Blueprint: Fed watchdog highlights banks’ commercial real estate exposure, Lone Star collects a third of its $6bn fundraising target, real estate secondaries volume falls

The Federal Reserve watchdog weighs in on commercial real estate bank exposures and lending reserves; Lone Star Funds makes headway amassing firepower for its latest fund ahead of a distressed vintage; Ares data shows real estate secondaries volumes have dropped; and more in today's briefing, exclusively for our valued subscribers.

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They said it

“I don’t think we’re at the middle innings on this. I think we’re at very early innings on this”

David Hodes, co-managing partner at Hodes Weill, on managers asking investors for more capital as they face a shortfall in fund reserves. Read the full story here.

What’s new

Barr: closely focused on loans issued by banks to commercial real estate borrowers (Source: Federal Reserve)

Higher surveillance

US banks just cannot escape the specter of commercial real estate travails these days. Following New York Community Bancorp posting a surprise quarterly loss and disclosing trouble with its commercial property loan book earlier this month [see affiliate Real Estate Capital USA coverage], the Federal Reserve was talking last week about being “closely focused” on loans issued in the sector. As per Bloomberg coverage, the Fed’s chief bank watchdog Michael Barr told an audience at New York’s Columbia University supervisors are looking at how banks are safeguarding against potential losses, reporting risks internally and, critically, if they have the reserves to dig themselves out of commercial real estate loan losses. “For a small number of banks with a risk profile that could result in funding pressures for the firm, supervisors are continuously monitoring these firms,” Barr said. “That’s a problem,” offered one global head of real estate at an institutional investor to PERE yesterday. “Banks have liquidity. But regulators are telling them to shrink.”

It will do little to assuage mounting fears across the pond. In the wake of Munich-headquartered lender pbb Deutesche Pfrandbriefbank needing to reassure investors earlier this month of its financial health following two unscheduled announcements relating to its €4.8 billion exposure to US commercial real estate, talk of lender contagion in Europe stemming from the US has resurfaced. Deutsche Bank is one lender that has significantly increased provisions for troubled real estate, as per this Bloomberg report.

Lone Star scores first $2bn

Lone Star Funds has raised an initial $1.98 billion for its latest fund, according to documents filed with the US Securities and Exchange Commission this month. The Dallas-based firm launched Lone Star Real Estate Fund VII a year ago, with an equity target of $6 billion, according to a document approving a commitment by the Arkansas Teacher Retirement System. Lone Star’s previous fund, Lone Star Real Estate Fund VI, attracted $4.6 billion back in 2019. Like that vehicle, Fund VII reportedly has a target return of 15 percent or more from its investments. What will these investments be? In an interview with PERE last year, founder John Grayken highlighted how hotels and forms of retail could be interesting amid opportunities he expected to emerge this year and next. In that interview, he also rejected the view that assets in places like San Francisco are not worth chasing. “When I hear certain cities are being written off, that sounds interesting to me. These types of broad conclusions, they can be challenged,” he said.

Starwood’s Irish data drive

A month on from launching dedicated data center platform Starwood Digital Ventures, Starwood Capital has made an $850 million investment in Irish data center developer Echelon Data Centres. According to a statement, the Miami-based manager will own 50 percent of the company, which has 140 megawatts in current capacity, and invest in growing the business across Ireland and the UK with capital from the 12th in the firm’s flagship opportunity fund series, Starwood Opportunity Fund XII and its private REIT, Starwood Real Estate Income Trust. The transaction, which values Echelon at around €2.5 billion, comes off the back of a 41 percent increase in take-up for data centers across Europe’s leading markets in Q4 2023, according to broker CBRE. Starwood has invested approximately $8 billion in data centers across the US and Europe in the past five years through diversified real estate vehicles. But with the launch of its 13th global opportunity fund in November, as reported by PERE, the firm included a specific allocation to data centers for the first time, representing 20-30 percent of the fund.

