Blueprint: Public REIT fortunes mixed after Fed interest rate hike; PERE explores borrowing problems; Brookfield’s South Florida hotel sale finally closes

Public equities markets react favorably to Federal Reserve's latest interest rate hike but real estate public markets have a mixed response; PERE's latest cover story highlights borrowers' issues in the current environment; Brookfield sells a signature hotel asset in South Florida after previously failed buyer efforts; and more in today's briefing, exclusively for our valued subscribers.

They said it

“It’s an over-simplification to say that this market correction is just another classic credit crunch”

David Hodes, founder and co-managing partner of global advisory firm Hodes Weill & Associates, said in the firm’s 2023 market commentary that many contributing factors make the current market turmoil different to the global financial crisis

What’s new?

Ups and downs: Jerome Powell’s address to the market on Wednesday appeared good for the broader economy, with public markets reacting favorably. Public real estate, on the other hand, had a rockier time.

Public market swings
Stock markets have initially reacted favorably to Federal Reserve chairman Jerome Powell’s forecast of slowing inflation and the central bank’s tapering velocity of base rate increases. The S&P 500 closed up around 1 percent on Wednesday after Powell addressed the market, and grew another half a percent the following day. Meanwhile the Nasdaq Composite index grew even more, closing up by 2 percent on Wednesday, up another 1.1 percent on Thursday and a further half a percent on Friday.

“We’re talking about a couple more rate hikes to get to that level we think is appropriately restrictive,” Powell said of the US central bank’s future policy. The Fed raised its federal funds rate by only 25 basis points after raising it 50bps in December and 75bps in November. “We’re going to be cautious about declaring victory and sending signals that we think that the game is won,” he added.

Private real estate managers were paying closer attention to the public real estate equity market response to the rate increases for clues for their future. They saw more volatility than the broader market indices. On Thursday, the FTSE Nareit All Equity REITs index produced a 2.14 percent daily return – a positive indicator after a prolonged period of poor visibility on values in the public markets. However, on Friday, that same index gave almost all of that positive momentum back, returning a negative 1.91 percent.  No doubt the private side will be watching closely in the coming weeks to see where the market settles.

Temporary pain relief
Amid a significant dislocation in the real estate debt markets, borrowers have been resorting to various workarounds to get deals done. As we explore in PERE’s February cover story, however, these temporary solutions can only go so far. For example, one workaround for more deep-pocketed players has been to finance transactions entirely with equity. With opportunities to acquire high-quality real estate at attractive pricing, “we are comfortable over-equitizing – closing all-cash today and likely financing when the debt markets find a new equilibrium,” Lauren Hochfelder, co-chief executive at Morgan Stanley Real Estate Investing, told PERE.

Similarly, APG decided recently to fund a development project all-equity after receiving unfavorable terms for a construction loan. But as European real estate head Robert-Jan Foortse points out, “It’s probably difficult to do everything all-equity. Our pockets may be deep, but they’re not endless.”

For more on how borrowers are coping with financing woes, check out our cover story here.

A record-low fundraising year in 2022
PERE’s FY 2022 fundraising report has revealed a dip of 24 percent in aggregate fundraising volume in 2022. A total of $168.7 billion was raised across 323 funds in 2022. While macro uncertainties played a significant part, the drop can be partially explained bythe fact it follows a year that saw the third-highest annual fundraising volume PERE has seen since it started tracking fundraising in 2008.

Last year saw the closings of only three mega-funds, but at least four funds targeting $5 billion or more are in the market right now. Two of these include potential record breakers from Blackstone. The firm’s 10th global flagship opportunistic fund, Blackstone Real Estate Partners X, had attracted $28.6 billion as of the end of 2022. Blackstone is also in the market with Blackstone Real Estate Partners Asia III, which is targeting $9 billion.

Third time’s a charm
Toronto-based Brookfield Asset Management has finally managed to sell a hotel property in Florida that it has owned since 2014. The Diplomat Beach Resort in Hollywood, Florida, was the subject of two failed bids, the first of which came in 2020, from local real estate firm Fontainebleau Development during the pandemic.

A joint venture between bank Credit Suisse and manager Trinity Partners closed on the deal, assuming the remaining debt on a $460 million CMBS loan and the equity in the building for $835 million in total transaction value, making it the largest hotel deal since the onset of the pandemic. Reports in 2020 had Fontainbleau attempting to purchase the property for approximately $800 million.

