July 2024

North America

·Blackstone has seen its investment activity increase the most in two years, spending $34 billion in Q2 2024. This includes acquisitions like Apartment Income REIT, Tricon Residential, and Tropical Smoothie Cafe. Anticipating that the Federal Reserve will cut interest rates later this year, Blackstone has committed another $19 billion in future investments. Their strategic focus on warehouses, rental housing, and data centres is driven by robust demand and favourable supply trends. Warehouses are crucial due to e-commerce growth, rental housing is in demand as homeownership declines, and data centres are vital due to increasing digital activity and AI advancements. These three sectors now make up 75% of Blackstone's global equity portfolio, up from just 2% in 2007. Despite these investments, Blackstone's real estate performance has lagged behind other segments, resulting in a 3% decline in fee-related earnings last quarter​. (Source: CoStar, Blackstone, Green Street, 2024)

·New York City office market shows signs of stabilisation. Breaking from the national trend, NYC's office market shows tentative signs of recovery. Data from CoStar reveals a 40-basis-point decline in Manhattan's available office space over the past year, bringing the current rate down to 17.8%. This stands in stark contrast to many major US cities grappling with rising vacancy rates. The limited development of new speculative office buildings in NYC likely contributes to this positive trend. However, a cautious approach remains necessary. While encouraging, the current availability rate sits considerably higher compared to pre-pandemic levels (around 11.7%). Additionally, potential economic downturns could dampen tenant demand and cause the vacancy rate to rise again. This evolving landscape presents a unique opportunity for both investors and occupiers in the NYC office market. (Source: CoStar, 2024)

Change in Availability Rate Over 12 Months

·Manhattan retail showing signs of recovery with asking rents rising in most retail corridors. Average asking rents rose in 10 of 16 shopping corridors in the first half of the year, driven by the return of tourists and office workers, according to a REBNY (Real Estate Board of New York) study. Madison Avenue between 57th and 72nd streets saw rents increase by 13.3% to $945 per square foot, while SoHo experienced a 28% rise to $481 per square foot. Times Square rents doubled to $1,955, and the Fifth Avenue stretch south of the Flatiron Building saw a 23% increase to $369. Increased office visitation and tourist activity have created strong demand, leading to bidding wars and allowing landlords to be more selective with tenants. Luxury retail demand remains robust, highlighted by significant property acquisitions such as Kering's $936 million purchase of 717 Fifth Ave. and Prada's $835 million acquisitions on Fifth Avenue. Despite improvements, rents in none of the tracked corridors have returned to pre-COVID peaks, and challenges such as staffing shortages, expensive buildouts, and high borrowing costs continue to impact the market. (Source: REBNY, CoStar, JLL, Crain, 2024)

Kering’s 715-717 Fifth Avenue, Manhattan Retail Property

·Royal Bank of Canada (RBC) to take over 82 San Francisco apartment buildings, which Goldman Sachs defaulted on. RBC is poised to take control of 82 apartment buildings in San Francisco after Goldman Sachs and Ballast Investments defaulted on a $687.5 million loan. These loans were tied to a total of 1,200 units acquired by Goldman Sachs and Ballast between 2017 and 2020 for $704.5 million. The takeover comes after RBC created special-purpose entities to manage two loans amounting to $478.5 million for 842 units. While the reason for the default remains unclear, speculation suggests a decline in local market conditions may have pushed property values below the loan amount. This incident follows similar struggles faced by other property owners in San Francisco, with Veritas Investments surrendering a 316-unit portfolio and Mosser Companies defaulting on an $88 million loan. Despite the takeover, Goldman Sachs and Ballast still hold ownership of 106 apartment buildings in the city. (Source: The Real Deal, Bisnow, The Business Journals, 2024)

·       KKR refinances 42 single-tenant occupied industrial portfolio with Barclays and BMO. KKR is refinancing a $571 million industrial portfolio, with Barclays Capital Real Estate and BMO Capital Markets co-originating the loan for the portfolio. Barclays will incorporate into a new commercial mortgage-backed securities offering. The loan is backed by 42 industrial properties and one office property totalling 6.7 million square feet across 17 states and two Canadian provinces. KKR acquired this portfolio through its Strategic Lease Partners since 2021, specialising in triple-net lease properties. The borrower, KKR Real Estate Partners Americas IV, is contributing $43.5 million in cash equity to the transaction as part of the refinancing, with the portfolio appraised at $844.4 million. BlueTriton, the largest tenant, leases 769,000 square feet of the portfolio, contributing over half the rent. Single-borrower industrial CMBS deals have surged to over $11 billion this year, compared to $1.6 billion last year. (Source: CoStar, Morningstar DBRS, BlueTriton, 2024)