Trending topics

Well-seeded Asian industrial

Industrial heavyweights GLP Capital Partners and ESR Group continue to grow their logistics market shares in Asia, with each introducing a strategy last week, according to respective statements. GCP launched the GCP China Advanced Research Manufacturing Value-Add Partners, targeting industrial park investments in China’s major economic hubs. With an initial investment capacity of more than $350 million, the fund will be seeded with a Beijing asset from GCP’s balance sheet. Meanwhile, ESR’s South Korean platform, ESR Kendall Square, established its first open-ended core logistics fund in the country. Seeded with seven initial assets from ESR Kendall Square’s balance sheet, the manager plans to grow the assets under management of the fund to $3 billion within three years, acquiring prime, income-producing properties. Interest in Asian logistics has waned of late, according to the latest Investment Intentions survey by CBRE. But that has not toppled it as the first-choice sector for new investment in 2024, the survey shows.

A marriage of two landlords

A significant sale could be on the cards for Blackstone in the UK. The mega-manager plans to merge St Modwen Logistics and Industrials REIT – warehouse landlords it took private in 2021 and 2023, respectively – into a separate company, together with other assets acquired via 25 deals, Bloomberg reports. The new business will be named Indurent, will own more than 200 warehouses, and will be the largest owner of UK industrial property behind REITs Segro and Tritax Big Box. On the same day as Blackstone’s Indurent plans were reported, Tritax reached an agreement to merge with another REIT, UK Commercial Property, which owns hotels, retail parks and offices – in addition to warehouses. Despite rental growth slowing and vacancy rates rising in UK logistics over 2023, the market remains a firm favorite for Blackstone and other institutionally-backed capital looking long term at supply and demand prospects.

Housing salvation for aging millennials

Boston-based manager Bain Capital Real Estate and Newport Beach-based residential specialist Cherry Tree Capital Partners are joining forces to target rentals in Southern California, with a view to deploying “several hundred million dollars over the next few years,” according to a statement. The BCT Development joint venture is focused on creating “elevated townhome communities,” they said, to house “aging millennials.” According to Tim Stanley, co-founder at BCT Development and head of development at Cherry Tree, this is one demographic hardly catered for. “Aging millennials are the fastest-growing demographic in Southern California. As individuals and families continue to migrate to the suburbs, they’re faced with a lack of attainable for-sale housing, and quality alternatives,” he said. “That’s where BCT comes in – meeting this deep need of elevated rental living through our premier townhome communities, all while prioritizing affordability by design.”

Data snapshot

Secondaries slip

Secondaries real estate trading dropped 21 percent between 2022 and 2023, according to data from manager Ares Management shared with affiliate Secondaries Investor. Last year, deal volume hit $9.8 billion, down from the record $12.4 billion reached the prior year. Nevertheless, 2023 was still the third-highest annual total on record.

People

Hines makes hire to boost wealth management

Houston-based manager Hines hired industry veteran Paul Ferraro away from private equity firm Carlyle to run its global private wealth solutions strategy. The company is banking that allocations from private wealth channels will reach trillions of dollars as access to institutional-grade real estate becomes easier, Hines global chief investment officer David Steinbach said in a statement. “Paul’s exceptional success in leading global private wealth platforms and raising significant capital from this space will propel Hines’ expansion of investment solutions and partnerships,” he said. During Ferraro’s time at Carlyle, where he was head of private wealth, the company expanded its global private wealth business to more than $50 billion, accounting for more than 13 percent of the firm’s assets under management.

Investor watch

Florida deviates from the norm

US pension State Board of Administration of Florida has struck an alternative tone with its latest private real estate commitments. In a filing, the investor approved a $300 million commitment to a self-storage joint venture with Chicago-based manager Heitman. The iStorage II venture is expected to be invested in assets demonstrating core risk and return characteristics in the US. The pension also allocated $78 million to industrial manager Alterrra Property Group‘s Alterra-IOS Venture III, a vehicle focused on the growing industrial outdoor storage sector with a $750 million fundraising target, as well as just over $100 million to Ares-owned Landmark Partners’ ninth real estate secondaries fund, Landmark Real Estate Fund IX, and an associated sidecar. Commitments were advised on by Townsend Group.

This week’s investor meetings

Tuesday, February 20

Wednesday, February 21

Thursday, February 22

Friday, February 23

Today’s letter was prepared by Jonathan Brasse, with Charlotte D’Souza, Miriam Hall, Christie Ou and Evelyn Lee contributing.