The CRE industry is a $20.7 trillion market. Core segments include: office, industrial, multifamily, retail, hotels and land.
Ways to invest in CRE:
1) Directly buy property & manage — a CRE equity investor;
2) Originate or buy CRE loans — a CRE debt investor;
The main issue: RE debt investors today are HIGHLY CONCENTRATED.
Small banks hold 80% of CRE loans worth $2.3T. Once defaults start piling in, the banking sector and all its stakeholders might be in big trouble.
In 2022, banks went on a frenzied buying spree for CRE. Loan exposure increased $4.8T to $5.3T, 4x the rate of years prior!
Why? Back in '21 rates were 0% & hikes imminent. Many CRE loans promise floating rate returns. Result: banks unanimously said BUY!
Current market Forces Impacting CRE Market
a. Rate hikes: EFFR is now 4.8%. In mid-2021, this was 0%.
b. WFH / COVID:
- this obviously destroyed occupancy rates across the country
- 2023 occupancy rates at a glance: Austin: 66% of pre-pandemic levels; NYC: 47%; SF: 44%
What could lie ahead? DEFAULTS
So far in 2023:
- Feb: Brookfield, #1 largest office owner in LA defaulted on $784M
- March: Pacific Investment Mgmt Co. defaulted on $1.7B of mortgage notes on 7 assets
- also March: Blackstone defaulted on $562M in Nordic CMBS
SOME KEY FACTS TO KEEP IN MIND.
- 4 collapses in 11 days
- $3B+ defaulted in March 2023 alone
- $270B in CRE loans due end of the year
- Current value of loans & securities held by banks is $2.2T lower than the book value recorded on their balance sheets
- 10% of banks have larger unrecognized losses than those at SVB
Source: Ming Zao