Analysts had their hands full in July trying to manage both the normal data cadence— CPI, PPI, the jobs report, bank and tech earnings, and a Fed meeting— but also a bevy of unexpected events that often reduced economic data to an afterthought. Not that many people need a reminder, but July saw a former presidential assassination attempt; the end of the re-election campaign for the sitting President; a new Democrat presumptive nominee; a Republican VP candidate selection; a major tech disruption courtesy of CrowdStrike; renewed fighting in the Middle East; and protests in France that shut down trains ahead of the Olympics. (Other than that, it was a pretty ho-hum month).
In addition, U.S. stocks saw a significant uptick in volatility as tech AI-darlings sold off sharply over a two-week span. And to top it off, the Nasdaq was down more than 3% in two separate recent sessions.
For the commercial real estate (CRE) markets, volatility and political unrest often lead to slowdowns. Distressed asset buyers, acquirers, sellers, and lenders usually crave stability so any volatility typically comes with pullbacks. If there was a silver lining to last month’s volatility, it’s that the CRE market continued to chug along. New CMBS issues were occurring; new sales were taking place; and lending spreads remained stable even in the face of volatility.
In fact, borrowers got a boost in July as Treasury yields fell considerably. The yield on the 10-year was down nearly 40 basis points from early July to late July. The yield on the two-year saw a similar decline as market watchers were all-in on expectations for a September Fed rate cut.
Noise Getting Louder
While the CRE market soldiered on, it is undeniable that the CRE “noise” continued to get louder. The lowering of values of several U.S. malls and trophy offices along with the relinquishing of properties by several well-known CRE operators reminded everyone that the office segment remains in deep distress and that several multifamily syndicators remain on the ropes.
Among the negative comps this month:
- The Enclave at Northwood— a 188-unit apartment complex in Clearwater, FL— was sold for a 28% discount to its 2021 sales price.
- 1601 Cherry Street – a 560,000 square-foot office in Philadelphia—sold for just $30 million, down from $95 million in 2017. The new owner expects to transition half of the office space to residential.
- The Dexter Horton Building in Seattle sold for $36.6 million, down 76% from its 2019 sale.
- 777 Tower— 777 South Figueroa Street—in Los Angeles is set to sell for $120 million. That represents about 41% of the outstanding debt on the property.
The number of disappointing property sales stories seemed to accelerate in July, making it more challenging for other investors to confidently deploy capital.
Bright Spots Still Discernible
Even though the negative headlines ramped up in July, there were bright spots as well.
For instance, the most recent CMBS conduit deal to price saw 60% of the collateral made up of either office or multifamily loans. (The percentage is even higher if one allocates the office and multifamily portions of mixed-use properties to that number). This issuance is meaningful because it demonstrates that there is indeed capital available for the “right” office.
In addition, conversations with bankers and workout specialists confirm what we have been saying either in our monthly blog or on our CRE Weekly Digest podcast. That is: because the CBD office market in many major cities is a disaster, apartment borrowers that used floating rate debt for 2021 purchases are under duress. That said, the rest of the multifamily market is largely performing, and distress in all other major property types continues to be very limited.
Among the sales highlights from July:
- J.P Morgan and Hines are slated to pay $300 million for 250 Park Avenue in Midtown Manhattan
- KKR paid $234 million for a 1.8 million square-foot industrial park in Houston
- Host Hotels spent $233 million for a New York City hotel, acquiring 1 Hotel Central Park from Starwood. The property last sold in 2011 for $72 million.
- A two-property apartment property in Jersey City sold for $221 million—representing the largest multifamily sale in NJ since 2019
- The Hilton La Jolla Torrey Pines Hotel was sold for $165 million to JRK Property Holdings
The Final Word, for Now
It is possible that U.S. stock volatility will persist, that the office markets will continue to be walloped with negative comparables and foreclosures, and that multifamily syndicator defaults will pollute the sentiment for the entire apartment segment. To focus only on those aspects of CRE will probably leave cautious investors regretful in a few years when interest rates and cap rates fall, and the market returns to its normal rhythm.