KKR’s 769,000 sq ft bottled water distribution facility at 4718 Mountain Creek Parkway, Dallas leased to BlueTriton

Europe

·Canary Wharf’s HSBC Tower to be fully reshaped. The Qatar Investment Authority (QIA) and Canary Wharf Group (CWG) have revealed the first images of the reimagined HSBC tower at 8 Canada Square, set for redevelopment after HSBC vacates the building in 2027. The winning design by Kohn Pedersen Fox (KPF) will transform the 1.1 million sq ft skyscraper into a mixed-use development, incorporating workspaces, leisure, entertainment, education, and cultural attractions, including a publicly accessible roof terrace. The redevelopment will start after HSBC’s lease expires, with a planning application to be submitted next year and expected consent by September 2026. This project aligns with QIA's vision for adaptable, multi-use real estate to meet long-term business needs. The plans also include a new public route between the Elizabeth line station and Canada Square Park​. (Source: Green Street, The Architect’s Journal, Reuters, 2024)

KPF’s proposal (RHS) to reimagine Foster’s HSBC Tower (LHS) at 8 Canada Square, Canary Wharf

·Amazon's renewed activity in the logistics market is significantly impacting the sector. After a pause starting in 2022, Amazon is back, having acquired land for a 2 million sq ft warehouse at Segro Logistics Park in Northampton and nearing a deal for an 882,000 sq ft warehouse with Panattoni in Avonmouth. Industry insiders estimate Amazon's current demand at 7-8 million sq ft of new space, with potential for four to six major deals in the next six months. This resurgence is not just about expansion; Amazon aims to replace older buildings to enhance efficiency. Unlike its previous build-to-suit strategy, Amazon is now acquiring land directly to develop buildings that meet its specific needs, a shift highlighted by its recent recruitment of a strategic land role from Logicor. Consequently, Amazon's return is expected to capture 10-20% of the big box market over the next year, revitalizing the logistics sector and potentially lowering vacancy rates due to its significant space requirements. (Source: Green Street, Savills, Cushman & Wakefield, 2024)

Amazon’s Market Share of Big Warehousing Sheds

·UK PBSA (purpose-built student accommodation) stands out as the crown jewel of the alternatives sector. Investment in the UK's PBSA sector reached £1.7 billion in the first half of 2024, according to BNP Paribas Real Estate. This includes £1.3 billion in the second quarter alone, a 256% year-on-year increase from £358 million. The total investment for the first half of the year saw a 245% rise from £493 million the previous year. The sector's strong operational performance and attractive long-income play have made it the "darling" of alternative markets. Despite falling applicant numbers, the demand for student accommodation remains strong due to a consistent oversubscription of university places over the past nine years. Investor funding allocations for PBSA have surged by around £5 billion in the last six months, focusing on London, prime regional cities, and STEM university locations. The second half of the year is expected to bring clarity on occupancy and increased transaction volumes, bolstered by improved political stability. (Source: CoStar, BNP Paribas, Colliers, 2024)

·Brookfield backs €500 million multifamily development in Cologne, Germany. Brookfield is diving into Cologne's booming housing market with a €500 million investment in a large-scale multifamily development by Empira Group. Scheduled for completion by end-2027, the project will inject 752 new apartments into a supply-constrained submarket experiencing significant population growth. Recognising the diverse needs of future tenants, the development offers a range of one- to five-room apartments alongside over 600 parking spaces, 5,000 sqm of commercial space, 10% as subsidised apartments and a daycare centre. Sustainability is a priority, with the project targeting KfW 40 NH and DGNB Platinum certifications. This partnership highlights the growing popularity of build-to-rent projects as a solution to the housing shortage. By providing much-needed rental stock, Brookfield and Empira aim to contribute to a more balanced housing market in Cologne's Marienburg district. (Source: CoStar, CRE Herald, IPE, 2024)

·Higher interest rates threaten Europe’s dominance as destination for cross-border capital.  Europe attracted over half of all cross-border real estate investment globally between 2010 and 2023. However, Europe could potentially lose its crown, warns MSCI. This shift stems from Europe's weaker economic growth outlook compared to the US and Asia-Pacific. The report highlights a significant decline in European cross-border investment during 2023, a stark contrast to Asia's record highs. Investors, seeking better returns, are now favouring debt over equity in Europe as property values undergo correction. The complexities of this new landscape are pushing investors towards specialised fund managers, potentially leading to a consolidation in fundraising. This trend coincides with a decline in the office sector's appeal due to the rise of hybrid work models. Industrial assets, on the other hand, emerged as the top investment target in 2023. This shift suggests an increase in portfolio and platform trades by cross-border investors adapting to the transformed landscape. (Source: CoStar, MSCI, 2024)