An ugly scorecard: Nearly 50% of real estate equity was likely wiped out over the last year. Value losses... We estimate that the U.S. CRE market was worth over $11 trillion 18 months ago and has fallen by nearly $2.5 trillion. Office led the market down but apartments caught up as rate spikes accelerated last quarter. Also, the apartment/multifamily sector is much bigger than the office sector, so apartment value declines had a much more meaningful impact on the industry's overall capitalization. Hotel incomes have outpaced interest rate moves, which has generally insulated the subsector from value declines to date. Retail has generally held up well, but industrial was the biggest mover over the last 1-2 months, falling 9% per Green Street's latest publicly available CPPI release. Equity losses... We estimate that 55% of total real estate capital at the peak of the market was debt, which implies 49% erosion of total equity over the last 18 months. Silver lining... Paper losses don't have to turn into realized losses. ...unless you have a loan maturity (e.g., 70% of maturing CMBS office loans have been unable to be refinanced YTD) or unless can't cover debt service. Is this a buying opportunity or falling knife? Stay tuned. PS - If the theoretical value of properties has fallen by 22% (on average), rather than taking a 50% markdown of equity, expect owners to try to grow their way out of their losses. Forget "extend and pretend." This cycle's mantra could be "extend and ascend." #creanalyst #distressedinvesting #capitalmarkets
Well like every cycle we see a big hit to values, a culling of the overleveraged herd, and an amazing recovery that ALWAYS exceeds the previous all-time high. Now that the COVID money printing already occurred the inflationary pressure in the next bull market will see values skyrocket. Your equity will have exponential growth, but with that everything else costs more. When you are celebrating your success over a cup of coffee at Starbucks in 2035 with a friend, each cup will be $20. As always Currency Debasement is our future.
If the historic 18-year property cycle pattern is still relatively accurate, by 2026 we should be down by 40% from the peak and/or roughly back to 2016 prices. 2008 + 18 = 2026. Then the cycle should start again for 18 years with a 7 year run up, pullback/pause, 7 years run up, 4 years down back to 2034 pricing in 2044. Repeat. Keynes quote (don't like his theories, Austrian School of Economics preference, but his quotes are good): "Better to be roughly right than precisely wrong". More caution as the liquidity cycle and lending continues to subside placing more demands (cost) on precious capital vs awash in capital. (there are general values vs specific asset/location differences for sure) 18-year property cycle for consideration: 2026 - 18 = 2008 (Subprime) - 18 = 1990 (S&L) - 18 = 1972 (FIAT Gold Standard / Petrodollars / side note: why did we have inflation in 78...Free floating FIAT not backed by hard assets) - 18 = 1954 (Post Korean War Recession) - 18 = 1936 (Roosevelt Recession) - 18 = 1918 (Post WWI Recession) - 18 = 1900 (1896 - 1904 period recessions)....keep going...who's keeping count of this historical pattern...something to analyze in addition to other data...I have a theory on what to do, just need $1B ;)ha!
None of the above comments seem to acknowledge that office values won’t return to investable as precious few people want to work in them, globally..that’s not going away no matter the dcf modelling tweak. The music may not fully stop on refinancing in 2024..but most of it should.. Office, mostly across western cities..isn’t convertible..so it is physically useless, never mind being an investable asset. So it needs to be torn down, to be useful. The global managed mass refinancing next year is just a stay of execution for equity, balance sheets and thus’ real’ peoples pension funds (not that they know their portfolios are exposed to 10-25% of it)
“Stay alive until ‘25”. You don’t realize losses until you sell. Thanks CRE Analyst for sharing the post. #CREValueAdd ?? Follow
This is a sobering update on the real estate market. The significant drop in equity and value, particularly in the office and apartment sectors, highlights the challenges faced over the past year. However, the resilience seen in the hotel and retail sectors offers a glimmer of hope. It's a critical time for investors to carefully assess their positions—whether it's a buying opportunity or a risk remains to be seen.
Given the lack of transaction volume, most markets have not yet realized these losses. Like paper losses on a bank's balance sheet, until they are forced to sell or refinance, the 'lost' equity might never impact some owners.
CRE Analyst It is probably a good number. On the multifamily side - on larger exposures of 2019-2020 "value-add adjustables" it is a bit of a bloodbath. Rate caps are expiring and borrowers need fresh equity. A restructure is the only way to get that done, so a bit circular. We are working through a few - but it makes it easier when the new equity is in hand. #atlascapital
Every asset class is taking a hit. According to this analysis, commercial real estate has lost $2.5 trillion in value over the past 18 months, led by: - Office:-31% - Multi-family:-29% - Retail:-15% In contrast, the U.S. housing market value has gained more than $2.6 trillion in value in the past year, according to Zillow: - U.S. housing market is ~$ 52 trillion - 49% higher than before the pandemic - Texas’s housing market value is roughly 6% of the total This is why I am confident that single-family real estate is the safest asset class.
There will be numerous strategic growth opportunities, especially for investors who have their sights set on well-located yet undervalued assets.
Principal / Chief Investment Officer (100,000+ Units Multifamily Experience) #SocialAlpha
1 年“There are no geniuses just cycles…”