CRE Analyst

Here are the trends and events that we think will define commercial real estate in 2024.

Why predictions? Drafting thoughtful (-ish) predictions requires reassessment and investing thought into how CRE systems are evolving. Not a bad exercise. Some thoughts on last year's calls with the benefit of hindsight... ------------- 1. CRE sector will be better than expected in 2024 [✓] A year ago, calls for a 'real estate apocalypse' dominated headlines. We accurately thought it was uninformed hyperbole. 2. Economists will be wrong again [≈] Most economists called for a recession in 2023. We guessed they would be wrong again and that job growth would turn negative in 2024. We were 12K jobs away from being right in November when job growth came in at 12K jobs vs. consensus estimates of +100K. 3. Apartment problems exceed office problems [✓] This one was controversial, but the 2Q24 NCREIF report confirmed more multifamily properties falling short of DSCRs than office properties. 4. Fewer real estate jobs [x] Thankfully, we were wrong on this one. Hiring slowed to a crawl and there were many layoffs but nothing like prior cycles. 5. Brokerage revenue disappoints, led by CBRE [x] Brokerage revenue recovered quicker than expected. Glad to miss this one. 6. Apartment syndicators face the music [✓] Syndicator pain started in 2024. Well over $1B in defaults and restructures. Unfortunately for LPs, still early innings. 7. Loan sales > loan defaults [✓] Another relatively controversial call. Ended up being accurate, primarily due to very low levels of defaults. But we thought there would be more loan sales. 8. Life science loses its luster [✓] It's hard to believe that life science was still favored 12-18 months ago. Very tough year for the sector. 9. Data centers will surge but raise eyebrows [✓] Similarly hard to believe that not many non-data center people were talking about data centers (or their power drains) a year ago. It reached such a fever pitch this year. Big tech companies responded by putting nuclear plans in motion. 10. Open-end fund manager recaps [≈] There has been significant fund manager recap activity, but we were expecting at least one blockbuster, which never occurred. 11. Japanese investors will be a top U.S. investor [x] Totally missed this one. Japanese capital ranked 6th this year (so far). 12. More platform plays and spinouts [✓] Lots of secondary investment activity this year. And many anecdotal examples of mid-career professionals spinning out of established firms. More to come. 13. CRE executives talk a lot more about AI [✓] We surveyed a dozen REITs and found mentions of "AI" spiked by 50%+ this year. 14. Business schools: more about "business" than "school" [x] On one hand, we nailed this. Acceptance rates are higher, the traditional B school model is struggling, and their go-to click credential provider filed for bankruptcy this year. But we also predicted that MBA applications would decline this year, which was wrong. Stay tuned for thoughts on 2025.

“Passive income” seems passive when returns are extraordinarily strong but… We are entering a whole new world.

Millennials: “Thanks for the down payment mom and dad!” Gen Z: “We’ll never be able to afford a home.” Gen X: “One of my kids won’t ever move out!” Alphas: “Look at this TikTok!” Boomers: “Nothing to see here.” The volatility in this chart suggests that the year you were born likely has as much to do with your housing situation than nearly anything else.

"Youth is wasted on the young." It's impossible to overstate this shockwave... ...at home and at the office.

'Maturity wall' narrative vs. default research... ----- Narrative ----- Commercial real estate maturity wall $950B in 2024, peaks in 2027 "Rate hikes by the Federal Reserve and changes in post-pandemic behavior have put pressure on commercial real estate (CRE) borrowers needing to refinance loans coming due. The tally is nothing to sneeze at, with approximately $950 billion in CRE mortgages set to mature in 2024..." "Should borrowers fail to seek the necessary refinancing and default on their loans, banks would not only face losses on their loans but valuations in the CRE market could come under significant pressure. Origination data shows that maturity wall will grow to nearly $1 trillion in 2025 and ultimately peak in 2027 at $1.26 trillion, suggesting that the issue is unlikely to resolve soon." (Source: S&P) ----- Research ----- The bedrock longitudinal study of commercial mortgage defaults was driven by Howard Esaki of Morgan Stanley. Here's what Esaki and his peers found regarding the timing of defaults: "On average, the annual default rate was low within the year of loan origination, rose to about 1% in the first year following origination, then jumped to a range of 1.5% to 2.7% for the next six years. Default rates then declined to less than 1% for the next three years, and tailed off gradually. These results are nearly identical to the Esaki (2002) study. As in that study, THERE IS NO SPIKE IN DEFAULTS AT BALLOON DATES. Some research analysts have noted that loan restructures result in the appearance of low default rates in balloon years, but there is no evidence to support this in our study." "The default timing pattern for individual cohorts can vary widely from the average. The timing and total defaults of a cohort are highly dependent on its position in the real estate cycle. For almost all cohorts, however, the peak in defaults is in years three through seven after origination." Which approach will define performance: 'maturity wall' or historical experience?

Partner at top 25 law firm: “Our headcount will be 50% smaller in ten years.” One off instance or sign of the times?

Nothing to see here...

Fishing for real estate value in the stock market Macy’s faces pressure from real estate-focused activists. Themes: -- Undervalued stock. -- Real estate worth more than the company. -- Calls for a structural shake-up. Barington Capital and Thor Equities argue Macy’s is sitting on up to $9 billion in real estate—more than its $7 billion debt and equity capitalization. Barington's solution: 1. Form a real estate unit to unlock value. 2. Slash capex. 3. Aggressively buy back shares. Macy’s leadership, under CEO Tony Spring, has a turnaround plan in motion trimming underperforming stores, expanding luxury brands like Bloomingdale’s and Bluemercury, and focusing on smaller formats. Activists believe they can do more, pointing to Dillard’s success with leaner spending and shareholder returns. The value of real estate (and every other asset) is in the eye of the beholder. Shareholders of retail stocks don't value properties like real estate investors. Disconnects between their perspectives occasionally create opportunities for: ...aggressive activists to create short-term value. ...and executives to lose their jobs (and their companies).

10% of office mortgages are currently delinquent. What share of office loans will end up defaulting? FYI - less than 2% of office mortgages have defaulted since the GFC.