For more coverage on the deal, check out sister publication Real Estate Capital USA’s article (registration required) on the debt involved and keep an eye on PERE in the next few days for more analysis.

Trending topics

To the (pin)point
Anne Valentine Andrews, the global head of infrastructure and real estate at asset management giant BlackRock, believes her firm is putting its money where its mouth is when it comes to property these days. The major lease it is assuming at 50 Hudson Yards in New York this year is a case in point. The firm’s conviction about this 2.9 million square foot future-proofed office chimes with the major takeaways from BlackRock Alternatives’ Private Markets Outlook white paper, which it published in December and Valentine Andrews discussed with PERE shortly afterwards. In that interview, featuring prominently in February’s issue of PERE, she demonstrates how broad thematic convictions are nowadays insufficient for institutions building robust property portfolios nowadays. “What’s driving our business now is picking individual assets. There are broad themes, which everyone knows about. But within the top sectors, it is important to make sure you’re picking the best properties,” she told us. You can read the full interview by clicking here.

Offic-ially in trouble
As the ‘great correction’ continues to play out in global markets, real estate investors will be wringing their hands over one sector in particular. Last week, there was a siren call for owners of outdated, sub-Class A office buildings everywhere when Scott Rechler, chief executive of property developer RXR, told the Financial Times he would “give the keys back to the bank” for some of his Manhattan offices.

More than just reflecting the pinch, office returns in the US slipped 4.8 percent in Q4 2022, according to the NCREIF Property Index. Rechler’s decision to surrender some properties to the lender signals the seriousness of the risk of obsolescence. Repurposing may present a way forward. But, according to research by CBRE, even if every US office conversion currently in the pipeline completes, and when combined with those completed since 2016, only 91.9 million square feet – approximately 2 percent of total US office inventory – would be removed from the market.

Competing on the how
The race to decarbonize most and soonest has gathered unstoppable momentum. Now the competition is spilling into how to do it. Latest to offer a solution better than the others is Paris-based manager Ardian, which claims to have uncovered a method of calculating a return on carbon that considers both embodied and expected operational carbon.

In a commentary, published by PERE yesterday, Ardian managing director Omar Fjer said the industry’s fixation on operational carbon – because it typically accounts for two-thirds of a building’s emissions – is distracting organizations from seeking a holistic reduction solution. He said: “Current models only cover the operational consumption of a building’s life cycle without considering the steps it took to get there. That means one-third of a building’s lifetime emissions are currently disregarded.” You can read the commentary in full here.

Data snapshot

Sale leasebacks are… well… back
New York-based advisory firm SLB Capital Advisors are forecasting a record year for sale leaseback transactions. Data through Q3 of 2022 shows transaction volume has already almost matched 2021 levels.

People moves

Habra’s global brief puts Ivanhoé’s house first
Developing a concerted strategy for all its partnerships has become an important focus for Ivanhoé Cambridge, the real estate business of Quebec state pension Caisse de dépôt et placement du Québec. Charged with developing this strategy is Karim Habra – his LinkedIn profile here. He has been promoted to the role of head of strategic partnerships in addition to his position as head of Europe and co-head of Asia-Pacific, PERE has learned.

“Karim Habra has been given a global mandate involving our strategic partnerships in order to develop a strategy for all partnerships within the organization,” Ivanhoé Cambridge told us in a statement. “In this role, he will be responsible for conducting an in-depth review of our strategic partnerships on a global scale and evaluating their performance in order to amplify or reposition them while developing our new agreements. This work will be done in collaboration with all the regional hubs so as to align a global vision and to ensure proximity to local ecosystems.”

What should external managers make of this? That this investor is bent on prioritizing collaborations with third-parties in line with its own objectives, one senior Ivanhoé Cambridge insider told us.

Investor watch

AXA bets on housing in Asia
Paris-headquartered AXA IM Alts has expanded its multifamily portfolio in Asia Pacific with the purchase of a €420 million portfolio in Japan, the firm’s first transaction in the country this year. AXA IM acquired the portfolio of 33 multifamily assets in Tokyo, Greater Osaka and Nagoya from JP Morgan Global Alternatives Real Estate Asia-Pacific. Last year, the firm executed close to $730 million of deals in the region with a strong focus on the living sector. Laurent Jacquemin, head of Asia-Pacific, real estate, at AXA IM Alts, said in an announcement that its decision to “further scale our Japanese residential portfolio is testament to the market’s dynamism.”

This week’s investor meetings

Tuesday, February 7

Wednesday, February 8 

Thursday, February 9

Friday, February 10