment. The outcome of this legal dispute will set a precedent for how similar situations are handled in the UK. For WeWork, losing this flagship location would be a significant financial blow, potentially impacting their UK business and overall profitability. (Source: React News, 2024)

·Clear bifurcation between low-cost insurance lenders and high-cost non-bank lenders. The non-bank lending market offers various options, from low-risk senior loans to niche subordinate tranches within the capital structure. Lower rates are expected to boost transaction volume, enabling deployment of previously raised funds. New entrants join the market, but cost of capital differences may create a divide between lenders. Debt yields and interest cover ratios replace LTVs as key factors for debt sizing, with lenders accepting lower coverage ratios with strong protections. (Source: Knight Frank, 2024)

Loan Margins by Asset Class (UK)