October 31st, 2023 - This Week in Real Estate
What’s new in the world of Real Estate
A survey of 1,000 real estate experts listed their top 10 issues to watch for in 2024. The top three are political unrest, hybrid work and the housing shortage.
There were a pair of multi-billion dollar REIT mergers. Realty Income acquired Spirit Realty Capital for $9.3 billion and Healthpeak Properties merged with Physicians Realty Trust in a $21 billion deal.
CBRE reported a 56% drop in profits. The world's largest commercial property brokerage doesn’t expect earnings to recover until 2025.
U.S. vacation home sales have plummeted. An inventory shortage has seen a 75% decline in sales since 2020.
Plus: The rise of Spirit Halloween and the race to create the “Amazon of Real Estate”.
Listing of the week: A heavily-discounted office building in San Francisco.
Freddie Mac 30 Year Fixed
(Weekly - 10/26)
7.79% (+.16 since last week)
Dow Jones Real Estate Index
(Daily - 10/31)
291.38 (+1.68 since last week)
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Research and Insights from the Vincent team
Political unrest and global economic health ranks as the #1 issue facing real estate, according to experts. A report from the Counselors of Real Estate that surveyed 1,000 real estate advisors listed the top ten issues affecting the market globally as we approach 2024. The rise of hybrid work and its effect on office properties ranked second, and the U.S. housing shortage ranked third. Other hot-button issues to watch are the rise of A.I., aging physical infrastructure, labor shortages and of course, inflation and interest rates.
Two major REIT mergers happened on Monday. In the first, Realty Income, a single-tenant commercial REIT, acquired the similar Spirit Realty Capital in an all-stock transaction of approximately $9.3 billion, becoming the 4th largest REIT in the S&P 500. The press release touted enhanced portfolio diversification, and corporate synergies leading to a 2.5% boost in value. The second transaction saw two healthcare REITs, Healthpeak Properties and Physicians Realty Trust, merge to create a $21 billion company. They also project substantial cost savings of up to $100 million over the next two years. In a struggling market, consolidations like these become more attractive as a way to increase efficiency and reduce costs.
The largest commercial real estate brokerage is cutting costs as its profits fell. CBRE Group reported a 56% decline in profits in the third quarter and does not expect a recovery until at least the second half of 2024, and a full recovery until 2025. They are planning to cut $150 million in costs as the slowdown in sales, financing activity and difficulty leasing properties have all affected their bottom line. As long as interest rates and the cost of capital remain high, market conditions are unlikely to improve.
Second home sales in the U.S. have dropped by 75% in the past three years. According to research by mortgage services firm Optimal Blue, the market correction is due in large part to an inventory shortage, as demand still remains high. This is because those in the market for vacation homes tend to be wealthier and less sensitive to interest rate fluctuations. Popular destinations such as Hilton Head, S.C. (-83%) and Lake Havasu, AZ (-87%), saw the biggest drops in sales volume. There are indications that vacation rentals are starting to bring in less revenue, which could lead to more supply on the market.
Listing of the Week
A property that caught our eye
A 14-story office tower at 115 Sansome Street in downtown San Francisco is on the market at an unofficial price of between $25 million - $30 million. The last time the building changed hands it was for $83 million in 2016 and as of 2019 carried $65 million in debt, so both the owner and lenders are prepared to take a significant loss on the transaction. Office buildings and downtown San Francisco have been hit particularly hard in the post-pandemic world, but there is still demand at this reduced price - there are reportedly around two dozen offers so far.
More stories worth checking out
Happy Halloween! Read about the rise of Spirit Halloween, the ubiquitous costume store and strip mall-savior.
Companies are competing to create the “Amazon of Real Estate” to disrupt the existing market - but no one is close.
Iowa farmland prices have stayed steady this year - after two years of record growth.
HSBC took a $500 million write-down on commercial real estate loans to China and warned of “further deterioration” - but their chief executive also thinks the sector has “bottomed”.
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